A measure that would implement a city hotel tax, with a portion of revenue slated to flow to rail transit, advanced during a City Council committee meeting Wednesday.

Bill 40 would levy a 3% city transient accommodations tax, or TAT, on visitor accommodations, which would be imposed in addition to the state’s current 10.25% hotel tax.

While the current draft creates specific allocations for the city’s TAT revenue, it does not specify how much would go to each proposed fund. In addition to the city’s general fund, portions would be reserved for mitigating the effects of tourism on public facilities and transit matters. It was amended Wednesday to direct funds to natural resources as well city facilities.

City Managing Director Mike Formby said the bill provides Honolulu with “an option — and the reality is the only option — to restore the lost revenue stream.”

The Legislature this year ended a sharing portion of the state TAT through which counties received a total of about $130 million annually, with Honolulu County receiving 44%, or about $45 million. The measure passed by lawmakers allows counties to recoup funds by implementing their own TAT.

In regard to the cash-strapped Honolulu Authority for Rapid Transportation, Formby said: “We know at some point in the future, we’re going to have rail (operation and maintenance) cost. So if we plan this right, at the 3%, we can … build capacity to complete the rail system in a way that is functional for the people of the City and County of Honolulu.”

Lori Kahikina, HART’s interim executive director and CEO, said with a constant stream of city TAT funds, HART would increase its ability to float bonds. Currently, HART draws funding from the state’s general excise tax and TAT, but both sources are due to sunset in 2030. “So all of our bonds right now needs to be paid off by that date … you cannot go past,”Kahi­kina said. City TAT funding, she said, “gives us a different capacity.”

The rail project, which aims to run trains along a 20.2-mile, 21-station route from East Kapolei to Ala Moana Center, is currently budgeted at $12.499 billion and is not scheduled for completion until March 2031. The budget faces an estimated shortfall of about $3.5 billion, with no simple plan to fully plug the deficit.

In response to Council member Heidi Tsuneyoshi questioning how taxpayers should respond to ballooning costs and construction delay, Kahikina said when she took over HART at the end of 2020, she had her staff calculate the worst-case scenario figures. Now HART officials are awaiting a more realistic draft report of their financial situation by an outside consultant. It will be used as part of a new financial recovery plan to eventually go to the Federal Transit Administration.

“We need to present a plan to the FTA that is approvable. And in order to do that we must demonstrate the financial capacity to deliver the projects so the TAT is a big part of that,” Kahi­kina said.

Kahikina also assured Council members that there would be enough funds to continue rail construction beyond Middle Street. “Now we have the utility relocations 100%, designed done for areas two through six, which is Iwelei to Ala Moana,” she said.

Formby said construction reaching past Middle Street is critical to the project’s success. “If we don’t build a functional rail system, if we don’t invest from this point forward using revenue streams that are available to the city because they’ve been authorized by the Legislature, then I think shame on us,” he said.

“If we don’t give transit riders an opportunity to get from where they start to where they want to end, and we force them to take the choice of getting off the rail transit system and getting onto a bus at some place that is inconvenient, they will not ride rail, and this system will become dysfunctional and unused. And that is not good for the future of this city.”

The Budget Committee voted 4-1 in favor of Bill 40, which will be heard by the full Council for second reading on Nov. 17. Council members Calvin Say, Radiant Cordero, Brandon Elefante and Kiaaina voted in favor of the measure. Tsuneyoshi cast the dissenting vote, and Council member Andria Tupola was excused.

The bill would impose a 3% tax on all gross rental proceeds from establishments such as vacation rentals, hotels and time shares. It would also apply to non-commissioned accommodation brokers, travel agencies and tour packagers.