Nightly hotel taxes in the United States last year generally increased by less than three percentage points, though the number of cities where the total tax approached 15 percent to 17 percent reached a new high. According to one taxation expert, this is the tipping point at which the hospitality industry, as well as business travelers and the companies picking up their tabs, start to object to the heavy tax bite.
"Some local and state governments kept hotel taxes flat in 2003, while others raised them 2 percent or 3 percent," said Charles de Seve, president of the American Economics Group research firm in Washington, D.C., and author of a study on hotel taxation issued this year under the auspices of the American Hotel & Lodging Association. "Each government body that raised taxes thought it had a reasonable explanation, mostly to fund civic projects that benefit the local community, if not travelers, whether on business or leisure. But after a point, people begin to lobby to roll back the high numbers."
At the very high end of the scale, Houston and Cincinnati and Columbus, Ohio, each levied taxes in 2003 in excess of 17 percent per night. Among the top 15 cities in BTN's annual Corporate Travel Index
(BTN, Feb. 23), the leaders in terms of taxes were Washington, D.C., at 15.86 percent, New York at 15.24 percent and Chicago at 14.9 percent. This means travelers to those cities found an extra $17.49, $25.84 and $15.38, respectively, tacked onto their bill. The national average tax for the year was 12.46 percent, representing $9.53.
For travel buyers, the gradually increasing taxes come at a time when hotel rates are rising in many markets, as the lodging industry rebound gains traction. At the same time, hotels are starting to increase charges for many value-added amenities, such as parking and breakfast, which they provided on a complimentary basis to lock in business during the recent downturn.
Hotel taxes are not one of the items that buyers can control, anymore than they can control the destinations where their travelers' business takes them. "But it adds to the pressure to keep a lid on the costs that we can control. Senior management, after all, expects the same vigilance as during the downturn," said Yasuo Sonoda, travel manager for Macromedia in San Francisco.
The focus on costs extends to incidental expenses, such as the value-added amenities for which travel buyers now may have to pay. "The cost of these things might not be significant in itself, but they add up," said Terry Sullo, manager of travel and meeting services at Akamai Technologies in Cambridge, Mass. The same applies to taxes.
"When it comes to budgeting and forecasting, many buyers still focus on the room rate itself, rather than the total cost, market by market," Sonoda said. Similarly, travelers typically do not focus on taxes until they are hurrying to check out, if at all. Recognizing the problem, the National Business Travel Association request for proposals format requires hotels to list applicable taxes, including both local and state. Both Marriott International and Starwood Hotels & Resorts Worldwide have begun providing total pricing information that includes taxes and special charges to global distribution systems
(BTN, July 7, 2003).Adding to buyers' concerns, hotel stays typically are subject to both occupancy and sales taxes. "Depending on the jurisdiction, hotel guests can pay several overlapping layers of occupancy, sales and special taxes on an overnight stay," American Economics Group's de Seve said. In Chicago, for example, the total is comprised of a 6 percent per night state occupancy tax combined with a 3 percent local occupancy tax and 5.9 percent in other local taxes.
Most hotel taxes are a percentage of the room rate, which means travelers staying in upscale and deluxe hotels pay more in absolute dollars than those staying in less expensive accommodations. Another approach is the fixed charge, which is added onto the room bill, regardless of room rate. In New York, a proposal is being considered to add an extra $1.50 to the existing percentage-based taxes. As with similar flat taxes in other cities, the proposal is intended to fund a specific initiative—in this case, the expansion of the Jacob K. Javits Convention Center—for a finite period only.
According to Jonathan Tisch, chairman of the city's convention and visitors bureau, who also is chairman of Loews Hotels, the dedicated per night charge will raise $500 million toward the expansion, as well as the cost of construction of a related sports stadium. Tisch in the 1990s had been a driving force in getting the city's existing tax of more than 20 percent repealed on the grounds that it made the city uncompetitive as a meetings destination.
Tisch said the expanded convention facility will make the city more competitive in attracting large groups. "As a result of inadequate capacity, the existing center has had to turn away bookings representing 800,000 room nights in the next five years," Tisch said.
Flat taxes provide municipalities with a safety net, said Steve Hammond, president and CEO of the convention bureau in Sacramento, Calif., where the total tax in 2003 was 13.18 percent per night. "It enables us to plan business opportunities with the confidence that the funds will be there to support them. With taxes based on a percentage, if business is down, tax revenues follow suit," he said.
Hammond disputed the idea that room taxes export the tax burden to travelers, while residents benefit. "It's true most locals don't stay in their own city's hotels, but some of their taxes often help fund a subsidy to build them," he said. "In fact, revenue from hotel taxes serve both the visitor and the local. Room taxes, after all, are reinvested in a variety of citywide amenities that visitors enjoy."
Yet, de Seve cautioned that there is a downside when hotel taxes get too high. "Travelers tend to stay fewer nights and spend less in restaurants and stores." AEG analysis estimated, for example, that an additional 2 percent increase in the room tax nationally to 14.6 percent would result in the loss of millions of dollars in sales and a gain in net revenue of less than one-half of the tax increase.