Work trips, vacations and tax revenue
Vacations are BACK. Business travel, not so much. Here's what that means for local tax revenue.
Happy Finance Friday! It’s been almost three years since the pandemic temporarily shut down pretty much everything and ultimately changed how (and when) we move around. What we do and where we go all have implications for state and local tax revenues and spending. The most obvious one is the fact that working from home has decreased the daytime population of cities. But I’ve written about that previously and this week, we’ll look at some of the other ways our post-pandemic travel movements are affecting public finance.
Business or pleasure?
My podcasting colleague Justin Marlowe, a professor at the University of Chicago’s Harris School of Public Policy, recently published research that looked at how the pandemic has affected lodging taxes. He and coauthor Thomas Hazinski, an expert on publicly funded sports and entertainment facilities, used hotel revenue performance as a proxy for lodging tax revenues.
They found that vacation and leisure travel destinations have not only recovered, many have exceeded their pre-pandemic levels. Meanwhile markets focused on commercial travel have lagged.
Specifically, from 2020 through June 2022, the RevPAR (average annual hotel revenue per room) ranking shifted dramatically. “The predominantly commercial and group markets declined more and have been slower to recover than markets with a mostly leisure demand,” the authors wrote.
Biggest declines: Boston, Chicago, and Washington, D.C.
New York lost its long-standing No. 1 lodging tax revenue ranking.
Popular tourism destinations (Oahu, Phoenix, San Diego, Orlando) are doing better than ever.
The chart below shows the difference between 2019 RevPAR rankings and the 2022 rankings thus far. The cities that have shot up dramatically in the rankings are all ones with attractive natural amenities like beaches and good weather.
The rankings shift between certain types of destinations indicate not only a de-emphasis on business travel but a more general shift toward vacation travel. So it’s not that we aren’t going places. But when we do go through the expense and hassle of travel, we want it to be for fun. In their paper, Marlowe and Hazinski note that meeting travel appears poised for a comeback but “whether small group and individual business travel will recover remains an open question.”
Revenue implications: On the plus side, this is not like the sales or property taxes, which make up the bulk of municipal tax revenue. Lodging taxes are a comparatively small share (less than 5%) of general local revenues in most places. The exceptions:
In Anaheim (home to Disneyland), lodging taxes account for 14% of general government revenue.
In Orlando, Minneapolis and San Diego, they make up nearly 9%.
Lodging tax collections have recovered in all these cities.
Still, Marlowe and Hazinski note that lodging taxes support roughly $14 billion in outstanding debt for projects (usually convention centers or other entertainment facilities). In places that have traditionally relied more on commercial travel, local governments may be asked to step in if lodging tax revenue can’t fully cover scheduled debt payments.
Planes, trains and automobiles
Considering how we get to and from our vacation destinations, it follows that airport and toll road traffic have nearly recovered. But mass transit isn’t even close.
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