Tax and Spend

Meetings & Conventions - Tax and Spend - March 2000

March 2000
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Tax and Spend

Cities are banking on hotel tax dollars to fund civic projects, but how much will the market bear?

By Maria Lenhart

In Portland, Ore., voters in a November 1998 election rejected a proposal to expand the Oregon Convention Center by raising property taxes. Two months later, Portland's tourism and civic leaders sought an alternative way to fund the project. The result: Portland's hotel tax will increase from 9 percent to 11.5 percent on April 1.

In Denver, voters in a November 1999 election approved a proposal to double the size of the Colorado Convention Center using funds supplied by an increase in hotel tax. The result: Denver's hotel tax went from 11.8 percent to 13.55 percent on Jan. 1.

In San Antonio, voters in a November 1999 election approved a hotel tax increase to fund a $175 million arena to be used for rodeos and the San Antonio Spurs basketball team. The result: San Antonio's hotel tax rose from 15 percent to 16.75 percent on Jan. 1.

In these and other cities across the nation, hotel taxes are creeping upward in an effort to shift the tax burden from local residents to out-of-towners. Convention centers are being expanded, sports arenas are getting built, and a host of other civic improvements are being made, all courtesy of tourists, meeting attendees and business travelers.

With local residents often reluctant to foot the bill for such projects, hotel tax increases are viewed by many cities as one of the few options left. "It's too difficult these days to pass any other kind of tax measure," says John Kaatz, director of convention industry services for Conventions, Sports & Leisure International, a consulting firm in Minneapolis. "If convention center expansions are going to rely on property tax, they just won't happen."

Good sports?
Not only are hotel taxes growing in popularity as a funding source, but they increasingly are being used to finance projects other than their traditional beneficiaries, convention centers and convention and visitor bureaus. Rick Webster, director of legislative affairs for the Washington, D.C.-based Travel Industry Association of America, notes that hotel tax increases now are just as likely to fund a new sports arena as a convention center.

"A lot of the increases are due to the desire of cities to build new stadiums in order to prevent their teams from moving away," he says.

An argument could be made that sports stadiums benefit tourism and meetings and therefore should be funded by hotel tax. Webster says TIA does not agree. "Sure, these facilities can be used for meetings, and some visitors do go to games, but that's minor," he says. "It's primarily local residents who are in the stands."

Nowhere is this issue more controversial than in Texas, where a recent state law enables communities to raise hotel taxes for new sports facilities by popular vote. Partly as a result of voters' support for new stadiums, Texas cities have some of the highest hotel taxes in the nation, including Dallas at 15 percent, San Antonio at 16.75 percent and Houston at 17 percent.

Among those alarmed about the situation is the Texas Hotel & Motel Association. "The taxpayers and sports team owners like what's happening, but the hotel industry does not," says Don Hansen, executive vice president of Austin-based TH&MA. "Our position is that these taxes should be used for convention centers and CVBs but not sports stadiums."

Hansen believes excessively high hotel taxes can drive away business. "Meeting planners are more concerned about hotel taxes than they were 10 years ago because taxes have gotten so high," he says. "We could lose major conventions because of this."

Tax threshold
Does Hansen have grounds for his fears? He might, considering the example of New York City, which cut its hotel tax from 19.25 percent to 13.25 percent in 1994 after a travel industry protest and boycott that was supported by Meeting Professionals International, the Professional Convention Management Association, the American Society of Travel Agents and other major organizations. According to the New York Convention & Visitors Bureau, the city stood to lose 44 conventions worth an estimated $54 million if the tax had not been reduced.

New York's hotel tax is now closer to the national average; an October 1998 TIA report on 50 major U.S. cities put the average hotel tax at 12.36 percent, up from 10.66 percent in 1995.

How high can a city's hotel tax go without hurting business? John Kaatz says, "The bar has been raised to about 15 percent, and it's difficult to go beyond that. It means cities that are at 11 percent or so still have room to grow."

Such is the prevailing view in Portland and Denver, where civic and tourism leaders insist their cities will remain competitive even with the higher hotel taxes. "We looked at cities of similar size and found we still would compare well," says Eugene Dilbeck, president of the Denver Metro Convention & Visitors Bureau. "Our hotel rates are ranked only 27th in the nation, and our tax is still lower than many of our competitors. If our hotel rates were $300 a night, that would have been different."

Weighing all factors, Dilbeck believes the 1.75 percent increase will improve meeting business, not hamper it. "It means we can expand our convention center, and that makes it well worth the increase," he says. "Groups that come to Denver are driven by available facilities."

Agreeing is Joe D'Allesandro, president of the Portland Oregon Visitors Association. "We have no sales tax in our state, and our hotel tax is still lower than most other other cities, so we feel we're still very competitive," he says.

D'Allesandro estimates Portland's hotel tax increase will bring in an additional $5 million a year, all of which will go toward expanding the convention center and other visitor-related projects. Although the increase was supported both by city hall and the visitor industry,

D'Allesandro says the CVB has made it clear to city officials that they should not regard hotel tax increases as a source for financing nontourism-related projects. "There is a threshold for visitor taxes, and we don't want to cross it," he says.

In San Antonio, whose hotel tax ranks just below Houston's as the nation's highest, there is concern the breaking point has been passed. The Greater San Antonio Hotel & Motel Association vigorously opposed last November's 1.75 percent increase, with several hotels resigning in protest from the San Antonio Chamber of Commerce, which supported raising the tax.

Steven Moore, executive director of the San Antonio Convention & Visitors Bureau, says "it is too soon to tell" whether meetings business will be affected by the increase. As a city-run agency, the CVB can take no official position on the tax hike, 100 percent of which will be used to build the rodeo/basketball arena. Moore says, however, that the city remains a good value despite the hike.

Careful shopping
In the overall scheme of things, do hotel taxes matter much to meeting planners? Independent planner Sue Walton, partner in Scott W. Walton & Associates Ltd. in Evanston, Ill., says although some of her association clients will not meet in cities where hotel taxes are too high, taxes are not a major factor in site selection. "Yes, I do look at taxes, but it's the overall compatibility of the city that matters most," she says.

Independent planner Joan Eisenstodt, president of Eisenstodt & Associates in Washington, D.C., says hotel tax should influence site selection more than it usually does. "It is a major factor because it can add considerably to the cost of a meeting," she says. "It's an issue that we point out frequently to clients and one that many planners don't look at when they consider destinations."

One planner who does pay careful attention to hotel tax is Naomi Romanchok, meetings and trade show coordinator for the Food Allergy Network in Fairfax, Va. "When hotel rates are quoted in a contract, I will play mystery shopper and call the front desk to find out what taxes are added," she says. "Frequently salespeople can 'forget' to tell you the hard numbers on these taxes. Since many meeting planners are offered comp rooms on site inspections, they don't see a real hotel bill."

The Top 12

U.S. cities with the highest hotel tax

Houston 17% San Antonio 16.75% Columbus, Ohio 15.75% Seattle 15.6% Anaheim, Calif. 15% Dallas 15% Chicago 14.9% St. Louis 14.1% San Francisco 14% Los Angeles 14% Detroit 14% Pittsburgh 14%

Source: Travel Industry Association of America