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A nice place to visit, but ...

Tourism can spark economic growth, but public funding of the industry is questionable

May 1, 2009


Phil Davies Senior Writer
A nice place to visit, but ...
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“Tourism promotion is an investment that pays off,” declared the Minnesota tourism office last summer, pitching the state Legislature for more financial support. Claiming that tourism “plays a part in the economy of every single county in the state,” tourism officials pointed to over 240,000 jobs and hundreds of millions of dollars in sales tax revenue attributed to the industry in 2006.

Tourism is widely perceived as an economic driver for states and communities, a powerful generator of wealth and jobs, especially in rural areas long dependent on natural resource industries such as agriculture, mining and forestry that have been volatile or in decline, or both. The promise of economic growth from tourism is the justification for public investments in the industry intended to spur further development.

Many rural communities blindly embrace tourism as the key to economic progress, said David Marcouiller, a professor of urban and regional planning at the University of Wisconsin-Madison. “It is easy to see why boosterism is so prevalent,” he said via e-mail. “If you’ve already decided that tourism is what the community needs for development, then attracting more tourists is the mechanism to achieve that goal.”

Tourism advocates insist that on the whole, tourism development is positive; it diversifies rural economies, lifts people out of poverty and helps finance upgrades to amenities that improve residents' quality of life. But is tourism necessarily a boon to district states and communities, and even if it is, should it be subsidized by state and local government to help it grow?

These questions are particularly germane during recessions, when cutbacks in discretionary spending—after all, nobody has to visit the Black Hills—punish the industry. Dwindling revenues force tourist businesses to cut their own spending and lay off workers. Last year cost-conscious Americans took fewer domestic trips than they did in 2007, according to the U.S. Travel Association, and they’re expected to travel even less this year.

Before the current recession growth in tourist visitation had been slowing, pitting state against state and town against town in an often futile battle to increase market share, observed William Gartner, a University of Minnesota economist and expert on tourism markets. “We just don’t have a lot of new travelers coming online,” he said. “[Tourist destinations] are all competing with each other for the same customers.”

Even in good times—many tourist areas in the nation and Ninth District grew rapidly in the 1990s—some have discounted tourism’s value as an economic engine. Critics charge that most tourism jobs pay too little, and that tourist development can increase the local cost of living, overtax public services and despoil the natural environment. Debate among economists over these matters is vigorous and ongoing.

But even if tourism lifts the fortunes of some communities, the larger question remains of whether government should subsidize it by marketing tourist destinations, upgrading infrastructure in tourist areas, authorizing tourism taxes and providing other types of assistance. (Government also selectively aids other industries—helping exporters through state trade offices and giving tax breaks to energy firms, for example.)

Unless markets fail, there’s no reason for government to interfere in private industry. And giving tourist businesses a leg up imposes opportunity costs on society: Tax revenues spent to promote tourism come out of somebody else’s pocket, and they cannot be spent on “public goods” that benefit the state or community as a whole.

An economic boon …

Tourism has been likened to a form of mercantilism based on the three Gs—“get them in, get their money and get them out.” Tourist towns leverage natural amenities such as mountains and lakeshore, together with developed attractions, to draw in visitors who buy goods and services in the community. That spending circulates in the local economy, fostering prosperity not just in the leisure and hospitality trade but also at other Main Street firms such as supermarkets, medical clinics, home builders and accountants.

In recent decades the economies of rural communities vested in tourism and recreation have grown much faster than those of towns without large stakes in those activities. A 2005 study by the U.S. Department of Agriculture’s Economic Research Service (ERS) analyzed socioeconomic data for over 300 rural, “recreation-dependent” counties, including counties clustered in water-rich or mountainous regions of the district. Employment in the tourist-oriented counties grew, on average, at more than double the rate of other rural areas during the 1990s.

Because tourism is a labor-intensive industry, it provides a livelihood for people who would otherwise be unemployed or underemployed. Large cities with diverse economies typically offer residents plentiful job opportunities, but in smaller communities pickings may be slim for low-skilled workers such as laborers and students. If the mine has shut down and the lumber mill isn’t hiring, a job in a restaurant, motel or amusement park puts bread on the table, or supplements income from other sources.

A number of studies, including the ERS report and a 2000 paper co-authored by Marcouiller, have shown that average per capita incomes in tourist counties are generally higher, and poverty rates the same or lower, compared with other rural counties.

Profitable, growing tourism businesses raise real estate values and generate increased tax revenues to pay for new roads, upgraded water systems, better schools and spruced up downtowns and parks. Public investments in infrastructure and community services may attract permanent residents and new industries that further expand the tax base.

These are the benefits of tourism development enumerated in economic studies that attempt to gauge the full impact of tourist visitation and spending on state and local economies. A 2006 analysis of Minnesota’s tourist industry estimated that 41 million visitors spent $10.5 billion in the state that year, supporting 244,000 leisure and hospitality jobs and an untold number in related industries. A study released last year of South Dakota tourism pegged the total economic impact of the industry at $2.4 billion annually.

… or bane?

However, economic impact studies don’t capture the costs of tourism development—how it affects the workforce and people who live in tourist towns year-round.

One of the sharpest criticisms of tourism is that the employment it offers—serving food, cleaning motel rooms, clerking in stores—doesn't provide a living wage. Many tourist jobs in rural areas are seasonal, and relatively low paying compared with those in manufacturing and resource-extractive industries such as mining and paper milling. Some researchers, including Marcouiller, worry about income inequity—the idea that tourism creates an underclass of workers toiling in subsistence-wage, dead-end jobs to serve well-heeled vacationers and seasonal residents.

Grounds exist for these concerns, although the low-wage question remains unsettled, partly because the tourism industry is ill-defined. (Gartner points out that lawyers, real estate agents and construction crews could also be considered tourism workers.)

Average per capita income may not reflect the earnings of the typical tourist worker, because a small number of wealthy residents can skew the numbers. In some analyses a truer picture emerges from data on earnings—income from wages and other labor. The ERS study found that the average job in recreation counties paid about 2 percent less than in other rural counties, although the study also found that resident workers of tourist areas on average earned more total pay—possibly because some workers held more than one job.

A number of case studies over the years of rural tourist communities have found that tourism does little to alleviate poverty or promote upward mobility. A study of a rural region of southwestern Wisconsin in the 1990s found that tourism supported a multitude of low-income workers and a much smaller cadre of well-off business owners and managers, but provided scant employment opportunity for middle-income households. Another charge leveled against tourism employment is that many low-skilled jobs at hotels, ski resorts and other tourist businesses are filled by temporary workers from outside the community, the state or the country. At the end of the season, they leave, taking part of the proceeds from visitor spending with them.

In addition to questioning the value of tourism jobs, critics of tourism development note that it can impose other, often unforeseen costs on communities:

  • More expensive housing and other goods. The flip side of fast-rising incomes and land values is a higher cost of living that erodes the buying power of low-paid tourist workers and retirees living on fixed incomes. Marcouiller’s 2000 study, co-written with U.S. Forest Service researchers, found that housing prices were higher, on average, in tourism-dependent counties than in other nonmetro counties.
  • Strained public services. Rapid population growth that often attends tourism development puts extra demands on roads, police and fire protection, water systems and other public facilities, particularly during the summer in the district. Local government may have no choice but to increase property and sales taxes (paid by residents all year) to pay for new and upgraded facilities and services.
  • Environmental degradation. Taken to extremes, tourism development can damage the natural amenities that attracted tourists—as well as seasonal residents and retirees—to a community in the first place. Air and water pollution and related health problems can also accompany heavy tourist development.
  • Increased crime. Research has shown that crimes such as robbery, larceny and burglary are an unfortunate byproduct of tourism. A seasonal influx of tourists into a community creates targets for both homegrown criminals and predators from outside the area. The ERS study found that the rate of serious crime was 17 percent higher in recreation counties than in other rural counties.

The path not taken

Arguably, despite its drawbacks, tourism still offers many rural communities the best opportunity for economic growth. Few rural communities have realistic prospects for job growth in well-paying, year-round industries like mining, manufacturing and health care.

“The thing is, what alternative do you have?” said Gartner, observing that employment in traditional industries such as mining and wood products has been waning for decades. In a 2004 analysis of rural employment in the United States, Gartner found that for every new job created in extractive industries over the previous 30 years, nine were created in retail and service, sectors closely linked to tourism.

And a little help from government may foster tourism growth in areas of the district suited to such development. State tourism offices strive to draw visitors from outside the state to patronize tourist operations and related businesses. State and municipal taxes on lodging and restaurant meals underwrite the promotional efforts of local convention and visitor bureaus. Cities widen roads and install sidewalks to improve access to hotels and amusement parks.

But any government role in promoting tourism is suspect. Tourism, like any other industry in a market economy, is capable of thriving on its own without interference. Government support for tourism entails an opportunity cost, the path not taken when tax revenues go toward upgrading infrastructure in tourist areas, or extolling the charms of a particular state, region or city. (Minneapolis’ convention and visitor bureau has an annual budget of $9 million, over three-quarters of it derived from city funds.)

Economic theory has established that government’s role is to provide public goods such as highways, schools and parks that lay the foundation for economic growth. Every dollar spent on tourism is a dollar unavailable to pay for projects and programs that benefit society at large. Yes, tourism development generates tax revenues for the public coffers; but much—even all—of the development might have occurred without help from government agencies.

Moreover, taxes raised to assist the tourism industry are paid by a multitude of firms and individuals who don’t benefit from tourism. Even tourism-specific taxes such as lodging taxes are passed on to business travelers as well as tourists, leaving companies with less money to spend on other goods and services. Such taxes act as a drag on economic growth, further damaging public welfare.

Government assistance isn’t necessary for tourism to flourish in a state or community; tourist operators can help themselves by pooling their resources. Local or regional tourism associations, for example, tap their own members to pay for advertising, travel guides, trade show presentations and other promotions.

Private tourism groups in the district that raise funds from fees assessed on tourist businesses include the Upper Peninsula Travel & Recreation Association and Mississippi Valley Partners, a nonprofit organization that promotes 17 towns clustered around Lake Pepin in southeastern Minnesota.