Taxing travelers is a fairly common way to fund state and local tourism promotions. The South Dakota Legislature, for example, voted in 1995 to remove the Department of Tourism from the state budget and instead fund the department's operations through tourism taxes. Last year was the first that the tourism program was funded solely by a tax on hotel/motel rooms, admissions to some attractions and gift shop sales at those attractions, as well as a percentage of proceeds from Deadwood gambling profits. But in 1996 visitor numbers were down in the state, fewer tax dollars were collected, and the Department of Tourism's budget dropped 35 percent.
For the past 10 years, Travel Montana, that state's tourism department, has been funded by a 4 percent bed tax. Montana tourism officials say you need only look at the numbers to see how successful that tax has been over time: Since 1988 Montana's annual visitor numbers have increased 54 percent, from just over 5 million to 8 million; the bed tax has generated over $64 million; and visitor expenditures were 1,200 percent larger than the bed tax amount invested in tourism development and promotion in the state.
The success of the bed tax has not escaped Montana legislators. Introduced in the current legislative session were a number of bills aimed at claiming some tourism tax dollars for the state's general fund, including one that would have capped the amount of money Travel Montana could receive, with the overage going to the general fund. Another would have simply increased the bed tax and transferred a percentage of the profits to general revenue. According to Travel Montana officials, a few of the bills were withdrawn from consideration, and it appears unlikely that the others will pass this session. But the move by state legislators to get a piece of that tax pie is not surprising, especially in mostly tax-free Montana, where revenue sources are already limited.
The danger of relying on travelers to sustain tourism, of course, is that the numbers do fluctuate, and the condition of the overall economy affects tourism perhaps more than other industries because it involves discretionary spending. And a state could end up in a "Catch-22" situation: less money to spend on promotions, fewer travelers are lured to vacation sites, resulting in less money to spend on promotions.
But perhaps more dangerous is looking to tourism taxes to contribute to government general revenues, according to research under way at the World Travel and Tourism Council Tax Policy Centre housed at Michigan State University in East Lansing.
Taxing authorities until recently have largely ignored tourism, says Donald Holecek, director of both the Tax Centre and the university's Travel, Tourism and Recreation Resource Center. But that is no longer true for a number of reasons, he adds. The travel and tourism industry has pushed hard to get recognition as a major player in the country's economy, and has also pressed for targeted taxes, largely to improve tourism efforts, Holecek says. Couple the economic scale of tourism with governments that face an increasingly rebellious tax-paying electorate, and travelers appear to be an easy tax target because they generally don't vote where they vacation, Holecek says. And overall, governments have run out of other new revenue sources.
But taxing tourism may be short-sighted, Holecek says. While an increase in taxes on tourism may expand revenues in the short term, tax increases generally lead to price increases, which could mean fewer sales and fewer tax dollars collected. And, ultimately, the businesses involved could reduce their work force, leading to, perhaps, other costs to government.
Tax Policy Centre research expects to show that projected revenue increases may not be realized; instead, taxes on travelers could produce negative net impacts on governments' fiscal position.
The industry is also worried about governments putting a greater tax burden on a single industry, Holecek says, citing the example of using tourism taxes to help build sports stadiums. Take New York City, says Holecek. When that city's bed tax, used to satisfy several state and local funding agendas, exceeded 20 percent, the city started losing convention business, and the taxing authorities had to back off.