Time to Talk Taxes Again

Excessively high occupancy rates can cripple the businesses they're supposed to help

I seem to come back to this topic every six or seven years, often when the economy is in the dumps, as it is now. Here's the scenario: the economy falters and local and regional governments feel the pinch. As legislators and executives cast about for ways to reverse revenue shortfalls, they all-too-often come to the conclusion that the easiest thing to do is tax visitors because they can't vote.

Sometimes, the trend veers toward raising taxes on car rentals, but usually the pols set their sights on hotel occupancy taxes, which they figure is an easy-to-implement step that doesn't generate a lot of controversy. It's kind of a victimless crime, so they think.

In recent weeks, I've seen press clippings about communities around the country — from cities (Philadelphia and Tulsa) to suburbs (Fremont, CA) to small burgs (Owasso, OK) — that are considering hikes in their occupancy tax rates.

Taxes aren't inherently wrong, of course, and occupancy taxes can serve useful purposes, but the local proposals I've been monitoring are wrong-headed for several reasons.

Some local and state laws mandate that occupancy taxes be used exclusively to promote local tourism and convention business. But in recent years, clever politicians have found ways to circumvent or even flaunt the law to use the revenues for other specific and non-specific uses. Some communities use the money to build sporting venues or cultural institutions or programs. The argument goes that this kind of infrastructure attracts out-of-town visitors who stay in hotels and spend money in restaurtants and shops. Maybe, but maybe not. In Tulsa, for example, a proposed occupancy tax hike from two to three percent would be used to help fund a $70-million downtown baseball stadium. That wouldn't be a bad idea if it were Milwaukee or Denver or some other major league city that wanted to use the money to build a sports venue. But I seriously doubt if many tourists will be flocking to Tulsa to see the Drillers (the town's AA baseball team) play in their new 10,000-seat stadium.

In nearby Owasso, OK, where voters will determine next month whether to increase the hotel tax from three to five percent, city officials plan to blatantly disregard existing law requiring that occupancy tax revenues be used for tourism promotion. If passed, the $140,000 in additional revenues will be used to get citizens more involved in the activities of their neighborhoods.

It's the same in Fremont, CA, where a proposal to raise the tax to 11 percent will be used to operate a local fire station. At least Philadelphia has a more rational idea: its proposal to lift the tax to 14 percent would generate an extra $9 million a year, which will be used to expand the city's convention center.

No matter how the funds are used, excessively high occupancy tax rates can hurt or even cripple the businesses, i.e., hotels, they're supposed to help. A recent study from the AHLA shows that a two-percent hike in the average occupancy tax (now at 12.62 percent nationwide) could cost the U.S. 327,000 jobs, $10 billion in wages and $33 billion in sales for hotels, restaurants and other businesses.

It's important that you keep a close eye on any of these proposals that may emerge in your communities. Well-reasoned tax legislation isn't wrong, but you must be careful that politicians neither raise the tariff too high nor, more importantly, use the revenues for things other than the promotion of your business and industry.

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