Policy Documents

Research & Commentary: The Damaging Effects of Tourism Taxes

July 28, 2009

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.

 

The Fallacy of Exportability
http://www.heartland.org/policybot/results/21350
This issue brief by the Maine Public Policy Institute denounces the idea that a state can successfully and legally export taxes off the backs of local residents and onto the backs of visitors. It notes that a good percentage of these taxes will be felt by local owners and employees rather than nonresidents.

Economics of Travel & Tourism Taxes
http://www.traveltax.msu.edu/intro/issues/part2.htm
This report by the World Travel & Tourism Tax Policy Center explains the direct and indirect tax contributions the tourism industry makes. It also warns that direct taxes on the tourism industry create distortions in the economy.

USA Today on Tourism Taxes
http://www.taxfoundation.org/blog/show/24837.html
States Tell Tourists to Stay Away
http://www.atr.org/statestelltouristsstayawaya3501
The Tax Foundation and Americans for Tax Reform comment on a recent USA Today article outlining the various states hiking tourism taxes around the country. They agree these tax hikes will have a negative effect on the economy and are an example of poor tax policy.

5 Least Tax-Friendly U.S. Cities for Travelers
http://www.smartmoney.com/spending/deals/5leasttaxfriendlyuscitiesfortravelers23714/?page=2
Smart Money magazine ranks the five least tax-friendly cities and then describes the daily tax burden on travelers in each city.

Taken for a Ride: Economic Effects of Car Rental Excise Taxes
http://www.heartland.org/policybot/results/19712/
Economists William Gale of the Brookings Institution and Kim Rueben of the Urban Institute outline many of the misconceptions about car rental taxes. The paper identifies who really bears the burden of the tax, why it is unjustified, and how it reduces consumer demand.

Promoting U.S. Tourism: Taxes Are the Wrong Approach
http://www.heritage.org/Research/HomelandSecurity/wm2492.cfm
This paper from The Heritage Foundation outlines why creating a government-run tourism agency funded by foreign travelers is a bad idea, and why such an endeavor should be left up to the private sector.

 

For further information on the subject, visit the Budget & Tax Issue Suite on The Heartland Institute’s Web site at www.heartland.org.

Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, contact Legislative Specialist John Nothdurft at 312/3774000 or jnothdurft@heartland.org.