2022 HVS Lodging Tax Report - USA
While the lodging industry is recovering from impacts of the COVID-19 pandemic, this twelfth annual HVS Lodging Tax Study quantifies the revenue impact of the pandemic over the past year. An analysis of 25 major US hotel markets shows that overall revenues have recovered to 2019 levels, but markets with high levels of leisure demand are faring better than those without. The lag in collections of lodging taxes will prolong the impact of the pandemic state and local government collection of the taxes. The report also provides historical data on tax rates and the collection and distribution of revenue from lodging taxes levied in all 50 States and the 150 largest US cities.
Introduction
Lodging taxes are typically ad valorem taxes (levied as a percentage of value) on short-term [1] overnight stays at hotels, motels, bed-and-breakfasts, and other lodging accommodations. Lodging taxes levied by state and local governments have common characteristics but bear many names, including hotel occupancy tax, hotel motel tax, room tax, bed tax, transient occupancy tax, tourism improvement tax, and various other names. States authorize the imposition of lodging taxes, except in home rule cities. [2] States may tax lodging as a part of general sales and use tax, a specific lodging tax, or both. For most lodging taxes, state legislation defines the tax base, determines who is exempt from the lodging tax, and establishes collection procedures. State, county, and local governments also impose lodging taxes which may distribute tax revenues to their general, special revenue, or debt service funds. In many cities, state and municipal governments have formed special districts to levy additional lodging taxes on hotels located within a defined geographic area within their jurisdiction. Different districts within a city may have varying rates of lodging taxes. Certain state and local governments also impose excise taxes on lodging at a fixed amount per unit of sale, such as a $1.00 per room night fee for the furnishing of a hotel room.
From a political perspective, lodging taxes may be easier to impose than other taxes because visitors that use lodging accommodations are not constituents of the local municipalities. Typically, hotel operators collect the tax from guests and receive a small administrative fee of one or two percent of collections.
While the legal incidence of the tax may fall on the consumer, the economic burden of the lodging tax is shared by both providers of lodging accommodations and their guests. The lodging market is competitive, and in a competitive market, the tax burden is shared between buyer and seller. A lodging tax raises the price of lodging accommodations. Depending on the elasticity of the supply and demand for lodging, the hotel manager may not be able to increase rates by the full amount of the tax. Since the elasticity of supply and demand changes depending on market conditions, the true incidence of a lodging tax varies as market conditions change. This study makes no attempt to estimate the economic incidence of lodging taxes.
Hotel owners are often willing to cooperate with local governments to impose lodging taxes dedicated to tourism promotion and convention center construction. For hotel owners, tourist-oriented public facilities and advertising serve as drivers of room demand. All of the hotels in a given market can benefit from programs that bring tourists and convention attendees to a city. Sponsoring these types of programs would be prohibitively expensive for any individual hotel. In the case of convention centers funded by a lodging tax, the hotels and individuals who benefit from the center pay for its construction and maintenance. Municipalities seek to benefit from visitor spending and the associated tax revenue that convention centers generate. Through the imposition of lodging taxes, those who benefit pay for advertising, marketing and sales efforts funded by lodging tax revenue.
Some states, particularly those with large tourism industries, prevent municipalities from depositing hotel tax revenue into their general funds. For example, Florida allows only a series of special purpose taxes for tourist development. Texas requires that local transient occupancy taxes fund convention center development or tourism promotion.
Since the 1970’s, lodging taxes have become commonplace across the country. Of the 150 largest U.S. cities examined in this study, more than 120 impose a dedicated tax, and all of them collect some form of taxation on hotel room revenue. In small suburban cities and major tourist destinations alike, lodging taxes have become an important source of funding for economic development initiatives. This study attempts to survey hotel tax implementation across the country to provide information for those who wish to compare the structure and revenue capacity of lodging taxes in a diverse set of markets.
COVID-19 Impact on the Lodging Industry
While the negative impacts of the COVID-19 pandemic were unprecedented as documented in the 2021 HVS Lodging Tax Study, the recovery of the industry is occurring at a faster pace than most analysts originally anticipated. Revenue per available room (“RevPAR”), the product of average daily room rate and occupancy rate is a standard industry metric that combines the effects of occupancy and average daily room rate changes on hotel revenue performance. The figure below compares the amounts of RevPAR in the top 25 US urban markets for each month from January 2019 through September 2022.
By the spring of 2022, monthly RevPAR has met or exceeded 2019 levels in the top 25 US lodging markets.
As an indication of the potential recovery of lodging tax revenues, HVS calculated RevPAR as a percent of pre-COVID levels (calendar year 2019) for calendar years 2020, 2021 and estimated year end 2022. The figure below shows the percentage of recovery or RevPAR from pre-COVID levels in 2019 for the major US markets.
The recovery has been led by the return of price-insensitive leisure travel demand. Unlike in prior downturns of the economy, the disposable income of higher income households increased during the pandemic. Once travel restrictions were lifted, pent-up lodging demand was unleashed on the market. Consequently, markets with a higher share of leisure demand (pre-COVID) and earlier lifting of COVID related travel restrictions are recovering faster than those with a lower share of leisure demand and restrictions of longer duration.
Labor Force Issues
Reconstituting the labor force in the industry has been a significant impediment to growth. The lack of staff has at times prevented many hoteliers from making their full inventory of rooms available for rental, causing the absorption of demand during peak periods to be less than optimal. The figure below compares the percentage change in hospitality employment with the percentage change in RevPAR.
Year-Over-Year Change in RevPAR and Hospitality Employment (Total US)
Revenues from Lodging Taxes
While a relatively small source of revenue for state and local governments, lodging tax revenues may have a significant impact on the tourism economy. Lodging taxes support tourism marketing, the repayment of debt of tourism related projects, or for general fund purposes. Most destination marketing organizations rely primarily on lodging taxes to support their operations, which were decimated during the pandemic. More than 100 municipal revenue bond issues with $10 billion of outstanding principal are backed– to varying degrees – by lodging tax revenues. [3]
Before the onset of the crisis, during fiscal year 2019, 25 major US markets generated approximately $3.7 billion in lodging tax revenue as shown in the figure below.
Lodging Tax Revenues in 25 U.S. Markets
In total, these markets experienced a decline in revenue to $2.4 billion in fiscal year 2020, which reflects early impact of the pandemic. Revenue declined to $1.4 billion in fiscal year 2021, which reflects a full year of the negative impacts of the pandemic.
