The sleight of hand that can be found among legislative proposals in this year’s session might remind readers of the mythological gift-bearing Trojan Horse.
One measure sent to conference committee for debate between senators and representatives would extend a hotel construction and remodeling tax credit for the cost of renovating those structures between January 2013 and December 2018. Likely, that part of the proposal was hailed in the hotel community, as hotel owners and operators would benefit from another round of tax incentives to renovate aging properties. It would be “another” round of hotel renovation incentives — the first was granted at the turn of the 21st century as Hawaii struggled in a lengthy economic malaise.
Supported by the hotel owners and construction workers, the tax break did rejuvenate activity to the point where demand was so high that it was often difficult to find workers to do all the work within the incentive-mandated time period. Renovation and construction activity were accelerated, but when the incentive expired, so did the work. Thus, the tax incentive did nothing more than skew the economic cycle, creating feast and famine in construction activity.
One of the lasting effects of that tax incentive and the ensuing frenzy was it artificially accelerated the cost of labor, as the demand for labor during that period was unusually high and the labor demands for compensation were artificially accelerated. The resulting soar in the cost of construction, whether new or renovation, put the financial feasibility of many projects into question. Like the agricultural workers of the sugar and pineapple industries of yore, construction workers priced themselves out of reach to the point where it was difficult to make the numbers pencil out.
Many projects which were underway after the tax incentive expired were faced not only with the lack of the incentive, but rising labor costs and suddenly the lack of financing as the credit markets froze in late 2008.
Like many of the other tax incentives adopted in recent years, lawmakers learned that state officials made no effort to evaluate either the impact they had in creating jobs and work activity, or how the incentives created an artificial response on the part of those who wanted to avail themselves of the tax incentive. Research into what might have occurred had the incentives not been made available was never done. Would construction activity have evened out over a period of time, providing a continuum of employment rather than spiking job creation in the brief period the incentive was available?
Let us not forget the downside of the legislative measure still being considered by conference committee negotiators. This measure would delete the sunset date on the two additional percentage points that increased the tax rate of the transient accommodations tax, or hotel room tax, from 7.25 to 9.25 percent. The higher rate was adopted by the 2009 session of the Legislature to help balance the state general fund. Adopted in two steps beginning July 1, 2009, the higher rate is supposed to expire June 30, 2015. However, the bill that provides tax incentives for hotel construction and renovation would make the increased rate permanent.
It would indeed be a heavy price for the hotel industry and the Hawaii visitor to pay. It is also hypocritical for lawmakers to profess the importance of the visitor industry and the need to promote Hawaii as a visitor destination and then turn around and make this “temporary” tax increase permanent.
As we have all come to learn, there is no such thing as having your cake and eating it, too. For hotel owners and visitors, it would be far better to do without the temporary renovation tax incentive than to endure the higher TAT rate forever. Beware of Greeks bearing gifts.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.
