House and Senate negotiators tentatively agreed this afternoon to a plan to increase the state hotel room tax to 12 percent to raise $1.3 billion to help fund both the rail project and public education.

House Transportation Chairman Henry Aquino suggested lawmakers drop the idea of extending the half-percent excise tax surcharge that is now providing most of the funding for the rail project, and instead increase the transient accommodations tax by 2.75 percentage points for 10 years starting January 2018.

The hotel room tax is now 9.25 percent, and the House proposal would increase it to 12 percent for the next decade, said Aquino (D, Waipahu). That tax increase would raise $1.3 billion by 2027, he said, which means the money would be available to the city for use on the rail project sooner than it would be if the state extended the excise surcharge on Oahu.

House and Senate leaders hailed the decision as an innovative way to resolve the sometimes bitter rail funding debate, and to shift more of the burden of building the 20-mile rail line from Hawaii residents to visitors.

However, state Sen. Donna Mercado Kim said the last-minute proposal is legally questionable because it was never debated in a public hearing and did not comply with the lawmaking process that is set out in the state Constitution.

“The industry had no input, nobody had any input on this, so at this hour to come out with an increase in the (hotel room tax) that was never discussed, never went to a public hearing, to me is not legal,” said Kim, (D, Kalihi Valley-Moanalua-Halawa).

She said the bill will be vulnerable to a legal challenge if it passes because “the law says it has to have three readings, and it didn’t go through three readings.”

The proposal that lawmakers gave preliminary approval would divide up revenue from the extra hotel room tax collections, with $50 million a year deposited into a “New Start Education Special Fund,” Aquino said. Lawmakers would determine the use of that money next session, he said.

The remainder of the $1.3 billion from the hotel tax increase would go to the city to use on the rail project. Aquino said that because the money would be provided to the city years earlier than it would with an excise tax extension, it would amount to the equivalent of $2.4 billion in future excise tax revenue.

At the same time, the state would reduce the city’s current share of the hotel room tax by $13 million, and apply that money to the rail project as well, said Senate Ways and Means Committee Chairwoman Jill Tokuda.

An earlier proposal would also have diverted a some of the neighbor island counties’ share of the hotel room tax to help pay for rail, but Tokuda nixed that idea. “I think that is only fair given that this project is for the City and County of Honolulu, and it should not disproportionately impact the neighbor island counties,” she said.

Aquino also said the proposed bill “would prohibit the City and County of Honolulu from overextending itself fiscally by using public funds to reconstruct or redevelop the Neal S. Blaisdell Center, which is expected to cost nearly $500 million,”Aquino said.

House Finance Chairwoman Sylvia Luke said that “we’ve been told time and time again that the tourists should pay for the rail, and that’s what the mayor (Kirk Caldwell) has continued to say,” she said. “That’s why today, we’re ensuring the elderly and working poor are not taxed anymore with this new proposal,” which instead would tax tourists.

Tokuda called the proposal “unique and innovative.”

Senate Bill 1183 now goes to the full House and Senate for further consideration. Senate Majority Leader J. Kalani English said a group of senators met in Senate President Ron Kouchi’s office to discuss the measure and said he believes the bill has the votes to pass in the Senate.

House Majority Leader Scott Saiki said the House Democrats have not yet been briefed on the proposal.

If the House and Senate approve the bill, it will be sent to Gov. David Ige, who will have the options of signing it into law, vetoing the bill, or allowing it to become law without his signature.