A Stitch in Haste

Tax Policy Blog relays an anecdote about a pet peeve of mine: hotel taxes —

Today at the National Conference of State Legislators in New Orleans, one speaker referred to raising hotel taxes as a great way to raise new revenue “without taxing your own folks.” That’s certainly true in a narrow parochial sense. But when everyone imposes a huge tax on hotel rooms, we’re all taxing each other.
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States often make this tax exporting to out-of-staters explicit by exempting residents from paying hotel taxes. In Mississippi, for instance, state legislators recently raised the hotel tax in Jackson, but exempted stays longer than 30 days (state legislators often rent hotels for the 90-120 day legislative sessions).

The post then cites to this New York Sun exposé describing how American Airlines was able to avoid $200,000 in hotel taxes in New York because the airline essentially qualifies as a “permanent resident.”

(The combined sales-and-hotel tax in New York City, incidentally, is 13.375% + $2 per room per night. No wonder so many visiting friends end up on my couch.)

I have no quibbles with the post or its view of the “resident exemption” to hotel taxes, which are no doubt sundry exercises in rent seeking by business interests. I just find it depressing, in the same way I find John McCain’s self-lobotomy on the gas tax to be depressing*, that state tax authorities engage in the same kind of economic obliviousness** regarding “tax the tourist.”

As I’ve blogged previously:

Suppose there were no hotel tax at all. The tourist would have that much more money in her pocket whilst visiting. Perhaps she would go to one more show. Maybe she would spend more in restaurants, shops and clubs. Maybe she should stay an extra day, making the hotel itself better off. Perhaps her friend back home — who couldn’t afford the hotel with the tax — would end up tagging along. And so on.

The visitor remits the tax, but does not necessarily pay all of it. A tax on tourists is passed on, at least in part, to the businesses that cater to those visitors. And, derivatively, to the employees of and investors in those businesses.

A “visitor tax” would only make perfect sense if visitors brought negative externalities with them — if the visitor tax were a Pigou tax. But that can’t be right: travel destinations like tourists, don’t they?

Apparently not, or at least not as much as, say, American Airlines.

For Discussion: My understanding is that the reason hotels in many nations ask for and sometimes even photocopy your passport is because they need to be able to prove that the room was occupied by a foreigner in order to avoid VAT or similar taxes (think “duty free” but at the hotel rather than the airport). In essence, these nations have the exact opposite policy of states that try to “soak the tourist.” Wise, foolish, or “all taxes are theft”?

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*Hit & Run has a quick post on John McCain’s warm-fuzzy-feeling (not to mention soak-the-poor) embrace of ever-higher cigarette taxes — “for the children.” As I noted in a quick comment over there:

So John McCain is willing, indeed feels compelled, to listen to “every living surgeon general in America” on the subject of cigarette taxes, but not to “every single living economist” on the subject of gasoline taxes?

“Right(ish)” indeed…

With emphasis of course on the “(ish)”…

**Speaking of tax authorities engaging in economic obliviousness:

Gov. Paterson, convinced [New York] state faces its worst fiscal crisis since the mid-1970s, will deliver the grim news in an unprecedented special address to New Yorkers as soon as tomorrow night, The [New York] Post has learned.

The governor’s address … will say that plunging state revenues will force painful cuts in state services, necessitate a reduction in the state work force, possibly through layoffs, and require other difficult economic measures, source said.
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Spendthrift New York City almost went bankrupt in 1975-76 and the state defaulted on some of its bonds at the same time in the worst fiscal crisis to face New York since the Great Depression.

While state and city leaders pledged to assure the prudence of future fiscal practices, that pledge was largely abandoned during the past 20 years as officials ran up state spending at two or three times the inflation rate because of sharp increases in education and health-care spending.

One of the original principles of Keynesian economics, abandoned long ago as “frivolous” or “obsolete,” was that during prosperous times the government should use naturally rising tax revenues to pay down public debt, establish “rainy day funds,” pre-fund government employee pension funds and other future liabilities, etc.

But of course, in an era where the Republican presidential nominee can insolently tell economists to drop dead, who can possibly expect sound economic policy principles to win the day? Times are good: more taxes to spend. Times are bad: more needs on which to spend. Either way, the spending must flow…

Filed under: Economics & Finance, New York City & State, Taxation & Fiscal Policy