Most of us enjoy going on a vacation or two during the year, and that usually involves spending the night in a hotel or rental accommodation. Did you know that you are taxed on that hotel room and have no say about it? This current form of taxation without representation is known as an occupancy tax.
In 1983, the General Assembly passed the first legislation authorizing counties and municipalities to impose an occupancy tax. The tax was authorized mostly in populous counties like Buncombe, Mecklenburg, Forsyth, and New Hanover, but also included smaller Haywood County. Since that time, the General Assembly has allowed more than 200 counties and municipalities to levy an occupancy tax.
Even though the tax must be authorized at the state level through a local act in the legislature, only local governments may levy an occupancy tax. Upon authorization from the General Assembly, the local government’s governing authority — a city council or board of county commissioners — must pass a resolution formally levying the tax.
Generally this process includes only a public hearing and not a referendum, as is the case with the sales tax. Similar to most local taxes except property tax, the occupancy tax remains in place until it is repealed. The only changes that can be made to the tax must be done through either the local governing authority or the General Assembly.
Most of the occupancy taxes in North Carolina are between 3 percent and 6 percent. Brunswick County has the lowest rate at 1 percent, while Mecklenburg County/Charlotte has the highest rate at 8 percent and the only one above 6 percent. The extra 2 percent was authorized in 2005 to help finance the NASCAR Hall of Fame museum.
In the 2011-12 fiscal year, total county collections were more than $135 million and municipal collections were more than $30 million. That’s a combined $165 million taken from tourists, business travelers, school groups, or anyone else who stayed in a hotel or rental accommodation in North Carolina during that time.
The funds collected from this tax are not sent to a General Fund for local government use, but instead are used for specific purposes such as tourism, beach nourishment, or building or operation convention and performing arts centers. While funds are spent on all of these items, tourism is the major focus of occupancy tax revenue.
When the tax is introduced to a local government for the first time, a local Tourism Development Authority is created. The local TDA controls the spending of occupancy tax revenue. During 2011-12, almost $90 million of the collected tax went to Tourism Development Authorities across the state.
When local governments levy an occupancy tax, they think they can pay for local amenities using money from nonresidents that impose no costs on local residents or businesses. Unfortunately, that is not the case.
When a hotel or bed and breakfast posts its nightly rate on the Internet, it is very easy for travelers to compare prices with competing businesses. If an occupancy tax pushes the price of the room to a level exceeding that of a neighboring county or city, then the traveler may choose the lower rate. In this case, a hotel within the higher occupancy tax area might choose to eat the cost of the tax increase to keep its room rates competitive with businesses in neighboring jurisdictions.
Other problems with this tax involve the use of the proceeds and who is accountable. TDAs decide how to spend occupancy tax revenue, yet they are not accountable to voters. While any sales tax increase is put on a ballot for a vote, an occupancy tax increase is not. So not only do out-of-town visitors have no say in this tax, but neither do local businesses that could be harmed.
A relevant example is highlighted in my most recent John Locke Foundation Spotlight report about Haywood County’s plans to increase its occupancy tax. The increase would leave Haywood County with the highest rate in the region at 6 percent, and reports from the local TDA show that proceeds from the current 4 percent tax are not used completely each year. If the additional tax is levied, it will be a perfect example of how taxation without representation is still alive and thriving in North Carolina local governments.
Sarah Curry is director of fiscal policy studies for the John Locke Foundation.