This tax is only applicable to hotels and other businesses that provide “rooms for dwelling, lodging, or sleeping purposes, except in hospitals or nursing homes, to transient guests”. This tax is not only unique to the tourism industry, it is also unique within the tourism industry, as only hotels and other lodging establishments are responsible for the tax. Other businesses that benefit from tourism, such as retailers and restaurants, are not obligated to charge additional tax on their products or services.

How do tax rates on accommodations compare with tax rates on other purchases?

Current tax rates on lodging establishments include the state sales tax (6%) and, in many counties, a self-imposed hotel assessment totaling 2% of the overall lodging bill. This assessment, established by PA 59 in 1984, allows communities to collect a 2% fee on hotel rooms to help fund the local convention and visitors bureau. All revenues generated under PA 59 are earmarked for the local CVB, and the fees must be used to promote the tourism industry within the communities covered by the bureau. There are currently more than 60 CVBs throughout Michigan collecting this assessment. This assessment and the tax authorized by PA 263 are mutually exclusive; counties may collect one or the other, but not both. The PA 263 tax therefore will replace the assessment in those counties currently collecting this assessment. Proponents have indicated that 2% of future PA 262 revenues would continue to be earmarked for tourism promotion. If a county decides to increase its tax rate to the limit allowable by PA 263, the tax rate on accommodations will total 11%. Other goods are services are subject only to the state sales tax. There are no national or municipal sales taxes.

How does the nominal and effective tax burden on this industry compare with other economic activities in the economy?

Under state law, Michigan counties have limited taxing authority. Counties cannot impose a sales tax, personal income tax or business tax, and therefore are almost totally dependent upon property taxes for their general fund revenues. The next most important source of revenues for Michigan counties is revenue sharing monies provided by the state. Property taxes are based upon the assessed value of properties. The tax rate for $1000 of assessed value varies across counties, but is relatively the same across property types within a given county. Thus, county taxes across all industry sectors are uniform and fair to the extent that assessments are accurate reflections of property values. However, there is a commonly held perception that tourists do not pay county taxes, yet receive county services such as police protection and use of county roads. Indeed, tourists are not taxed directly, rather they drive up the value of property in the county which is taxed. Tourists are responsible for the development of new hotels, restaurants, second homes, and support infrastructure, such as construction businesses, banks, and wholesale businesses. They are also responsible for higher assessed values of existing properties whose property values are higher because of profits made on sales to tourists. Therefore, the perception that tourists don’t pay for county services is incorrect. The assessment of the degree to which property taxes paid reflect the costs of services consumed by specific industry sectors is beyond the scope of analysis. Finally, the state revenue sharing funds received by the counties is determined in part by tourist activity in the county (e.g., gasoline purchased) and thus represents another indirect way tourists compensate for services received.

Principle No. 1 summary: Is this an equitable taxing scheme?

The principle of Equity is fairly straightforward; it states that all industries should be treated fairly in regards to taxation. In this case, PA 263 targets a specific industry and creates a tax on the consumer that is nearly double that of other purchases. One of the chief concerns among hoteliers in Grand Traverse County is that PA 263 is not an equitable tax; their hotels are the only businesses required to collect the tax, yet hoteliers have a very limited say in how the revenue is spent.

“Taxes must generate revenue without a significant impact on the demand for a good or service (unless the tax is designed to modify behavior). At a certain threshold, the revenue gained from a tax increase can be lost because of reduced demand. Even more, the decrease in demand sends a debilitating wave throughout the economy as suppliers are affected. The negative impact swells, because of the subsequent loss of tax revenue in many sectors.”
 

Is this tax designed to modify behavior?

This purpose of this tax, in its original wording, is to raise revenue for the county for tourism-related promotional activities and tourism-related capital projects. It is not designed to modify travelers’ behavior.

What will be the monetary impact on total trip costs (lodging, car rental, meals)?

Taxes imposed under the current system include: 6% state sales tax (applied to car rentals, restaurant meals, and lodging); a 10% airport access fee levied on car rentals; and, a 2% assessment levied on hotel rooms. If PA 263 is amended, taxes will remain identical in all sectors except for lodging, where the 2% assessment will be dropped in favor of the 5% PA 263 tax.  This will result in an increase of roughly $16.00 in both hotel and total trip costs.

How does this tax increase compare with the Consumer Price Index and Travel Price Index?

For the year 2000, the Consumer Price Index for Urban Consumers increased 3.4% over 1999, while the Travel Price Index increased 6.1%, as determined by the U.S. Bureau of Labor Statistics and the Travel Industry Association of America, respectively. For the year-to-date in 2001, the CPI is up 3.3% and the TPI is up 2.4%. The TPI for lodging shows an increase of 4.7% in 2000, and an increase of 2.2% thus far in 2001. Currently, visitors who utilize accommodations in Grand Traverse County pay a 2% room assessment on their lodging rental bills. This assessment would be replaced by the 5% PA 263 room tax. This 150% increase in the lodging tax rate will result in an additional 2.8% increase in total lodging costs.

Will the new tax rate allow the city to remain price-competitive with other cities in the region?

Traverse City has the highest hotel room rates among the cities surveyed, with in-season rates averaging $136.00 per day. If Traverse City raises its tax rate to the maximum extent allowable by PA 263, its rate will be 37.5% higher than competing cities (11% vs. 8%). For a five-day, four-night trip, travelers to Traverse City will pay nearly $60.00 in hotel taxes, compared to an average of $30.00 for its chief competitors. The proposed lodging tax rate will be the highest in the region, and will most likely make Traverse City and Grand Traverse County a less competitive destination.

Principle No. 2 summary: Is this an efficient taxing scheme?

The Principle of Efficiency considers the threshold at which the revenue gained from a tax increase is lost due to decreased demand. Traverse City is located in one of the state’s most competitive tourism markets. The projected 3% increase in its lodging tax rate will give Traverse City the second highest rate in the state, and, combined with its high in-season room rates, will make Grand Traverse County one of Michigan’s most expensive overnight destinations. Traverse City is the largest community in the region, and offers much in the way of recreation, shopping, and services. However, neighboring communities will likely use their price advantage to attract visitors normally destined for Traverse City.

“Complicated taxing schemes eat up revenues through administrative costs. These costs include both those borne by government in the process of collecting and enforcing taxes, and those borne by taxpayers. One objective of good tax policy is to achieve the highest possible ratio of revenues generated per dollar invested in collecting the tax. Special note should be made to consider the taxpayers’ costs of compliance in calculating this ratio. Simplicity in taxing also dictates that governments should make it clear what the tax rates are, and how the revenues are to be used.”
 

Is this a complicated taxing scheme?

The taxing scheme is relatively simple and straightforward for the hotelier and the consumer. A tax of 1-5% (depending on the rate determined by county administrators) is added to the hotel guest’s final bill.
 

What will be the government’s cost of collection?

Because it is the hoteliers’ responsibility to collect the tax, the government’s cost of collection is low. The county controller is generally responsible for auditing hotels and monitoring tax collections.
 

What will be the taxpayers’ cost of compliance?

The taxpayers’ cost of compliance is low. The tax is included as part of their total lodging bill.
 

Is it clear how the tax revenues are to be used?

As stated above, “simplicity in taxing also dictates that governments should make it clear what the tax rates are, and how the revenues are to be used.” One of this proposal’s most visible shortcomings is the fact that it does not clearly define how these revenues will be used. According to the current legislation, tax revenues may only be used for fund administration, tourism promotion, or tourism-related capital projects. However, proponents of the tax have gone on record saying that they wish to broaden the definition of “tourism”, thereby allowing them to use PA 263 revenues on projects or services normally paid out of the county’s general fund.
 

Principle No. 3 summary: Is this a clear and simple taxing scheme?

Aside from failing to adequately address how the collected tax revenues are to be spent, this proposal adheres relatively well to the Principle of Simplicity. It is uncomplicated, and has low costs of collection for the government and low costs of compliance for the taxpayer.

“Fair revenue generation arises from the concept of equity. In the evenhanded capturing of tax revenue, it is unreasonable to assess special fees or levies on specific goods or services. These types of taxes are often cloaked by language and terminology to hide their real intent. Although special charges and fees may appear on face value to be modest, they can quickly accumulate and become an unreasonable burden to a sector.”
 

Is this tax a special charge or fee?

This proposal would allow a special tax to be added to lodging bills. The rate has not yet been determined by Grand Traverse County officials, but the legislation’s current wording allows for a tax totaling 1-5% of the total room charges. As noted earlier, taxes introduced under PA 263 are mutually exclusive with the 2% PA 59 hotel assessment. Proponents have indicated that 2% of future PA 263 revenues would be earmarked for tourism promotion, and would replace the 2% hotel assessment. It is reasonable to assume that, since advocates have mentioned the probability of financing various public services with PA 263 tax revenues, the rate will increase beyond 2%. Four of the eight PA 263 counties currently collect the maximum 5%, and two impose a 4% tax.
 

What other special charges or fees are already in place in this city’s tourism sector?

The special fees and charges already in effect in Traverse City/Grand Traverse County are generally comparable to the rest of the destinations surveyed. The charges on air passengers are federal taxes applied to domestic passengers at all airports. The airport access fee on car rentals has also become quite common, although rates vary from airport to airport. As noted above, the PA 59 assessment will be replaced by the PA 263 tax.
 

What percentage of the tax revenue will be used in ways that will benefit tourists or the tourism industry?

The county board of commissioners decides how the tax revenue is allocated. In its current wording, PA 263 tax revenues can only be spent in three ways: 1) administration of the tax; 2) tourism promotion-related activities; 3) tourism-related capital projects. The percentage of revenue retained for administration varies by county, but is generally between 5-10% of the total tax receipts. In theory, this would leave 90-95% for tourism promotion or tourism-related capital projects. In most counties, the local convention and visitors bureau receives a portion of the revenue for tourism promotion; this amount also varies by county. The legislation leaves the interpretation of what constitutes tourism promotion to the counties, and the majority of the counties have used as much as 80% of PA 263 tax revenues to finance capital projects. In addition, some of the funds have been used to pay for the development and promotion of community projects of varied benefit to tourists (especially overnight visitors), such as local theatre/arts groups, festivals, and youth sports programs. In many cases, this has required an increase in the tax rate from the original level. It is probable that no matter how the tax revenues would be spent, tourists and the tourism industry would benefit to some degree. However, because proponents have not clearly defined how the revenue will be used, the actual benefits to tourists or the tourism industry is unknown.
 

Will these earmarked funds be spent in a reasonable timeframe?

PA 263 does not specify a certain timeframe in which the tax revenue is to be spent. The revenue is controlled by the county and distributed as county administrators see fit. County governments in Michigan are required to operate on a balanced annual budget basis; they are not allowed to run long-term deficits or surpluses. Thus, it can be assumed that accommodations tax revenues will be expended either in the year they are collected or in the following year. In the case of facilities construction, tax revenues are commonly used as the basis for assuming long-term debt, which in effect earmarks tax revenues for many years into the future. Debt reduction plans are based upon revenue projections from multiple sources as well as cost projections. In the fairly common instances where projections prove to be overly optimistic, county governments have been prone to draw more heavily on PA 263 revenues to meet debt obligations which may erode revenues available for other purposes deemed critical to the financial vitality of the local tourism industry (e.g., promotion).
 

Will the tax be reduced or concluded at the end of the project?

PA 263 allows counties to collect an accommodations tax for an indefinite period of time.
 

Principle No. 4 summary: Does this tax generate revenue in a fair manner?

The Principle of Fair Revenue Generation maintains that it is unreasonable to assess special fees or levies on specific goods or services. This proposal places a special fee on a specific service, and therefore does not generate revenue in a fair manner.

“Tax incentives and disincentives should be imposed with the underlying goal of stimulating growth. Taxes that support infrastructure will ideally result in the attraction of investment and new employment. However, when taxes become excessive, economic growth often grinds to a halt.”
 

Is the goal of this tax to stimulate industry growth?

Because the phrase “promotion and encouragement of tourism and convention business” is not clearly defined in the original PA 263 legislation, the county commissioners are left to decide what programs and promotions fall into this category. Based on views expressed by advocates of the new proposal, PA 263 revenues would help offset the costs of tourism-related public services, such as road improvements, police protection, and county park upkeep. They have not mentioned industry growth as an objective, but since the proposal has not yet been finalized, its actual goals are unknown.
 

Will the tax revenue be invested in productive infrastructure developments?

The revenue has been used in the past for infrastructure developments, but primarily on developments that appeal more to local residents (i.e., parks, amphitheatres, etc.) than to tourists. Advocates of the new proposal have suggested future PA 263 revenues will be used for road repair, city beautification projects, and other programs loosely tied to the tourism industry.
 

Will the tax revenue be invested in destination marketing or promotion?

A percentage of the tax is normally given to the local convention and visitors bureau for the purpose of destination marketing and promotion. However, this percentage is determined by the county administrators and varies from county to county, depending on the terms of the contract signed between the county and the CVB. In Kent County, for example, administrators allocated only 20% of PA 263 tax revenues for destination marketing. The remainder of the revenue was used to finance various capital projects. This lack of destination marketing funding eventually led hoteliers to push for legislation that created a 1% county hotel assessment, with revenues specifically earmarked for the Grand Rapids CVB’s marketing programs. The Michigan CVBs oppose the proposed amendment to PA 263 presumably because they prefer to draw upon their 2% room assessment revenues than subject their future revenue stream to the uncertainties of the county political process.
 

Will the tax revenue be invested in tourism-related government services (e.g., safety and security services)?

Although advocates of the proposal have mentioned funding extra police officers during peak tourist season with PA 263 tax revenues, no other specific tourism-related government services have been mentioned.
 

Principle No. 5 summary: Is this tax an effective stimulus to industry growth?

Although the original legislation specifies that PA 263 tax revenues must be spent on tourism-related promotion or capital projects, advocates of the proposal are seeking to broaden the definition of acceptable uses to include services they feel are tourism-related, but in actuality will have limited benefits to the industry. Advocates of the proposal have not indicated that industry growth is an objective, and, although there are still many unknowns, it seems reasonable to assume that the proposal will do little to stimulate the industry.