by Tom Isler | February 01, 2008

IllustrationThis is part two in a series on the economics of the meetings industry that began with “Gauging the Value of Meetings” in our January issue.

Hotel tax is a ubiquitous expense for travelers, but it never comes with an explanation or a tracking number. The bill never lists where that extra $15 in Cincinnati or Detroit goes. Or that additional $20 in Anaheim, Calif., or Washington, D.C.

Guests still experience sticker shock when it comes to hotel tax, which now frequently adds between 12 and 16 percent to bills (usually between $10 and $30 per room night), even in second- or third-tier cities. In places like New York, or at high-end properties in smaller cities, hotel tax easily can add $40 or more per day.

“The rate of taxation and the number of taxes have ex-ploded in the last couple of years, and what the taxes are being used for is becoming a more and more bizarre story,” says Bill Connors, executive director and COO of the Alexandria, Va.-based National Business Travel Association, which currently is working to shed more light on travel taxes of all descriptions.

So where does the money go? Hotel tax typically funds initiatives to make destinations more attractive to travelers (convention center expansions, new sports arenas) and to communicate how desirable the destinations have become (tourism advertisements, booths at trade shows). Convention and visitor bureaus generally get the bulk of their funding from hotel taxes, and some of that money goes directly to meeting planners, in the form of familiarization trips or incentives to bring groups to town, such as reduced rental fees or complimentary receptions hosted by the bureau. These expenditures are lauded by members of the hospitality industry, who often don’t have the resources to fund such things on their own.

But the money doesn’t run out there. Hotel tax revenue commonly is used -- designated specifically by the tax code, in some cases -- to maintain municipal sewer systems (Atlanta), support low-income housing (San Francisco), and bankroll jails (Phoenix). The money goes to schools (Las Vegas), fairgrounds (Oregon) and historical societies (Orlando). It pays to fill potholes, collect trash, and build bridges and boardwalks in numerous cities.

Hoteliers, naturally, aren’t as enthusiastic about having travelers pay for these nontourism-related projects, though the attitude has less to do with sympathy for the customer than displeasure that the whole amount guests pay in taxes doesn’t stay in hotel bank accounts. The furor tends to get louder when the revenue funds projects that won’t benefit the hotels in the long run.

“I think the reason for the taxes is simple,” says Jim Smither, president of the Greater Birmingham (Ala.) Convention and Visitors Bureau. “Governments need money, and it’s safer to tax someone who is not going to vote you out of office.”

As tax and room rates creep up, and as cities look to build larger convention centers to keep pace with competitors, hotel tax rates and allocations are a hot topic at city council meetings. Some discussions last fall centered around using hotel tax dollars for livestock barns (Winnebago County, Wis.), film festivals (Columbia, Mo.) and a prison expansion (Hamilton County, Ohio). Legislators, hoteliers, CVBs, pro sports franchises, tourist attractions and convention center developers all are competing for a slice of the multibillion-dollar hotel tax pie.

How crucial is the tax issue to the industry? The American Hotel & Lodging Association, based in Washington, D.C., currently is putting together a report about hotel tax, due out later this year, and is in the early stages of planning a midyear summit on “the assault on room taxes,” to instruct regional lodging associations on how to keep tax rates low -- or at least keep the revenue within the industry. NBTA is working on its own tax research and plans to publish later this year a list of the best and worst cities when it comes to travel taxes. In fact, NBTA has hired a staff member specifically to travel the country and lobby against tax increases.

How much is collected and how it eventually is spent will have an impact on meeting planners, whose groups not only shell out the money but stand to gain -- or lose -- depending on whether the funds are used to improve the visitor experience.

‘Bottomless pot of gold’

Taxing travelers is often viewed as a low-risk political maneuver by local officials because it generates money without placing much burden on their constituents. “It’s taxation without representation in the classic sense of the word,” NBTA’s Bill Connors says. Local officials generally believe that part of the benefit of a thriving tourist industry should be a windfall of revenue, and if tourists use the roads and subway systems -- and occasionally medical and police services -- why not earmark some of the hotel tax for those things, which benefit the entire community?

“We always feel the best bang for the buck is to market the area,” argues Scott Joslove, president and CEO of the Texas Hotel & Lodging Association. If the money is spent on advertising, he says, more people will visit and pour even more money into the economy. A recent study by Travel Oregon, that state’s tourism commission, appears to bear out the theory. The report determined that 682,900 visits to Oregon were motivated at least partially by the $900,000 worth of advertising the commission produced. Those tourists spent an estimated $143 million during their stays, including $5.5 million in taxes. Tourism advocates like to point out that without the direct spending and tax revenue generated by travelers, property and other taxes on residents would have to be much higher.

But when cities have budget deficits to contend with and pensions to fund or ambulances to buy, marketing dollars are among the first to be cut. And because hotel tax revenues are fast-growing or at record highs in many cities, they are an increasingly tempting resource for local authorities. In Chicago this year, the tax is expected to generate $62 million, up from $37.5 million five years ago. Revenue from San Francisco’s hotel tax has increased 40 percent over the past decade, and this year it’s projected to top $200 million for the first time. Hotel tax revenue in New York City now exceeds $330 million annually, and in Las Vegas, it generates $400 million each year.

“The tax has long been looked at as a bottomless pot of gold in Orange County,” says Martha Haynie, Orange County (Fla.) comptroller, who has seen countless attempts by local officials in the Orlando area to appropriate the hotel tax for the county’s general fund -- efforts that have been thwarted by a powerful tourism lobby.

In Florida’s Orange County, hotel tax generated $157 million in the fiscal year that ended last September. Roughly the first $100 million went to convention center operations and to pay down debt; $46.5 million went to the Orlando/Orange County Convention and Visitors Bureau, and the balance went to other sports and cultural programs. The county struck a deal with the city of Orlando last summer to commit $540 million to build or upgrade three area sports facilities, which “effectively sucks up every bit of money in projected growth for many years,” Haynie says. Over the next few years, the CVB’s allocation will drop as a result. The pot of hotel tax, in other words, not only has a bottom, but, in some cases, the gold already has been claimed for decades to come.