Taxing visitors is still costly
Published 10:37 pm Wednesday, June 24, 2015
Lodging taxes in Pike County will rise by 4 percent, thanks to a bill passed by the Alabama legislature in 2015. The measure will provide funds to repair and maintain roads our county roads.
Proponents claimed during these deliberations that visitors to our community would pay the tax. Politicians sometimes say the darndest things about taxes, so is there any validity to the claim that others will really be paying to repair Pike County roads? The answer is yes, but this highlights a challenge posed by taxes within our federal system of government.
Economists study the effects of taxes by comparing, as best we can, before and after snapshots of the economy. We do so by using models like supply and demand and statistical analysis. Suppose that the Alabama legislature in its upcoming special session imposed a $0.50/pack tax on cigarettes. If this raised the price by $0.40 per pack, economists would say that smokers (consumers) paid $0.40 (80 percent) and sellers paid $0.10 (20 percent) of the tax.
This analysis is called tax incidence, a staple of public finance economics. Tax incidence can be challenging, because taxes can have effects in distant markets. But economists agree that consumers, many from outside the local community, pay a large share of hotel taxes.
Of course a lodging tax is not paid exclusively by outsiders. The Johnson Center hosted two conferences this last year bringing students and faculty to Troy. We will pay more for lodging for future conferences. And visiting family or friends who stay at local hotels will also pay this tax.
The ability of communities to impose taxes paid in part by non-residents is called tax exporting. Exporting occurs because economic markets and political jurisdictions do not coincide. Tax burdens can be exported across nations as well: taxes that the U.S. imposes on imported goods, called tariffs, can be paid in part by foreign companies.
Unfortunately, the political process tends to view exported taxes as free money. Consequently “visitor taxes” have been rising rapidly. Both states and cities impose hotel taxes, often at rates in excess of regular sales taxes. Four states have sales and lodging tax rates of 10 percent or more, and cities impose additional taxes. Hotel taxes in the 150 largest U.S. cities average over 13 percent. St. Louis had the highest total hotel tax rate at 17.7 percent. Birmingham and Mobile check in at 17 percent each.
Cities also heavily tax rental cars. Some cities charge taxes of up to 25 percent on rental cars. Americans have paid over $7.5 billion in car rental taxes since 1990. Most out-of-town visitors, who rent cars arrive at airports, also pay hefty airport concession fees.
These taxes definitely do not constitute “free money” for our economy. Taxes paid for business travel will drive up prices of goods for consumers. Visitor taxes have become the politically favored way to fund dubious projects like sports stadiums. A 2006 study found that rental car taxes were funding at least 35 stadiums nationwide.
Tax exporting also raises ethical issues. Travelers cannot vote on the taxes they must pay and essentially face taxation without representation, which the founders of our nation labeled tyranny. And pervasive visitor taxes fuel a turnabout-is-fair-play dynamic: because we pay them when traveling, we impose them on others when it is our turn.
Our federal system of government normally contributes to sound political and economic decisions. Cities and states provide a laboratory to test out new policies, allow people to move to communities with parks and schools to their liking, and offer helpful yardstick comparisons to reveal which governments are wasting our tax dollars. Yet federalism leads to excessive taxes when states or cities can impose easily exported taxes.
Politics too readily views exported taxes as free money, despite their very real costs to the economy. Sound economic decisions require ensuring that the benefits of our actions exceed the costs. The principle applies to the public sector as well, but ignoring the taxes passed on to visitors can lead to wasteful public spending.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at email@example.com and like the Johnson Center on Facebook.