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Wednesday, November 3, 2021
SB666: Unconstitutional Entry Fee for Tourists
By UHERO @ 5:37 PM :: 1629 Views :: Taxes, Tourism

Should Hawaii Levy a Visitor Green Fee to Protect Our Environment?

Since the visitor to the Islands unquestionably contributes significantly to the State’s environmental problems, he will no doubt have to bear a substantial portion of the outlays needed for their solution. -- William Baumol, 1970

by James Mak, UHERO, Nov 2, 2021

Introduction

More than 50 years ago in 1970 when Hawaii hosted a relatively paltry 1.7 million visitors, Princeton University economist, William Baumol, authored a report, The Visitor Industry and Hawaii’s Economy: A Cost-Benefit Analysis, in which he advised Hawaii to implement measures “capable of discouraging the visitor’s contribution to the problems of pollution, crowding, waste removal, and misuse of the land”; if not, tourism will decline.[1] He continued: “Since the visitor to the Islands unquestionably contributes significantly to the State’s environmental problems, he will no doubt have to bear a substantial portion of the outlays needed for their solution.” Baumol’s view on who pays is simply a restatement of the Matching Principle in state and local public finance—i.e. those who benefit from public services should be matched with those who pay for the cost of the services. Similarly, those who pollute the environment should pay for the cost to fix it. He suggested a “system of taxes” to pay for the solution to these problems.

Fast forward to 2021, the Hawaii Tourism Authority (HTA) recently issued individual island action plans that describe the specific actions HTA would take to “rebuild, redefine and reset” tourism’s direction over the next three to four years (2021-2024). HTA’s Destination Management Action Plan (DMAP) for Oahu calls for the establishment of a “Regenerative Tourism Fee” that “directly supports programs to regenerate Hawaii’s resources, protect natural resources, and address unfunded conservation liabilities.” HTA is still studying what type of fee should be imposed and who should pay; it would be a fee assessed by the City and County of Honolulu authorized by the State Government. 

The idea of a fee to raise money from visitors to fund conservation and environmental management programs that benefit visitors and residents alike has been simmering in Hawaii for some time under a different name—a “visitor green fee.” Green fees, in general, are taxes and charges levied on polluters to generate revenues to fund conservation and environmental management and/or to make it more costly for people to engage in behavior that may be harmful to the environment. A green fee has to have an environmental purpose. Green fees represent the market approach instead of command-and-control regulations to manage the environment. A visitor green fee is an environmental levy on tourists.

In its very useful report (Green Passport, Innovative Financing Solutions for Conservation in Hawaii, 2019), Conservation International (CI) explores the legal, economic and political considerations for establishing a visitor green fee program for the State of Hawaii. The CI report influenced two bills that were introduced in the 2021 State Legislature to enact a statewide visitor green fee. Senate Bill SB 666 (and its identical companion House Bill HB805) states that “there is levied and shall be assessed and collected a green fee surcharge of $20 for each guest, either a visitor or resident, of a transient accommodation.” Money raised from the fee would fund “workforce programs and services that promote certain environmental goals. ” The bill died in committee.

Visitor Green Fees Around the World

As visitor numbers continue to climb around the world, tourist destinations are increasingly levying green fees on visitors (“visitor green fees”) to fund programs that manage visitor impacts on destination ecosystems and natural resources. Conservation International (CI) counted 14 destinations world-wide that have visitor green fee programs. It finds the small Pacific island nation of Palau has “one of the most effective green fee programs in the world, a US$100 visitor fee [called the Pristine Paradise Environmental Fee” enacted in 2018] embedded into airline tickets.” Likewise, Ecuador’s Galapagos Islands also imposes a US$100 entrance fee [called the Galapagos National Park Entrance Fee enacted in 1993] at the port of arrival with the revenues directly used to fund “conservation, protection, and management”. It is worth noting that in Palau, of every $100 collected, $25 goes to the operations of Palau International Airport, $12.50 is divided among the state governments, and $22.50 goes to the National Treasury. In the Galapagos Islands, 30% of the revenues collected is distributed to local governments. CI notes that “visitor data demonstrates that implementing the fee did not impact visitor arrival rates.” 

In both Palau and the Galapagos Islands, the entry fees are essentially lump-sum (head) taxes that are intended to raise revenue, not to manage the number of visits. A lump-sum tax “is a fixed amount that must be paid regardless of the consumption, income or wealth of the taxpayer.”[2] Head taxes are unpopular among the general population because they are widely perceived to be unfair. In the Maldives, the “green tax” is a more palatable per diem tax (i.e. a flat sum per person per day) and assessed at tourist accommodations.

If Hawaii could levy a lump-sum entry fee like in Palau and the Galapagos Islands, it would be simple to collect the fee at airports from incoming visitors. However, lump-sum entry fees assessed on visitors only are legally problematic in the U.S. as they may be judged to impede travel between states and discriminate against non-residents in violation of the U.S. Constitution and federal laws.[3]

According to CI, no mandatory visitor green fee systems exist in the U.S.[4] Denver (Denver Open Space Sales Tax, 2018) and Georgia (Georgia Outdoor Stewardship Act, 2017) enacted sales tax surcharges to fund environmental programs; both residents and tourists have to pay.

Should Residents Pay?

A 2017 World Tourism Organization (UNWTO) report (Managing Growth and Sustainable Tourism Governance in Asia and the Pacific) made the obvious observation that “Tourists become temporary residents of a destination, use the same services, visit the same attractions and consume the same water and food resources as locals.” In Hawaii, the resident population places far greater demand on the state’s environmental resources than tourists.[5]

If protecting the environment is the principal purpose of a green fee/tax, then both tourists and residents should pay because both contribute to environmental problems. Why should only tourists pay? Arizona State University professor, Jack Kittinger, argues that a visitor green fee can provide Hawaii visitors “the means for a more authentic experience shaped by a more empowered resident community.” I surmise the real reason is politics: raising taxes is politically risky for lawmakers, but the risk is perceived to be lower if tourists are made to pay rather than locals because tourists don’t vote.[6] In Hawaii, bills are introduced during every legislative session to make tourists pay even more; SB 666 is just another example. Hawaii state lawmakers had little difficulty raising the TAT five times after it was first enacted in 1986 (effective January 1, 1987) from the initial 5% rate to the current rate of 10.25%. (Adding the 4% general excise tax on top of the 10.25% raises the combined GET + TAT tax rate on transient accommodations to 14.25%, the third highest among the 50 states and Washington D.C. in 2019. Connecticut had the highest rate at 15%. This doesn’t include the newly authorized county TAT of up to 3% in Hawaii.)[7]

SB 666 would require residents who stay in transient accommodations to also pay the proposed green fee. (Residents currently pay the TAT.) But there is an eye-opening exception to the norm in Hawaii. At Honolulu City’s Hanauma Bay Nature Preserve and at Hawaii’s State parks, residents are currently exempt from paying entrance fees. In 2001, a tourist from San Diego sued the City in federal court alleging that charging an admission fee on tourists at Hanauma Bay and not residents violated the U.S. Constitution because it discriminated against her based on her place of residence. Federal courts sided with the City. Federal District Court judge Alan Kay ruled that because residents already pay taxes that “underwrite” upkeep of the preserve, it is appropriate to exempt them from paying the fee. The decision paved the way for other parks and natural attractions in Hawaii to impose visitors-only admission fees. 

The problem with the courts’ logic is that Hawaii’s tourists pay far more tax revenues to State and county governments than what it costs to provide public services to them.[8] Hawaii’s visitors “underwrite” a lot of public services enjoyed by residents. Making both residents and locals pay could generate even more revenues for environmental stewardship. However, there may be equity concerns over a policy to tax visitors and residents at the same rates, as visitors are more affluent than residents and are probably more willing and able to pay. There are ways to address the equity issue, among them a discounted entry fee for locals or through the income tax system.

Designing Visitor Green Fees in Hawaii: CI’s Two Options

Hawaii Tourism Authority’s Hawaii Tourism Product Assessment study (1999) concluded that “Hawaii’s unspoiled natural beauty is the foundation of Hawaii’s tourism product.” In Hawaii, the State Government spends less than 1% of its annual operating budget on natural resource management. Most observers would agree that the current level of funding is woefully inadequate. The 2019 Annual Report from the State’s Environmental Advisory Council (EAC) notes that “State agencies cannot address the significant and increasing environmental responsibilities that they face without adequate funding and capacity. Unsurprisingly, the need for increased funding and qualified employees was identified by all agencies as their greatest needs. Agencies shared how lack of capacity is impacting their ability to respond to their environmental responsibilities which have been made more critical by compounding factors such as (over)tourism and the effects of climate change.” EAC’s report further notes (p.13) that “Impacts related to infrastructure such as roads and bathrooms, natural areas, fresh water resources, and biosecurity due to inappropriate and over use were cited by both DOT [Department of Transportation] and DLNR [Department of Land and Natural Resources] as being critically concerning challenges related to tourism.” 

CI estimates the difference between existing and needed funding—the “unfunded environmental liability”—is approximately $360 million each year. If the State could collect $40 from each arriving visitor at the State’s airports, as some have suggested from time to time, that would just about cover the funding gap. An entrance fee to Hawaii, like that in Palau, is not likely to happen. CI suggests two primary ways that Hawaii can erase the funding gap: (1) levy new fees on visitors; and (2) green the fees [notably, the TAT] already collected from visitors.   

Few taxes in Hawaii are predominantly borne by tourists. The most prolific state taxes—i.e. the general excise tax (GET) and the individual income tax–are largely paid by residents. That leaves the transient accommodation tax (TAT) and the car rental tax as the principal tourist taxes in Hawaii. CI’s two green fee options means either adding a surcharge on the existing TAT and car rental taxes or reallocate some of the money already collected from these two taxes to be used for environmental purposes. It won’t be a slam dunk to adopt either of these two options.

Hawaii’s state and county governments constantly plead poverty. Greening existing tax revenues paid by tourists means taking money from current non-environmental programs. Since every current public program has its own fierce supporters, good luck with that! This leads to the more likely option—another tax hike on tourists may be coming soon.

One warning about raising taxes earmarked for environmental purposes. There is no guarantee that new revenues may not be diverted for other uses in the future. When the State started collecting the TAT, 95% of the revenues were allocated to the counties; HB 862 diverted the revenues to the General Fund. It is also possible that General Fund revenues that previously went to support environmental programs may be withdrawn as revenues from the new tax flow into these programs.

The Case for Environmental User Charges

The CI report did not discuss environmental user charges as an option. User charges are specific charges for the use of publicly owned or publicly provided facilities or services. An example of an environmental user charge is the entry fee at Hanauma Bay Nature Preserve. Environmental user charges are effective and efficient because (1) they capture the cost of environmental services and damages in the prices of the goods and services to more closely reflect their true costs to society; (2) at higher prices they provide incentives to consumers and producers to become more environmentally responsible; and (3) they raise revenue. But as demonstrated at Hanauma Bay Nature Preserve, even with an entry fee, it may still require command-and-control regulations to reduce congestion because the admission fee couldn’t be raised high enough to bring attendance down to the desired level due to stiff political opposition to user fees.[9]

The application of user charges is consistent with the Matching Principle in state and local public finance. The applicable rule, derived from the principle, is: “Whenever possible, charge.”[10] Looking ahead, smart technology will make it even more “possible” for State and local governments to charge access to Hawaii’s natural resources and to manage them. Currently at Hawaii’s State parks, user charges (entrance fees) are the last revenue option when it comes to planning the Division’s budget. They need to play a more prominent role in funding park services. And it doesn’t mean that the entire budget of the State parks division must be financed solely from user fees. The cost of constructing a park and its facilities (i.e. the capital costs) should be paid by those who benefit from its existence (which is everybody via the General Fund), while the operating costs should be paid by those who use the park and facilities directly (through user fees).[11] In some instances (e.g. at low attendance parks), it is not worth the expense to collect an entrance fee. The same reasoning applies to the funding of other community resources such as hospitals, ambulance services, sports stadiums and convention centers which are supported in part by user chargers and in part by general funds.

In sum, Hawaii needs to spend more money on environmental stewardship and to encourage residents and visitors to care for the Islands’ precious resources upon which so much of our livelihood depends. It should begin by crafting a coherent user fee policy on everyone’s access to Hawaii’s natural resources.

Acknowledgements: I would like to thank Kimberly Burnett, Chris Wada, Nori Tarui, Carl Bonham, Erik Haites, Bob Ebel, and Steve Craven for helpful comments on earlier versions of this essay.

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