Cities raise travel taxes to bridge budget shortfalls
By Don Sadler
The economic downturn wreaked havoc on the finances of many cities and states across the country. California issued 29,000 IOUs last year to residents awaiting income tax refunds. Clayton County, Ga., outside of Atlanta suspended its bus services in March because of financial woes. Street lamps are being turned off to save energy. Potholes are going unfilled. Municipal staffs are being cut.
One way cities can raise additional revenue to help bridge budget shortfalls is to raise travel taxes for everything from hotel occupancy (or bed) taxes to rental car, airport, meal and other taxes. These taxes are assessed primarily on visitors, rather than residents.
Raising travel taxes can be an effective revenue generator and is usually popular with local citizens since the taxes are paid primarily by out-of-towners. But for cities that rely on tourism and conventions, raising taxes too much can hurt that all-important visitor business.
Politically Popular Strategy
Bonnie Wallsh, CMP, CMM, chief strategist with Bonnie Wallsh Associates meeting management consulting firm, says that she hasn’t heard of any cities that are decreasing travel taxes. “Cities and states are in dire need of money, so I’m seeing a growing trend toward increasing travel taxes. In effect, these are taxes on non-voters, and most politicians are very nervous right now.”
In Charlotte, N.C., city leaders didn’t want to require local citizens to foot the bill for the new NASCAR Hall of Fame, so they raised the hotel occupancy tax by one-half percent to finance it, says Wallsh.
Los Angeles is now planning an increase in hotel occupancy taxes. Hotel owners have proposed a 1.5 percent hike in the city’s current 14 percent occupancy tax to help finance more tourism and convention marketing and promotion for the city.
The fee would not affect small hotels; it would be levied only by hotels with more than 50 guest rooms, raising an estimated $10 to $11 million per year to be added to the $11.4 million Los Angeles currently spends on tourism marketing and promotion. This amount is far lower than comparable cities like Las Vegas and San Diego, hotel owners note, which spend $71 million and $24 million, respectively, on tourism promotion. The Los Angeles City Council will have to vote to approve the measure.
The state of New York also plans a 20 percent increase in hotel occupancy taxes assessed to third-party travel intermediaries (like travel agencies and online travel companies) of 20 percent as part of the currently proposed state budget. This would raise the occupancy tax in New York City for hotel rooms booked through a travel intermediary from 5.875 percent to 7.05 percent.
State officials say the increase would capture revenue that’s not being collected from travel intermediaries due to the fact that they pay taxes on the rates at which they purchase rooms, not the higher rates at which they resell them. (See Battle Over Internet Booking Tax Heats Up for more on this issue.) Intermediaries dispute this, claiming they earn revenue from service fees and commissions, not room markups, and that the tax hike is intended to raise money to help promote tourism.
Remaining Competitive
Despite the need to raise funds during this tough economy, some cities are saying no to additional travel taxes. Carling Dinkler, president of Custom Conventions destination management company based in New Orleans, doesn’t see travel taxes going up in the cities where he primarily does business. “I don’t see anything on my radar indicating that any city that wants to be competitive has plans to raise travel taxes,” he says. “Tourism has been in a deep depression for the past couple of years, and it may be a while before it starts to come out of it.”
Nikki Nicholson, vice president, convention sales, with the New Orleans Convention and Visitors Bureau, says that the city’s 13 percent hotel occupancy tax is on the low end for cities of similar size. “This tax has held steady for at least 15 years,” she notes, “and I’m not aware of any plans to raise it.”
However, she understands the plight many cities face in the current economy. “While it’s certainly difficult to raise travel taxes, it’s the only way many cities can generate additional marketing dollars and remain competitive.”
This tax also provides a lot of bang for the buck, Nicholson points out: While a 1 percent bump in the hotel occupancy tax only raises a traveler’s bill about $5 on a typical three-night stay at $175 per night, it can generate an additional $1.75 million a year for a city with 1 million annual room nights.
In Las Vegas, the hotel occupancy tax recently rose from 9 to 12 percent after a voter-approved ballot initiative, with the increase helping fund education, according to Jeremy Handel, a spokesperson for the Las Vegas Convention and Visitors Authority. The CVA receives approximately 34 percent of the revenue the occupancy tax collects, he says, adding that no current plans are in place to increase the tax further. “Like most organizations, we have had to make adjustments to our operations due to declining revenue,” he says. “However, we continue to promote travel to our destination through advertising, marketing and public relations campaigns around the world.”
Update Sept. 9, 2010: The City Council in Costa Mesa, Calif., voted this week increase hotel room taxes 1 percent to help fund the Costa Mesa Conference and Visitor Bureau. The new tax affects 10 hotels on the bureau’s board and increases bureau funding to $1.6 million (up from $1.1 million). City residents vote later this year on a measure that would increase transient occupancy tax from 6 percent to 8 percent.
