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House and Senate leaders reached a tentative deal Friday to increase the state’s hotel tax to help pay for construction of Honolulu’s rail system, a step that would dramatically alter the financing of the troubled project.

House conferees on surprised their Senate counterparts earlier in the day with the proposal, which includes ending the general excise tax surcharge in 2027 as currently scheduled.

Rep. Sylvia Luke, chair of the House Ways and Means Committee, said shifting much of the financing to the hotel industry��makes sense, given that Honolulu Mayor Kirk Caldwell has often explained that tourists end up paying one-third of the general excise tax.

How the industry might react was not immediately clear Friday, but resistance is likely.

The tax proposal still must be approved by the full Senate and House. That vote could come as early as Tuesday.

By using the transient accommodations tax, Luke said, the working poor and the elderly would not be unduly burdened, given that the GET is a regressive tax.

The TAT increase, if approved by both chambers, is “equivalent to receiving $2.4 billion in future GET revenues,” the House said in a press release. “This would provide more funding for rail than any package currently being proposed.”

After first learning of the House’s idea, Sen. Jill Tokuda, chair of the Senate Ways and Means Committee, thanked the House for its “innovative” approach to finding a solution to rail funding, expressed appreciation that education would get money out of the deal, and said the Senate would “take a good, hard look” at the proposal.

The provisions of the House counter-proposal include:

• Removal of the House’s proposed two-year GET extension for 2027 – 2029
• Increase of the TAT by 2.75 percent from the current 9.25 percent to 12 percent for 10 years from Jan. 1, 2018, to Dec. 31, 2027

Meanwhile, revenue generated from the TAT increase would be distributed as follows:

• $50 million set aside annually for education in a newly created education special fund
• $1.3 billion will go to the Honolulu rail project concurrently with the GET surcharge revenue that the city is already receiving now
• Reduce TAT revenues for Honolulu from $93 million to $80 million, with the difference going to rail cost. (This was added to the proposal by Senate negotiators. The House proposal included all four counties.)
• Maintain the House position to lower the state’s share of the administrative service fee to from 10 percent to 1 percent
• Give all counties the option to extend the GET surcharge
• Require Honolulu to repeal any ordinance prohibiting use of county funds for rail��
• Prohibit the use of the GET surcharge revenue to fund HART’s administrative, operating and personnel expenses.

The House also called��for a moratorium on redeveloping the Neil S. Blaisdell Center, which is estimated to cost nearly $500 million. That’s so the city “does not fiscally over extend itself,” as Luke put it, and can focus on rail, its top��priority.

Caldwell and City Councilman Ikaika Anderson, along with several executives from the Honolulu Authority for Rapid Transportation and other lawmakers, were in attendance in the crowded conference room.

In a press conference Friday afternoon, Caldwell thanked lawmakers for their efforts on rail but said the House plan would still leave the city with a cumulative deficit of as much as $1.5 billion by 2037.

The mayor said that the GET and the TAT together would generate $420 million per year for 10 years.

“That gets us further down the track,” he said.

But with the GET expiring in 2027 and the city having to cover the costs of operating the rail system after it opens in 2025, ��officials are expecting a deficit of $937 million by 2037. Given that the Federal Transit Administration will want a 10 percent cushion on remaining costs and will assume lower economic growth, the shortfall would balloon to $1.5 billion.

The money will have to come from somewhere, Caldwell said, whether from increased revenue or cuts in city services. But referring to a pie chart of city spending and revenues, he said it would not be easy to find that kind of money.

“At some point, I think Oahu residents are going to have to put skin in the game,” he said.

Caldwell also pointed out that the House bill would immediately blow a hole of some $30 million in the city budget by having the city take over HART’s operating budget and dedicating the city’s share of the TAT to rail.

The mayor, however, was sanguine that the $15 billion visitor industry could absorb the blow of a higher TAT.

“I think they can survive this,” he said. “We have to see.”

‘Rail Is A City Project’

Legislative leaders were pleased with the compromise they were able to strike��after having been at loggerheads for nearly the entire session.

But they also made clear that Honolulu needs to step up when it comes to handling rail.

“What we want to emphasize is that rail is a city project. It is not a state project,” House Majority Scott Saiki said after the conference vote. “The city needs to bear some responsibility in managing the finances of this project. It cannot keep turning to the state or to the Legislature for assistance. It needs to manage its project itself. “

Asked if that meant that the city must raise property taxes, Saiki replied, “The city needs to explore alternative means of financing. There are other forms than simply raising property taxes.”

Saiki and Senate Majority Leader J. Kalani English both said that the Legislature could never get satisfactory rail funding figures from the city.

English was also asked whether the revised SB 1183 has the��support of his colleagues.

“Right after the proposal came over, we tried to gather as many people as we could, and we met in the Senate president’s office to discuss it,” said English. “And that’s why we came back with what we did. So I think it’s a general acceptance from our members, given the long, hard path that we’ve been on to get to this.”

English added that he was “personally very impressed” with the House’s creative solution.

Draft After Draft After Draft

The bill has undergone radical revisions since it was first introduced by Sen. Lorraine Inouye.

It initially called for extending the surcharge in perpetuity.��Then senators tried to find a way to use the bill to fund other items, notably the State Highway Fund.

The measure was later dramatically scaled back by Tokuda to only give the city the 10 percent administrative fee or “skim” the state currently takes from the surcharge.

Under Luke, SB 1183 allowed for only a two-year surcharge extension. Once the bill got to conference committee, Inouye proposed a 10-year extension and took language from Luke’s draft to force the city to move toward using property taxes to help pay for rail.

On Wednesday, Luke and Inouye clashed in a rare hearing that was held in front of the public and media. Conference committee is mostly held in secret, as making sausages can be an unpleasant��process.

Inouye insisted at that meeting that the Senate wants the full 20-mile rail route built with all 21 stations, but her colleagues were willing to compromise on the GET extension and other parts of SB 1183.

But Luke scoffed at��the Senate’s plan, asking to see estimates of how much revenue it would generate and questioning whether the Senate was united.

Friday’s meeting was also advertised through a media advisory — not the normal practice at the Legislature during conference committee but evidence of just how important SB 1183 is.

The��hearing was also held in a larger conference room, to accommodate the big audience.

Meanwhile, talk continued to swirl through the Capital hallways and offices that both the House and Senate could face possible leadership reorganization depending on where lawmakers stood on the rail tax.

The rail project has cost $6.8 billion so far, and it’s estimated that $10 billion will be the amount needed to complete construction.��

The rail deal comes two days before a federal deadline for city officials to present a financial recovery plan for the project.

Staff writer John Hill contributed to this report.