CHARLOTTE – The city of Charlotte is about to have a new government-funded tourist attraction – the NASCAR Hall of Fame – but it won’t cost local residents any new taxes, say the city and county officials who favor the deal. That’s because most of the cost, $118 million out of $155 million for the museum and attached facilities, will come from higher taxes levied on hotel stays.
Not only did I see this argument in print and broadcast coverage of the Hall of Fame announcement, but I also heard it in person from supportive politicians at a John Locke Foundation Headliner Luncheon Tuesday in Charlotte. But with respect, to suggest that hotel taxes do not cost local residents anything is fundamentally to misunderstand the concept of tax incidence.
To put it simply, he who writes the check to the taxman may not actually bear the cost of the tax. When a tax pushes up the price of a good or service, buyers and sellers respond. In some cases, the higher price gets passed along to the consumer. But if consumers can find substitutes for the good or service in question, it may be in the interest of sellers to eat the loss and keep the price level. There is a lot of disagreement in the tax literature about the incidence of various taxes – but none at all about the fact that taxes affect many more people than simply those to whom the taxes are formally charged.
In the hotel-tax case, many decisions about lodging are made in a highly competitive atmosphere. A difference in hotel bills of a few dollars may not seem like much, but in bulk it can make or break a deal to attract a gathering or weekend getaway. When hotel prices rise, some visitors won’t change their behavior at all. Others will choose to pay the higher price but then cut back on other expenditures during the trip, such as meals or entertainment. Still others will decide to go elsewhere.
Thus, those who actually bear much of the cost of a higher hotel tax in Charlotte aren’t from far away. They are local business owners and employees, in hotels as well as other industries catering to visitors. Think about it this way: hotel taxes at the local level are akin to national governments taxing their exports. Does anyone really believe that increasing the cost of American exports via taxation wouldn’t reduce the volume of exports, thus harming the companies and employees involved in manufacturing and shipping them? Charlotte is in a highly competitive market for business or pleasure travel, a market now based on quick price comparisons on the Internet. In this environment, much of the real cost of hotel taxes is borne by local companies and workers in the form of lost sales and wages.
Also, don’t overlook the fact that local businesses and households do bear some of the direct cost of a hotel tax. Many businesses – the John Locke Foundation among them – use hotels to put up vendors, consultants, out-of-town employees, and others with whom they do business. And how many of us have never put up a friend or relative in a local hotel?
There are other problems with the NASCAR Hall of Fame deal, of course. But this is the most annoying one: the notion that there is indeed a free lunch in economic development, a meal paid for by people from New Jersey.
Hood is president of the John Locke Foundation.