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Tuesday, December 17, 2019

Five Questions for Lodging-Tax Supporters

The lodging tax is increasingly popular among legislators in Wyoming. It also has the governor's support. Here are five questions that those who want the tax should take a serious look at.


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The fight to save Wyoming from higher taxes is going into high gear. We already have the corporate income tax hanging over us, courtesy of Senator Cale Case, Representative Dan Zwonitzer and a majority on the Joint Revenue Committee. There is also a range of other tax hikes in the making, including an increase in the gasoline tax.

And a lodging tax. This one is likely going to be at the top of the agenda when the legislature meets for its 2020 session. 

I have five questions for those who back this tax. And there are many of them. From the Casper Star Tribune:
Gov. Mark Gordon told lawmakers Monday that he would be “willing” to consider a statewide lodging tax if it came across his desk this winter. However, in his first budget presentation to members of the Joint Appropriations Committee this week, Gordon declined to entertain any other tax legislation, instead focusing his first hearing on cost-savings as the state faces a future of declining revenues.
The Tribune makes it sound as if the lodging tax is the only tax hike that Governor Gordon could consider. That is not the case. As I explained after the governor's budget presentation on December 9, our state's chief executive is willing to make a "comprehensive review" of our entire tax system. That, if anything, is "entertaining" other tax legislation. 

We should also keep in mind that the Revenue Committee has endorsed a corporate income tax, which gives that tax significant leeway when it is introduced during the legislative session. So will the lodging tax, even if it is not supported by Revenue; we should not rule out that this tax was brought up in Appropriations precisely because it failed to get through Revenue.

The Tribune maintains its narrative that there are no other tax hikes out there, placing instead the lodging tax in the context of Governor Gordon's endorsement of efficiency reform to state government:
As expected, Gordon spent much of his presentation focusing on cost-savings in the long-term. What was not expected, however, was his support for a new tax. Gordon maintained throughout his time as a candidate and in-office that he would prefer to avoid any tax increases until all possible cost savings are realized, either through budget cuts or by finding efficiencies in government operations. 
Even if these were the only options to reduce the budget deficit that the governor and the legislature had, it would not make either option any more palatable. You cannot close a budget gap with tax hikes, nor can you do it with efficiency gains

Yes, if these two alternatives were taken in complete isolation, efficiency reform would always be preferable. It offers a start on spending reform: it gets you is a little bit of mileage to begin structurally downsizing government.

Over time, though, the gains dissipate, eaten up as they are by the regular growth rate in government spending. (You cannot change the growth rate in government spending without structural reform.) That said - again - in the choice between a rock and a hard place, efficiency reform is always preferable to tax hikes (which are never preferable).

Speaking of which, the Tribune reminds us that the lodging tax would not even bring in that much money - and it would be spent on industry-specific items:
Estimated to generate roughly $19.5 million annually, the legislation was not the most significant revenue bill floated last year. However, the bill was considered to be as close to a self-funding mechanism for the state’s tourism sector as possible, levying fees anticipated to be paid primarily on visitors to Wyoming. If the bill was passed, 80 percent of those revenues would have gone directly to the Department of Tourism, while the remaining 20 percent would have been deposited into a special projects account for tourism-related initiatives.
In other words, here is what the tax is being sold as:

a) A marketing scheme, where one private industry gets a favor from government that no other industry has, namely to get its national and international marketing done for it (when was the last time government marketed windows made in Wyoming to Europeans?); and
b) An economic development - corporate welfare - project funded by the industry.

It is not the government's job to advertise for private industries. Plain and simple. Nor is it the government's job to do "special projects ... for tourism-related initiatives". 

This second use of the revenue from the tourism tax is fluffy and really just means paying for more state employees. So long as they are designated "tourism" workers they can be said to be doing "special projects" in compliance with what this tax would be used for. 

It is surprising to see that this industry does not prefer to do those "special projects" themselves, but prefer to surrender their money to government and trust them with knowing how to best attract more customers for them. Yet as the Tribune reports, this is likely what is now going to happen. The tax, namely, has friends on the Joint Appropriations Committee:
It seems some politicians are warming up to legislating for revenue generation. After Gov. Mark Gordon announced his willingness to consider a statewide lodging tax last week, members of the Legislature’s Joint Appropriations Committee had an earnest conversation Friday in favor of supporting one, reviving a bill that moved swiftly through the House of Representatives in 2019 before suffering a swift death in the Senate.
This time around, though, the lodging tax has growing support, including backing from Senator Bebout. It is not clear what benefits the supporters see to the tax, partly because it will not add anything to the General Fund. Their support, however, is even more mysterious given the complexity with which the tax is applied in many states. One easily gets the impression from the public conversation that the tax is just a general, flat excise tax on a specific industry. 

That is not the case. In fact, here are  questions that highlight the uncertainties associated with the lodging tax.

1. Is it going to be a general, statewide tax, or a selective tax applicable only to parts of the state?

The general, flat-rate model is used in 27 states and the District of Columbia, but it is far from the only model. For starters, Alabama has a higher rate for the part of the state that attracts the most tourists.

In Kansas it is levied on "special statutory designated redevelopment districts". 

2. If the state goes with a general, statewide tax, will it be flat across the board, or will it be differentiated?

The Michigan version is even more complicated. Structured as a progressive tax, it charges
  • zero percent on small hotels with no more than 80 rooms;
  • 1.5 percent on mid-size hotels with 81-160 rooms; and
  • 5.0 percent on large hotels with more than 160 rooms.

For "convention hotels located within a qualified local government unit" there is an additional 1.5 percent tax on mid-size hotels and an additional one percent on large hotels. In other words, convention hotels pay 3-6 percent depending on size.

3. Will the state subsequently let local governments in on the revenue stream?

Montana has divided its lodging tax into two parts: in addition to a four-percent straight lodging tax there is also a three-percent special sales tax on accommodations. This construction is ostensibly to allow local governments to share in the taxation of lodging businesses, thus getting around the states sales-tax ban. 

In Nevada, they have structured the tax exclusively to benefit local governments. Their lodging tax is determined, collected and spent at the local level. The rate varies between one and two percent.  

4. Is the tax going to apply year round, or is it going to be seasonal?

South Dakota does the latter, applying the 1.5-percent tax only from June through September.

And last, but not least...

5. What rate will the state go with, and how long will that rate last before it goes up?

The unweighted average rate for general statewide lodging taxes is 5.3 percent, though the tax can be significantly higher. The highest rates are in Connecticut (15 percent), the District of Columbia (14.95) and Hawaii (10.25). 

Georgia does not charge a percentage. Its tax is instead set to $5 per room.

The lodging-tax bill from last year, HB66, proposed a five-percent tax. This would be higher than nine states that currently have a general lodging tax, but it might be worth noting that the lodging tax should always be viewed in the context of the state sales tax. Here, the picture changes. If we add our four-percent state sales tax to the five-percent lodging tax we now charge a higher combined rate than 38 other states.

And we haven't even accounted for local sales taxes, which are set to go up in Wyoming thanks to more leeway for municipalities to raise their rates. 

Those who support this tax should make sure that they have answers to these five questions, and that those answers are good for more than just the passing of the bill. Experience suggests, namely, that once a tax is in place it is prone to both go up and get new, more complicated features added to it. 

We could, for example, see a Michigan-style convention surcharge in the future, and some revenue-sharing scheme to let municipalities in on the loot.

There are a lot of questions yet to be answered about the lodging tax, questions that supporters need to ask - and be sure to get reliable answers to them.

There is actually a sixth question they need to think about. Click here for more on that one.

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