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Economic Currents

Keep up to date with the latest UHERO news.

Science and Community Engagement to Improve Water Management in Hawaii

‘Ike Wai (from the Hawaiian ‘ike, meaning knowledge, and wai, meaning water) is a five-year National Science Foundation project. The multidisciplinary research team from UH Manoa and Hilo will collect new geophysical and groundwater data, integrate these data into detailed groundwater models, and generate an improved understanding of subsurface water location, volume and flow paths. Data and outputs from ‘Ike Wai will be used to develop decision making tools to address challenges to fresh water scarcity from climate variability, increasing population demands, and water contamination.

UHERO Project Environment researchers will work with stakeholders to develop land-use scenarios, with a particular emphasis on potential areas for watershed restoration. Recharge values and restoration costs will be estimated for these scenarios and used as inputs to the groundwater model. Assumptions about development and population growth will be used to project consumption on the demand side, and the groundwater model will then allocate pumping spatially to minimize declines in water levels and deterioration in water quality due to seawater intrusion (SWI). Results from the pumping simulations can then be compared with current estimates of sustainable yield. We will also estimate the return on investment in watershed restoration for each of the scenarios.

The new field data and groundwater modeling efforts will help to improve current sustainable yield estimates. With recharge likely to change in the future due to climate change and land use decisions (e.g. watershed restoration), sustainable yield should also be variable. Although, current estimates of sustainable yield do not account for ecological and customary uses, several stakeholders have shown interest in developing a framework to do so. We will therefore look at how submarine groundwater discharge (SGD) along the coast varies with pumping and simulate the effects of different SGD constraints. We will also estimate the costs, in terms of restricting groundwater pumping, of enforcing those constraints. That is, we will: (1) compare projected groundwater consumption under each scenario to new sustainable yield estimates that account for both SWI and SGD, and (2) estimate the potential costs of maintaining pumping below sustainable yield.


Michael Roberts Receives Agricultural & Applied Economics Association’s Quality of Research Discovery Award

UHERO congratulates Michael Roberts, recipient of the Agricultural & Applied Economics Association’s Quality of Research Discovery Award for his article, "Who Really Benefits from Agricultural Subsidies? Evidence from Field-level Data." Michael will be recognized during the AAEA 2017 Annual Meeting this summer in Chicago.

Michael Roberts is a UHERO Research Fellow, Professor of Economics and co-founder of UHERO's Energy Policy and Planning Group


Raising Property Taxes to Improve Public Schools

Posted February 3, 2017 | Categories: Hawaii's Economy, Blog

Hawaii’s public school teachers’ union (HSTA) is back at the State Legislature this session to ask lawmakers to help find more money to pay teachers and other education expenses. HSTA was at the Legislature last year to lobby for a 1% increase in the State’s 4% general excise and use tax (GET) to fund K-12 public education. That effort failed. HSTA is back again with a new plan. The plan calls for an amendment to the State’s Constitution that would allow the State to impose an “education surcharge” on the counties’ real property taxes on residential “investment property”. Hawaii’s Constitution currently only allows the counties to levy a property tax. The proposed amendment includes a daily room tax on tourist accommodations which State lawmakers can enact without a constitutional amendment.

The proposed amendment (SB 683) reads as follows: “Shall the Legislature fund a quality public education for all of Hawaii’s children, including the recruitment and retention of teachers; lower class sizes; special education program; and career and technical education, art, music, Hawaiian studies, and Hawaiian language instruction by establishing a surcharge on residential investment property and visitor accommodations?” HSTA estimates that the two taxes would generate $500 million in revenues each year. (By comparison, data from the State’s Comprehensive Annual Financial Report for fiscal year 2016 show State tax revenues collected from all sources totaled $6.454 billion and expenditures on lower education was $2.522 billion.) That money would be set aside in a special fund for education. The real intent is to generate more money to pay teachers in order to address a teacher shortage crisis, which HSTA President Corey Rosenlee said is “…going to make it very difficult to attack a lot of those other problems that are affecting education.” The proposed amendment requires the approval of voters; thus, lawmakers can escape blame for raising taxes. Pretty clever. But lawmakers will still be on the hook for passing bills to implement the proposed amendment. Senate bill SB 686 specifies what will be taxed and at what rates. It is a highly discriminatory bill.

Unfortunately, the current proposal put forth by HSTA to tax investment properties and visitor accommodations is seriously flawed. Consider the property tax surcharge proposal. What are residential “investment properties”? HSTA defines residential investment property as any residence that doesn’t have a homeowner exemption. To qualify for a homeowner exemption, the residence must be its owner’s principal residence. U.S. Census data (American Community Survey) show that in 2015, 56.9% of the 450,572 occupied housing units in Hawaii were owner-occupied, and 43.1% (181,028 units) were occupied by renters. The average household size in occupied rental units was 2.83. Thus, there are a lot of renters living in HSTA’s “investment properties.” A property tax surcharge on investment property is also a tax on renters in Hawaii.

Authors of SB 686 recognized the potential negative impact of their plan on renters. SB 686 states: “This part shall not apply to property rented for an amount no greater than $1,500 per month, not including any applicable maintenance fees, utility fees, and services charges.”

U.S. Census data show that in 2015, the median monthly gross rent in Hawaii was $1,438. Forty-seven percent of the occupied rental units, or 84,562, had a gross monthly rent of $1,500 or more; those units housed about 240,000 people. However, property values and rents vary among the counties, with Honolulu at the top. Home ownership is also lower on Oahu compared to the Neighbor Islands. Thus, the education surcharge will have a disproportionate impact on Oahu renters.

There’s more. The tax on rental properties priced above $1,500 per month will drive up their monthly rents; but it may also drive up the rents of exempt units as some renters switch out of the higher priced units into the lower priced units.

SB 686 requires the counties to administer and collect the education property surcharge. It won’t be easy for the counties to sort out which properties qualify for this exemption. Counties don’t have information on which properties without homeowner exemptions are rented and for how much. And rents also can change periodically requiring constant adjustment to the $1,500 exemption threshold.

The education surcharge tax rates, set on a sliding scale, are not modest. For example, for FY 2016 to FY2017, the Honolulu County property tax rate for “residential” properties is $3.50 per $1,000 net taxable property for all properties except Residential A properties (valued at $1 million and above) which are taxed at a higher rate of $6 per $1,000 net taxable property. In SB 686, the lowest property tax rate is $3.50 per $1,000 for properties valued at below $500,000. Thus, an owner of an investment property in Honolulu worth less than half a million dollars can expect to see his (her) combined City and State property tax bill double. For an investment property valued between $500,000 and under $750,000, the combined property tax bill will be 2.29 times the previous County-only tax bill. SB 686 is also silent on whether the valuation thresholds will be properly indexed to allow for changes in housing prices. In the absence of indexing, more and more investment property owners will be pushed into higher tax rates as housing prices rise.

Taxes are sometimes levied to discourage certain kinds of behavior—e.g. smoking and drinking. We call them “sin taxes.” But the most important reason to levy taxes is to raise revenue to pay for public services that we desire. The tax is the price of the services consumed. Households whether they own or rent and send their children to our public schools consume a public service that is not produced at zero cost. HSTA’s education tax surcharge proposal gives homeowners with exemptions a discount on the consumption of public education services. What is the rationale for that? Is it because owner-occupants can less afford the additional tax than renters? A good tax system should be equitable as well as pay for public services that we collectively value the most. The HTSA proposal is patently unfair.

The education surcharge on visitor accommodations is arguably even more bizarre than the property tax surcharge. SB 686 states: “The education surcharge on visitor accommodations shall be imposed statewide on all visitor accommodations, regardless of occupancy.” In other words, it is also levied on vacant units. Rates are set at $3 per day for units that rent for less than $150 per day, and $5 per day for units that rent for $150 per day or more. Thus, the visitor accommodation tax is not an occupancy tax like the State’s transient accommodation tax (TAT); it is essentially a property tax.

Hawaii’s TAT is a tax on consumption even though it is levied on sellers (hoteliers); the TAT is passed on to consumers/tourists. A property tax is a tax on capital (including land). In my own research on the distribution of the burden of the hotel property tax, I came to the conclusion, that an increase in hotel property taxes in Hawaii cannot be fully passed on to hotel guests. With the TAT, hotel guest bills include a separate line item stating the amount of TAT payable by the guest. If hoteliers wish to visibly pass on the visitor accommodation tax to guests in the same way, what is the appropriate amount to list on the guest bill since the tax levied per occupied room varies from hotel to hotel depending on the hotel occupancy rate?

Finally, HSTA’s plan puts the cart before the horse. Ideally, one should first have a detailed implementation plan for what is needed to create a “quality” state-wide public education system then figure out how best to fund it. HSTA’s current proposal seems to say, “Give us more money and we’ll figure out how best to spend it.” Apparently, HSTA is hoping that voters will be more willing to raise taxes that appear to target tourists and wealthy property investors. Hawaii’s public schools may need more money, but HSTA’s plan is not the way to raise it.

- James Mak and Carl Bonham

Addendum (2/5/2017):
HSTA does have a report (Schools Our Keiki Deserve) that articulates many reasons why public schools need more money.


How Many Tourists is Too Many?

Honolulu Star Advertiser columnist, Lee Cataluna, recently asked: “How many tourists is too many tourists?”1 Apparently, she already knew the answer. To her, the 8.5 million plus tourists coming to Hawaii each year is way too many. She laments that nobody seems to be talking about limiting the number “…like maybe we’ve all become accustomed to being crowded. Like maybe we lost the fight.” Tourists used to stay in designated tourism zones like Waikiki, but now they are everywhere. Indeed, Hawaii Tourism Authority’s (HTA) 2015 study of vacation rental units “show that there were vacation rentals available in almost every zip code across the state.”2 We are receiving record number of tourists, but 2016 visitor spending per Hawaii resident is expected to fall 31% below its 1988 peak, after adjusting for inflation. Cataluna concluded: “It would be one thing if the explosion in tourism meant better living for everyone, nicer schools, cleaner parks, spiffy roads, but we’re getting all the tourism problems without the tourism benefits.”

Recent surveys show a growing percentage of Hawaii’s residents agree with Cataluna. Still, most people in Hawaii “strongly/somewhat agree that tourism has brought more benefits than problems.”3 HTA’s 2015 Resident Sentiment Study noted that 66% of Hawaii’s residents surveyed felt that way. But the percentage of residents who agree with the quote has been slipping in recent years. The percentage used to be in the 70s, going as far back as 1975. However, the percentage of respondents who perceive “Tourism has been ‘mostly positive’ for you and your family,” has slipped quite a bit from 60% in 1988 to 40% in 2015. The less positive responses at the individual/ family level might be explained by the fact that we are much less dependent on tourism than we were 25 to 30 years ago as tourism’s imprint on Hawaii’s economy—measured by its share of the state’s gross domestic product (GDP)--has declined. Tourism’s (direct) share of Hawaii’s gross domestic product peaked in 1988 at 24.7%4; by 2010 it had fallen to 12.3% (16.4% in 2010 if tourism’s indirect effects are included, and 16.7% in 2015).5

The surveys show a more disturbing trend; the majority (58%) of the respondents to HTA’s survey in 2015 agreed with the statement: “This island is being run for tourists at the expense of local people.” The first year this happened was in 2005. Yet, no follow-up studies have been done to find the reasons for the response and hence how to reverse the perception. If residents in growing numbers feel their wellbeing is not the state’s priority in developing tourism, how might that affect the “Aloha Spirit” which is so important to the industry? HTA conducts a resident sentiment study almost every year; I wonder how many people pay any attention to them.

Cataluna is not the first to inquire about Hawaii’s tourism carrying capacity. In the late 1960s and the entire decade of the 1970s, many in Hawaii felt that tourism was growing way too fast.6 The average annual rate of increase in visitor arrivals in Hawaii was 20% in the 1960s and nearly 9% in the 1970s. In response, the Legislature passed Act 133 (The Interim Tourism Policy Act) in 1976 which required the State to craft a 10-year strategic plan to chart the course of tourism development for the next ten years. It became part of Hawaii’s first (overall) State Plan in 1980. In 1980 Hawaii had 3.9 million visitor arrivals compared to less than 300,000 in 1960, and the number kept rising. As the count of visitors approached 7 million in 2000 the 2001 Legislature directed the Department of Business, Economic Development and Tourism (DBEDT) to conduct a tourism sustainability study “to begin looking to how Hawaii can better monitor and manage future growth in tourism.” The $1.2 million study was completed in 2006.7 By then the number of visitors had increased to 7.5 million. Except during the Great Recession (2007-2009), even more visitors would come. Hawaii Tourism Authority (HTA) announces the ever-increasing numbers of tourists with pride since HTA is charged with promoting tourist travel to Hawaii. With the Great Recession, attention has focused more on how to bring more tourists in, and not how to keep them out.

Even if we wanted to, Hawaii has few weapons available to control the inflow of visitors. We can raise taxes on tourism to make it more expensive to visit Hawaii; spend less on tourism promotion; tighten and enforce land use and zoning laws; or make Hawaii a less attractive place for tourists (and, unfortunately, for us as well!) Unlike in some countries, Hawaii cannot (on our own) limit the number of people who can travel to Hawaii. An entry tax, imposed in many countries, would not be legal here.

Indirectly, Cataluna recognizes that there is no magic number of tourists that’s best for Hawaii. Eight million visitors might be o.k. “if the explosion in tourism meant better living for everyone, nicer schools, cleaner parks, spiffy roads.” We might welcome more tourists if we can increase tourism’s benefits and reduce its problems. In my 2004 book, I discuss some of the tools that can be used to achieve this.8 However, the burden is on us collectively to get it done. Hawaii doesn’t have nice public schools, clean parks and public bathrooms, and spiffy roads not because tourism has failed us, but because we have, for too long, come to accept that nothing works here. Ainokea! A term (meaning “I don’t care”) that columnist David Shapiro once described as “our official state attitude—not only in popular culture but also in officialdom.”9 What state and local governments everywhere are supposed to do well (i.e. the core functions of government), they are not done well here. Limiting the number of tourists won’t change that.

Money, or lack of it, is frequently given as the main reason why things don’t get done in Hawaii or why it takes so long to get things done. The U.S. Census Bureau reports that in 2014 Hawaii’s state and local governments received $14.5 billion in general revenues, or $10,239 per resident.10 (That amounts to nearly $9,300 available to spend on every man, woman, child and tourist present in Hawaii on a given day.) Hawaii ranked 10th among the 50 states and the District of Columbia.11 As a group, Hawaii’s state and local governments are not poor when compared to other states. According to the Tax Foundation, Hawaii has one of the highest state-local tax burden as a percent of state income among the 50 states and the District of Columbia. Why aren’t we getting more for our tax dollars? Some residents who find the “price of paradise” too high choose to leave. Even as more tourists are pouring into Hawaii, there is a net (and growing) exodus of Hawaii residents to the mainland even though the local economy is humming along and structural unemployment is non-existent.12

Lee Cataluna reminds us that in developing tourism the wellbeing of residents must come first. What should be done about tourism’s problems? Rather than trying futilely to limit the number of tourists, a better strategy is to attack the problems directly. That requires leadership and effort.

- James Mak 


1Honolulu Star Advertiser, "Foundering canoe is full already, yet more get in,” January 11, 2017.

2Hawaii Tourism Authority, 2015 Visitor Plant Inventory.

3Hawaii Tourism Authority, 2015 HTA Resident Sentiment Study.

4Andrew Kato and James Mak, “Technical Progress in Transport and the Tourism Area Life Cycle,” in Clement A. Tisdell (ed.), Handbook of Tourism Economics: Analysis, New Applications and Case Studies, 2013.

5Eugene Tian, James Mak and PingSun Leung, “The Direct and Indirect Contributions of Tourism to Regional GDP: Hawaii” in Clement A. Tisdell (ed.), Handbook of Tourism Economics: Analysis, New Applications and Case Studies, 2013; also 2015 State of Hawaii Data Book.

6James Mak, Developing a Dream Destination: Tourism and Tourism Policy Planning in Hawaii, 2008.

7DBEDT, Planning for Sustainable Tourism, Project Summary Report, 2006.

8James Mak, Tourism and the Economy: Understanding the Economics of Tourism, 2004, Chapter 11.

9Honoluluadvertiser.com, “Why you should care about ‘ainokea,’” January 4, 2010.

10U.S. Census Bureau, State and Local Government Finances by Level of Government and by State: 2013-14.

11DBEDT, 2015 State of Hawaii Data Book, Table. 9.11.

12Honolulu Star Advertiser, “Census: Growing exodus of residents to mainland,” December 22, 2016.


Sherilyn Wee recognized as Outstanding Student of the Year by the U.S. Department of Transportation

Sherilyn Wee at the UTC Awards Banquet January 7 in Washington D.C. with keynote speaker, Dr. Beverly Scott, CEO of Beverly Scott and Associates.

UHERO congratulates Sherilyn Wee on receiving an Outstanding Student of the Year award, presented by the U.S. Department of Transportation (DOT). Sherilyn was recognized in Washington D.C. for her contribution to the transportation field through her research and leadership with the Electric Vehicle Transportation Center. For 26 years, the University Transportation Centers (UTC) Program, under the management of the U.S. DOT's Office of the Assistant Secretary for Research and Technology, has advanced U.S. technology and expertise in transportation through education, research, and technology transfer.

Sherilyn Wee is a postdoctoral researcher and former graduate research assistant at UHERO. She holds a Ph.D. in Economics from the University of Hawaii.


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