Although travel buyers and hoteliers infrequently see eye-to-eye at the negotiating table, there is one issue they unify against: high hotel taxes levied by state and local governments. Hoteliers describe them as a disincentive and buyers as a disservice, but they are united in seeing such taxes as detrimental to the hotel industry.
Now that the hotel industry has reclaimed its position as robustly profitable and continues an upswing in average daily rates and revenue per available room, governments steadily are imposing higher hotel taxes to finance and support state and local endeavors. What miffs hoteliers is that, in many instances, the money generated from increased taxes is not being funneled back into the industry or used to promote tourism. Instead, it often subsidizes such ventures as new sports arenas, offsets teachers' salaries or even shrinks government debt. "When municipalities are looking for additional revenue, the first thing they do is say, 'Let's have additional taxes on the hotel industry,' " said Joe McInerney, CEO of the Washington, D.C.-based American Hotel & Lodging Association, which represents and acts as a mouthpiece for every sector of the lodging industry. "Taxes take care of municipal spending. If you are going to raise taxes, at least promote more tourism and travel with it." The AHLA joins with its state associations to combat new state and local taxes when they are announced.
Rob Canton, PricewaterhouseCoopers director of its sports, convention and tourism practice, bolstered McInerney's sentiment. "Most destinations that raise their hotel tax do so under the premise that it will reinvest the revenue back into the community," said Canton. "If that reinvestment is in a convention center or headquarters hotel for that center, than it's a lot easier to justify as opposed to keeping or attracting something like a pro sports franchise. Good for the community, but less of a return because the number of out-of-town visitors would be less."
The difficulty for hotels is that taxes are an entity entirely out of their control. While a hotel can set its own room rates, even other room fees, taxes levied by governments are out of their command. Yet a misconception is that hotel taxes affect tourists traveling into the city, when that's not necessarily the case. "We're seeing more and more states and municipalities thinking it's an easy way to collect cash and they figure it's not a tax on local residents, it's a tax on the visitors," said Bill Connors, executive director of the National Business Travel Association. "That's not always true. A big company's overall hotel spend will probably be the biggest in that company's headquarters city because they have people coming in, doing sales and such. If you ask any of our members what city their biggest hotel spend is, they'll tell you it's their local headquarters. It's not just a tax on visitors, it's a tax on local employers and that's the argument the NBTA brings to the table."
While hotels are forced to include these taxes on top of already steep room rates, it is the corporate travel buyer who feels the full brunt of the added fees. "From the buyers' perspective, taxes are making the challenges even harder," said PwC's Canton. To navigate through this challenge, some companies have curtailed the number of employees sent on certain business trips.
"We limit the number of travelers to certain locations because of high taxes," said Kevin Maguire, director of global travel services at Applied Materials. "It's really a double-edged sword, not just a buyer issue. The seller is hurt too because they have no control over taxes. What it does is make you look at eliminating the amount of travel to certain locations because of the costs involved."
Also suffering is the meetings business, which hotels rely upon as a key revenue source. "Companies and organizations are not holding meetings in certain places because taxes are so high. It's hurting all parts of the industry, and we're getting killed," said Maguire.
Understanding taxes is yet another skill corporate travel buyers must possess in order to manage a successful travel program—one that also placates senior management. "The biggest thing about taxes is that people forget about them and get caught up too much in ADR," said Sam Schisler, co-chair of the NBTA hotel committee and global hotel program manager for clothing manufacturer Limited Brands. "Taxes are forgotten about, but shouldn't be because spend is spend and so it needs to be budgeted for."
While some taxes may be smaller than others and amount to only a few extra dollars on top of rate, NBTA's Connors warned that although the amount may be small, it's exacerbated by the amount of room nights some bigger companies occupy. "Some people say it's only a few dollars a day," he said, "but if you have a corporation that has a million room nights, it's a tremendous expense. Rates are already bad and get worse when you start piling on fees."
As history has shown, lobbying to lower hotel taxes or expunge them altogether can result in success. In 1990, a New York City hotel room was subject to taxes totaling 21.25 percent according to the New York City Independent Budget Office. However, mounting pressure to reduce hotel taxes persuaded the New York Senate to eliminate its 5 percent hotel occupancy tax in 1994.
"New York is a classic example of how you can turn it around by eliminating taxes," said Connors. "The city was losing business left and right, so they eliminated the tax, which resulted in showing that you can stimulate business if you get rid of crazy taxes." Added PwC's Canton, "There was a lot of criticism of those taxes and there ended up being a quasi-boycott of the destination and the pressures led to it being reduced."
Taxes on hotel rooms always will be a source of government income, but recent efforts by such hotel companies as Marriott International to provide total pricing transparency
(BTN, April 3) are important, said the AHLA's McInerney. "People are now requesting that hotel companies quote their rates with the total taxes," he said. "It's important for the consumer to see actual cost."