Easiest way to ruin tourism industry? Tax it.
Tourism taxes have become an increasingly trendy pick for elected officials hoping to raise additional revenue to cover increases in government spending.
Tourism taxes have become an increasingly trendy pick for elected officials hoping to raise additional revenue to cover increases in government spending. But hiking already-high taxes on car rentals, hotels, airline flights, and other tourism necessities brings on a slew of problems.
Policymakers should know better than to place additional burdens on struggling industries during a recession. Unfortunately, too many politicians see these taxes as an easy way to tap additional revenues from non-voting visitors and avoid backlash from their own constituents. But such tax hikes have serious consequences for residents, even in locations that don’t have a vibrant tourism industry.
According to the Maine Public Policy Institute, “while there is no economic consensus about which party taxes are shifted to, a general rule of thumb is to assume that one-third is shifted to owners, one-third to employees, and one-third to customers.”
In Hawaii, economist Leroy Laney found tourism affected roughly 75 percent of all jobs in 2007. Thus tourism taxes can have a devastating effect. Even if Hawaii’s recently passed hotel tax hike has only a small direct effect on the Hawaiian tourism industry, the indirect negative effects will be amplified as they ripple through three-quarters of the state economy. And when these tourists go elsewhere, taking their spending with them, taxpayers will be left with yet another budget deficit and a further weakened state economy.
Car rental taxes are a prime example of a “tourism” tax that is paid largely by local residents. William Gale, vice president and director of economic studies at the Brookings Institution, concluded in a study he conducted on car rental taxes, “the burden of these excise taxes on car rental customers creates substantial negative effects on local consumers and business owners.” He added, “broadly speaking, tax exporting is a ‘beggar thy neighbor’ policy; all localities would be better off in the absence of all such policies.”
Tourism taxes also are being used on the local level. In 2008 Smart Money magazine noted, “Chicago has the highest tax burden for travelers, adding $42.44 to daily expenses,” making it the least-friendly U.S. city for travelers.
Instead of kicking an industry while it is down, states and localities should focus on reining in their budgets by eliminating subsidized development schemes such as sports stadiums and convention centers. In order to promote tourism as part of a strong state or local economy and have a stable budget, it is vital to create a non-distorting tax code with low rates and a broad base, coupled with spending reforms. The documents linked below offer further discussion of tourism-related taxes.