This 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.
General fund
factor
Since 2003, city funding of the San
Diego Convention and Visitors Bureau has been cut by more than $5
million, or 37 percent, during which time the city usurped a
steadily growing slice of the hotel tax for general expenditures.
Last year, the local government allocated slightly more than half
of the $150 million generated by the hotel tax for the general
fund.
Mike McDowell, chief executive of the
San Diego Lodging Industry Association, knew more cuts were
inevitable, so he spearheaded an effort to create a Tourism
Marketing District (TMD), a nonprofit entity that collects a 2
percent assessment on hotel bills at properties with 70 or more
rooms, effectively raising the total tax rate on those hotels from
10.5 percent to 12.5 percent. The TMD went into effect in January,
and all of the money generated by the 2 percent assessment will be
controlled by a nine-member board of hotel representatives and will
be dedicated solely to destination marketing, with about half going
to the SDCVB. After this June, the city will keep all of the
original 10.5 percent hotel tax, most of it for discretionary use.
The TMD is projected to raise between $28 million and $30 million
this year, and officials at the CVB expect to see a boost in
overall funding as a result, despite the loss of hotel tax
revenue.
San Diego’s is a rare case of hoteliers
agreeing to tax themselves without a tangible product, such as a
new convention center, to fund. McDowell says they never would have
approved a hike if the money weren’t restricted to marketing.
The percentage of hotel taxes dedicated
to municipal general funds is one of the most emotionally charged
issues of the debate. Most hoteliers or CVB executives would
bristle at the thought of a city controlling 100 percent of the
hotel tax funds. Paul Astleford, president and CEO of Experience
Columbus (Ohio), thinks it’s legitimate for local governments to
take a portion of hotel taxes, “but once it starts going above 20
percent, now it’s getting irresponsible.” His opinion is echoed by
many other CVB officials.
Across the country, allocations vary
drastically. Boston sends 45 percent of the total tax on hotel
rooms to the state’s general fund, and another $18 million annually
to the city’s general coffers. In California, San Francisco
dedicates 57 percent of its tax to the general fund, and Los
Angeles keeps a whopping 60 percent for general use. By contrast,
Houston and Indianapolis leave none of the local hotel tax for
discretionary use, dedicating all money to improving or marketing
the cities, though Houston also has a state hotel tax, of which a
portion goes to the general fund.
Bill Geist, president of Madison,
Wis.-based Zeitgeist Consulting, a company that works with
destination marketing organizations, conducted a study in 2006 for
the Madison chapter of the Wisconsin Lodging Association, looking
into the allocation of hotel tax money for 40 cities comparable to
Madison. He found that, on average, those cities dedicate about 30
percent of the hotel tax to convention centers and 40 percent to
DMOs. The remaining 30 percent “is all over the map,” Geist says.
Madison, whose CVB had been “perennially underfunded,” according to
Geist, a former president of the Greater Madison Convention and
Visitors Bureau, increased its appropriation for the bureau after
the report came out, but only to approximately 20 percent of hotel
tax receipts.
Where the money
goes
Here’s a look at how much other
destinations charge in hotel taxes and how that money is spent.
The 17 percent club.
Cincinnati, Houston and Homewood, Ala. (in Greater Birmingham), all
tax hotel rooms at a rate of 17 percent, among the highest in the
country. Chattanooga, Tenn., charges 17.25 percent. But just
because a city has a high tax rate doesn’t mean it’s an expensive
destination. In Cincinnati, travelers could spend about $100,
including tax, for a hotel room, whereas a room in Boston, with a
lower tax rate, might cost $180 (see chart, below). Still, at
upscale properties in tax-heavy destinations, the dollars can add
up. A standard room at the 487-room Westin Galleria Houston for the
first week in February recently was listed on the hotel’s website
for $319 before taxes; a 17 percent tax rate adds more than $50 to
the bill, bringing the total to $373.23.
Officials in these cities are proud
that the bulk of the revenue is used to improve the visitor
experience, and all dismiss the impact of high tax rates due to
overall affordability. Of Cincinnati’s tax, about 60 percent goes
to the CVB and convention center, 35 percent goes to general funds,
and 3 percent goes to sports stadiums. Close to 80 percent of the
hotel tax in Birmingham, generally set at 14 percent, is funneled
back into the tourism industry, and Chattanooga dedicates all of
the money from its 8 percent hotel tax (a 9.25 percent sales tax
also applies to hotel rooms) to its CVB and to pay off debt on a
$120 million riverfront improvement project.
The state of Texas has what could be
the country’s strictest legislation governing the use of city hotel
tax. Every expenditure must directly promote tourism and the
convention and hotel industry, and must fit into preapproved
categories, such as convention center costs, historical
restorations or arts programs that generate hotel activity. In
Houston, by law, at least 23 percent of the tax revenue must be
spent on advertising and promotion, and up to 19.3 percent on arts;
the balance for at least the next 20 years will pay for the
convention center and headquarters hotel.
Cleveland. For years,
Cleveland tried to improve its convention center but only began
moving forward after Chicago-based Mer-chandise Mart Properties
Inc. promised to bring a medical mart with permanent exhibit space
to downtown, contingent upon the city building a new convention
center.
The issue, as always, was funding.
“Commissioners looked at all tax applied by county law, and the
only one that generates enough revenue as a single source is sales
tax,” says Dennis Roche, president of Positively Cleveland, the
city’s CVB. It didn’t hurt that in Cuyahoga County, sales tax can
be increased without a public referendum. Last October, county
commissioners raised sales tax by a quarter percent, to 7.75
percent, to fund the project, increasing the total tax on hotel
rooms in Cleveland to 15.25 percent. Of the 7.5 percent hotel tax
in Cleveland, one-fifth is still paying off debt on the Rock and
Roll Hall of Fame and Museum, which opened in 1995, and much of the
rest goes to the convention center and the CVB.
Spreading the tax burden widely via
sales tax increases is the envy of the tourism industry. Hoteliers
often complain that they are singled out to be piggy banks for
governments, and they argue that everyone who benefits from the
expenditures of the hotel tax should contribute to it.
Las Vegas. The gaming
mecca collects the most dollars of any city in the country through
hotel tax, just shy of $400 million last year, by charging 9
percent (sales tax is not applied to rooms), well below the average
of its competitors. Because the intake is so large, the city and
county can afford to spread the wealth around. Clark County, Nev.,
received $44 million from the hotel tax for transportation
expenditures, and $71.5 million went to county schools. The state
tourism commission received $16.5 million and the city kept $53.5
million. The Las Vegas Convention and Visitors Authority’s
allotment was $212 million, more than the total hotel tax revenue
in most cities.
The LVCVA distributes some of that cash
through a grant program, which has funded things such the Fremont
Street Experience, a pedestrian mall with a giant LED-screen
canopy, at a rate of $1 million per year for seven years;
Shakespeare in the Park in the city of Henderson, and a pavilion
with a stage for events near Henderson’s city hall.
How much is too
much?
“People have a limit as to what they’re
willing to pay,” says Joe D’Alessandro, president and CEO of the
San Francisco Convention and Visitors Bureau. “When local
government pushes too far, they risk killing the goose that laid
the golden egg.”
The Washington, D.C.-based American
Economics Group has studied hotel tax extensively and in 2004
prepared a report for the American Hotel & Lodging Educational
Foundation in which it was argued that, on average, a 2 percent
increase in hotel tax would end up costing destinations enough
business as to make the net gain less than half the revenue
generated by the higher tax rate. The study also posited that the
negative impact “can be mitigated, and it may even become
beneficial” if tax revenue is used for travel promotion.
But no one else reports a loss in
business due to hotel tax rates, because in most cases, the amount
isn’t enough to make the trip unaffordable. Todd Davidson, CEO of
Travel Oregon, ridicules the suggestion that a 1 percent state
hotel tax established in 2003, when the state passed legislation to
protect hotel tax revenue for tourism development, had any effect
on business. Similarly, A. Douglas Bennett, vice president of sales
for the Indianapolis CVA, says the recent 3 percent hike in hotel
tax to fund the convention center expansion hasn’t cost the city
one piece of group business.
Echoes Robert Doak, president and CEO
of the Chattanooga Area Convention and Visitors Bureau, “We have
not lost any business as a result of the tax rate.” Yes, he allows,
it’s high -- 17.25 percent -- “but when you multiply that rate by
the low ADR, that’s when the real important number comes in,” he
says.
Perhaps the only example of a city
going too high is New York, in the early 1990s, when the total tax
on hotel rooms hit 19.25 percent plus $2 per night. Only then did
travelers and hoteliers push back, eventually getting the rate
reduced to below 14 percent. Now, most see an 18 or 19 percent tax
rate as the limit of what travelers -- or meeting planners -- will
tolerate.
Still, New York’s tax troubles
continue. Hoteliers agreed to a $1.50 per room per night increase
in 2005 to fund an expansion of the Javits Convention Center.
Despite the fact that the project now appears dead, more than $109
million of that tax money already has been spent, including $35
million on consultants.
A Look at Hotel Taxes in 61
Cities
Every room rate in the United States
gets extra charges tacked on in some form of tax, whether it’s
called sales tax, hotel occupancy tax, city tax, convention center
tax, stadium tax or some other tax. Sometimes the amount added to a
hotel bill includes a compound tax, as is the case in Salt Lake
City. The following chart simplifies the combinations of sales and
occupancy taxes as total tax on hotel rooms, but many of the
municipalities pile several additional tariffs on top of room
rates, as reflected in some of the totals provided below.
