This proposal would eliminate the population requirement of Michigan’s Public Act 263 of 1974, giving rural counties the ability to collect an accommodations tax of up to five percent. Currently, only those counties with a city of at least 40,000, but a total county population under 600,000, are eligible to impose an accommodations tax under PA 263. Eight Michigan counties currently meet this prerequisite*: Calhoun, Genesee, Ingham, Kalamazoo, Kent, Muskegon, Saginaw, and Washtenaw. The amended law would permit any of Michigan’s 83 counties, regardless of size, to impose hotel taxes. The tax revenues would accrue in the county treasury to be appropriated for unspecified purposes. However, advocates for the tax have indicated that revenues would be used for public services such as road improvements, police patrols, and public parks.

The proposal was introduced by the Grand Traverse County Board of Commissioners. Grand Traverse County is a popular travel destination located on Lake Michigan in Michigan’s northern lower peninsula. The county has a population of 77,654 and its principal city, Traverse City, has a population of 14,532 (Source: Census 2000, U.S. Census Bureau). Grand Traverse County controls an estimated 6.1% share of Michigan’s pleasure trip market, and direct pleasure trip expenditures pump an estimated $310 million into the local economy (Source: Travel, Tourism, and Recreation Resource Center, Michigan State University).

At the Michigan Association of Counties annual summer conference, Grand Traverse County administrators argued the following points in support of their proposal:

1. Eliminating the population requirement would “level the playing field” in regards to a county’s ability to raise revenue. In their view, PA 263 in its current wording gives the more populous counties an unfair advantage over smaller communities.
    
2. Smaller communities, especially those in northern lower Michigan, often have a sizable tourism industry, and they struggle to cope with the resulting strain placed upon their infrastructure.

Among those who have passed resolutions opposing this amendment are the Michigan Association of Convention and Visitors Bureaus and the Michigan Hotel, Motel and Resort Association. They argue the following:

1. The proposal is nothing more than an easy way to earn revenue for the county, and represents an intrusion by the county into private business that will adversely impact their competitiveness.
    
2. Although they are solely responsible for collecting the tax, hoteliers have a very limited say in how the revenue would be spent. Tax advocates have indicated that revenues would be used for “tourism-related” public services, but opponents note that almost any proposal could be justified as being “tourism-related,” which essentially gives county officials the ability to allocate hotel tax revenues for general fund purposes.
    
3. The proposal simply shifts the tax burden from the residents to overnight visitors.

(*The population eligibility requirements (counties with a city of at least 40,000 but a total population of less than 600,000) effectively prohibits the city of Detroit from imposing an accommodations tax under PA 263. The Metro Detroit area’s accommodations tax is covered by a separate act.)

Michigan Public Act 263 of 1974

Public Act 263 of 1974 permits counties meeting specified population requirements to establish a hotel tax, the revenues from which can be used specifically to fund tourism promotion activities and tourism-related capital projects. The ad valorem tax levied on the sales of hotel rooms is administered by the county government subsequent to the passage of a local ordinance. The tax can be collected from any “business [engaged in] providing rooms for dwelling, lodging, or sleeping purposes, except in hospitals or nursing homes, to transient guests, whether or not membership is required for the use of accommodations.” A transient guest is defined as a “person staying less than thirty consecutive days”.

The allowable uses of the tax revenues are:

1. The cost of administration and enforcement of the ordinance.
    
2. The financing of the acquisition, construction, and improvement, enlargement, repair, or maintenance of convention and entertainment facilities including the payment of principal and interest, when due, on bonds or other evidence of indebtedness issued by the county for convention or entertainment facilities.

 
3. Current or future annual rental payable by the county to an authority organized pursuant to state law for the purpose of acquiring, constructing, improving, enlarging, repairing, or maintaining the convention and entertainment facilities and leasing them to the county.
    
4. The promotion and encouragement of tourist and convention business in the county.

“Convention and entertainment facilities” are defined as “all or any part, or any combination of convention halls, auditoriums, stadiums, music halls, arenas, meeting rooms, exhibit areas, and related public areas.” It does not specifically define “promotion and encouragement of tourism and convention business” or how funds are to be distributed between capital projects and promotional efforts.

The legislation was amended specifically for Kent County in 1989 by Public Act 13 to allow the tax revenue to be used for museum construction in cities with a population of 180,000 or more. This amendment was introduced by Kent County legislators who wanted to fund the construction of a local museum. The additional allowable use clause reads:

5. The principal or interest, when due, on bonds or other evidence of indebtedness issued by or on behalf of the county for the purpose of financing the construction of a museum, or the current or future rental payable by the county to an authority organized pursuant to state law for the purpose of constructing a museum and leasing it to the county, only if the museum is located in a city with a population of 180,000 or more.

The Michigan Attorney General broadened the definition of allowable expenses in opinion 6958 of 1997:

1. A county may lawfully appropriate its accommodations tax revenue collected under 1974 PA 263 to purchase, maintain and improve county fairground properties. A county may lawfully appropriate its accommodations tax revenue collected under 1974 PA 263 to fund county fairs and festivals if, in the judgment of the county's board of commissioners, such activity promotes and encourages tourist and convention business in the county.

When PA 263 was implemented, each of the counties contracted with either an existing independent convention and visitors bureau (i.e., an organization that is not a division of a larger organization) or with a convention and visitors bureau created as a division of the local chamber of commerce. The terms of these contracts vary, but typically run for one to three years. In exchange for developing and implementing a destination marketing program, the CVBs receive a percentage of the county accommodations tax revenues. The CVBs depend heavily on this tax revenue, and in many cases it is their single largest source of funding. One county, Muskegon, recently terminated its contract with the county’s independent CVB and has established a tourism promotion office under the direct supervision of the county administrator.

The accommodations tax thereby linked the CVBs to two interest groups, county government and hoteliers, with not only potentially conflicting interests, but with the potential to influence the CVB’s structure and the focus of its local tourism promotion programs. Tourism businesses, largely represented by hoteliers, perceive a right to a voice in CVB governance and program development because they are responsible for collecting the tax. Growth in tax revenues provide CVB presidents with larger budgets and create an incentive for them to focus attention on promotion programs that generate business for hotels. However, this is balanced against the interests of representatives of county government who often believe that the construction of facilities, support for festivals, or community identity are more important goals for the organization to pursue.

There have been many disputes over the distribution of revenues among competing interests in the counties where the tax is collected. Urban areas within these counties often vie with their rural neighbors to boost their share of the revenues or for greater investment in projects they perceive more beneficial to their respective interests. Cities that operate convention and meeting facilities are prone to seek access to PA 263 revenues to offset operating deficits common among such facilities. Because the legislation leaves the interpretation of what constitutes tourism promotion to the counties, different groups wanting funding for promotion or facilities often attempt to define their goals in the context of tourism and seek funding from the accommodations tax. In many cases, this has required an increase in the tax rate from the original level to fund community projects such as festivals, parks, and local theatre and arts groups. When such disputes arise, they are often directly or indirectly resolved at the level of the county commission, thereby demonstrating that the county, rather than tourism interests, ultimately control how PA 263 tax revenues are allocated.

The eight counties which already have a PA 263 accommodations tax in place levy the tax at the following rates:  Calhoun (3.0%), Genesee (5.0%),  Ingham (5.0%), Kalamazoo (4.0%), Kent (5.0%), Muskegon (5.0%), Saginaw (4.0%), Washtenaw (2.0%).

Some counties established the full 5.0% tax rate allowed by law upon implementation, while other counties established a lower tax rate and have since increased it. Washtenaw County is the only county that has not increased the tax rate since the tax was implemented.

Currently, the Grand Traverse County Board of Commissioners has not determined what rate it will charge if the proposal is approved. For the purpose of this study, we are operating on the presumption that they will impose the full 5.0% rate.

The exact provisions of the proposed amendment to PA 263 have not been determined. A critical consideration will be how revenues from the tax will be allocated.

There are three sources that can be drawn upon to project how the tax allocation issue is likely to be resolved:

1. The existing provisions in PA 263 and amendments presented above.
    
2. Evidence derived from how PA 263 revenues have been used by the counties currently authorized to levy the county hotel tax.
    
3. Statements made by those advocating the proposed new amendment.