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Thursday, December 19, 2019

Another Question for Lodging-Tax Supporters

In a previous article I asked five questions about the lodging tax. In this article I add a sixth question, all of which the legislators who support the tax need to answer before they actually vote on it. 

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The lodging tax is a rapidly rising threat to private businesses in Wyoming, not just those who operate in the industry targeted by the tax. The threat comes in two forms: the impact it will have on the local economy, and the motive that our state government has for wanting the tax in the first place. 

It is worrisome that the tax appears to have support within the accommodations industry: they are being told that the tax will only be used to market Wyoming on behalf of our tourism industry. But why would government - out of sheer benevolence - get involved in advertising, a profession that the private sector has perfected over the centuries? Why would government do this without gaining a single dime for itself?

The obvoius answer is: it won't. Our state government, desperately reaching for new revenue in every cardinal direction, wants the lodging tax because they know that once the tax is in place, they can raise it and get more revenue for their own general fund. They sell the tax now as something innocuous, to win over skeptics who otherwise would not want to see their industry burdened with yet another cost they can't accommodate (no pun intended).

Supporters of the lodging tax, both within the industry and in the legislature, may want to rethink their support on the grounds of five questions I asked in my previous article on the lodging tax:

1. Is it going to be a general, statewide tax, or a geographically selective tax?
2. If it is a general, statewide tax, will it be a flat rate or will it be differentiated with varying rates?
3. Will the state subsequently let local governments in on the revenue stream?
4. Is the tax going to apply year round, or is it going to be seasonal?
5. What is the tax rate going to be, and how long is it going to stay unchanged before it goes up?

I am adding a sixth question later in this article. 

The fifth question above is particularly important and points squarely to the government motive behind this tax. Generally, the trend in taxation is that once a tax is created it only grows upward and outward; the occasions where we see taxes go down are rare, and even more rare are those occasions where a tax is cut without being "replaced" by another tax.

Once we have a lodging tax in Wyoming it will go up, especially for the reasons I point to in the third question above. However, it is also important to keep in mind that even if the state retains all the revenue, it will raise the tax in the future to get money on top of what it promised the industry (to do its advertising). We would not need any significant rate increase for it to start doing some real damage. 

In fact, already from day one the lodging tax would stick out: the rate proposed in HB66 from the last session was five percent, higher than in nine other states. If we add the state sales tax - as we should - the combined rate exceeds that of 38 other states. 

Then we have to add the local sales taxes, which - if the Revenue Committee gets its way - will go up next year.  

It goes without saying that if a hotel in Wyoming has to add more money to the bill than comparative hotels in 38 other states, they stand at a disadvantage trying to attract conventions and conferences. Since many proponents of this tax also are quick to point out that the tourism industry (as it is casually referred to) is our state's largest employer (it is not) it makes no sense that they are trying to burden it with yet another tax.

Supporters of the tax within the industry should be very careful what they ask for. Right now they are under the impression that the tax revenue is going to be used to pay for advertising on their behalf - so they don't have to do it themselves with the money they now surrender to the state in the form of a tax. 

However, this is a dangerously short-sighted approach: as my questions above indicate, there are several ways that the state can raise, expand and otherwise broaden the tax. For example, if the municipalities demand a share of the revenue stream (there are examples of this in other states) the state will have to raise the tax rate in order to not lose any of its own revenue. A mere one-percent increase from a five-percent rate would push the combined lodging and state sales-tax rate up to where only five states and the D.C. had a higher rate. 

Again before adding local sales taxes.

It is never a good idea to raise taxes - they are high enough as they are - but it is a particularly bad idea to raise taxes in a state where the economy has been one of the worst in the nation. The private sector in our state, is not doing well. We have seen some decent GDP numbers lately, but that is almost entirely due to a spike in minerals activity. In the second quarter of 2019 the minerals industry, which is one quarter of our state's economy, accounted for more than 86 percent of our economic growth.

Most other industries grow at paltry rates, stand still or decline. The accommodations industry, which is being targeted by the lodging tax, accounted for only two percent of our state's economic growth. Its share of our state GDP is 3.1 percent, which - bluntly - means that already before it has been burdened by a lodging tax, it is growing below its potential.

The size of the industry is important, especially since it is being used as an argument for the tax. Those how propose the tax, and to socialize advertising for it, suggest that "tourism" is our state's biggest industry. However, this argument does not hold water. 

To begin with, there is no such thing as a specific "tourism" industry; the businesses included under this term range from hotels to restaurants to art galleries to theme parks and other recreational outfits. All of these attract all sorts of visitors, not just tourists from Europe (which is basically what the lodging tax would pay to attract). 

The term "tourism" is slapped on to some economic activities not because it helps us understand our economy, but because it gives this impression of a free tax base that we can tap into at no cost to ourselves. If a Hungarian family decides to spend their vacation in Wyoming, it is said, the taxes they pay are "free money" to our government. Nobody in Wyoming is burdened by that tax.

At the same time, a family in Rock Springs that goes to Sheridan to visit Aunt Mabel who is in a long-term care facility, will be staying at the same hotel as the Hungarian family. Both families pay the same tax. 

On top of that, even when a tax does grab money from tourists, in the bargain it harms the local economy. The money that the lodging tax siphons off from the Hungarian tourists as they pay their hotel bills, is money they would otherwise have spent somewhere else in the community. When they discover that taxes add a surcharge to being a tourist in Wyoming, they re-think their spending. A dinner at a steak house is downgraded to a stop at the local Arby's; less money goes toward souvenirs; they stay at cheaper hotels. 

A cheaper spending pattern reduces revenue for local businesses, and for the tax-grabbing state government.

Add to this all the other taxes that our legislators want: a higher gasoline tax, higher local sales taxes, and above all: the corporate income tax. How much will be left for local businesses to make, once government has grabbed its share?

There is another aspect to the "tourism" argument. The tax that is supposed to attract more tourists is going to hit lodging companies, in other words those that fall under the "accommodations" label in official statistics. This industry is not at all the largest in the state:

  • The minerals industry is the largest in terms of production value;
  • Retail has the highest number of employees;
  • Weekly payroll is bigger in minerals, construction and professional services.

The number used to portray "tourism" as the largest industry is from the "leisure and hospitality" super-category. However, if we are going to use those numbers the largest industry - by a fair margin - is actually "trade, transportation and utilities".

The super-category "government" towers them all, but that is a story for another day.

In other words, the industry targeted by the lodging tax is not nearly as strong economically as it is made out to be. While the Leisure-Hospitality super-category provides approximately 36,000 jobs on an annual basis, that number varies dramatically over the year. In 2018 the number of employees topped out at 42,800 in July and fell to a low-point 31,100 in November. 

The lodging tax would hit employers of about one third of these workers, namely those who are specifically employed in accommodations.

Even small adverse changes will harm the employees in this industry. The argument that the tax is used for advertising is, at best, a hollow one: nobody has produced a report showing what tourism activity can be expected from having government employees do the advertising instead of the businesses themselves. 

Which brings us to my sixth question to the supporters of the lodging tax: will the tax bring enough new business revenue to compensate for the increased cost?

This is no small question. Employment in leisure and hospitality is generally a cyclical - not to say volatile - experience. It will not get better with a tax, the positive effects of which are vague at best, a mirage at worst. Workers in this industry have the shortest work week anywhere in the private sector. Looking again at the super-categories reported by the Bureau of Labor Statistics, with annual average numbers from 2018,

  • Private-sector workers generally in Wyoming have a workweek of 34.9 hours;
  • Mining workers (including both extraction and support functions) average 45.3 hours;
  • In construction the work week is 41.6 hours;
  • Trade, transportation and utilities (again the largest super-category in terms of employees) works 35.6 hours per week;
  • Professional and business service employees put in 33.4 hours;
  • In education and health services the work week is 33.8 hours;
  • Leisure and hospitality workers report an average of 25.4 hours per week.

In 2018 the average weekly paycheck in leisure and hospitality was $396. This is less than half the average in the private sector. 

I hate to say this, but those in the lodging industry that support this tax are being bamboozled into becoming another milking cow for a government hungry for more tax revenue. Rather than putting themselves in this position, they would be smart to change their position and reclaim the right to do their own advertising and, generally, run their businesses as they see fit.

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