Travel Can Be Taxing in More Ways Than One

For 10 years starting in 2010, the U.S. tourism industry was thriving. Tourism taxes accounted for nearly 6% of state and local tax collections. Then came the pandemic and everyone stayed home. A strong sector of the economy suddenly collapsed. One-third of travel jobs were lost, travel spending declined by nearly $500 billion and states lost billions of dollars in tax revenue.

In 2019, tourism generated $180 billion in tax revenues for federal, state and local governments. During the pandemic’s early days, tourism-reliant states were hit hard by declining revenues. Hawaii initially projected the loss of $300 million in tax collections and 6,000 jobs. New York City lost $1.2 billion in tax revenue. Nevada faced a bleak economic outlook when visitor spending declined by 52.2% from the previous year.

But as traditional tourist destinations faced massive losses, rural areas across America saw an uptick in travelers. Rural areas near state and national parks saw visitor numbers grow as more people sought outdoor recreation to avoid exposure to COVID-19. Airbnb reported a rise in homes booked in rural areas in 2021. In Jackson Hole, Wyo., lodging tax revenue hit record highs. Tourism tax revenue in Arkansas totaled $20.5 million in 2021, 16.7% higher than 2019 collections.

While increased tourism is beneficial for state revenue, it also comes with costs. Areas that experienced a boom in visitors faced a new problem: added stress on state and local resources.

The sudden shift to domestic rural travel during the pandemic highlights the need for policymakers to think about the burdens tourists place on state and local resources. Gini Pingenot, director of external affairs at Colorado Counties Inc., reported a lack of sufficient infrastructure to host the number of visitors who came to Colorado. In addition, people who live in popular tourist areas are being priced out of the communities in which they work. Both these issues reverberate in other rural areas where tourism boomed because of the coronavirus. In fact, a University of Montana study found that 38% of residents disagreed that increased tourism improved the quality of life for Montana residents (the most recorded since 1992). Negative sentiment among locals in highly-traveled areas has some state lawmakers modifying tourism tax legislation.

Tourism tax revenues often are earmarked to promote tourism. But, to tackle issues brought on by shifting travel preferences to small rural communities, legislators are changing the ways that revenue can be used. In Utah, legislators passed a bill to increase spending flexibility in certain counties—including Washington County in southwest Utah, home to Zion National Park—for lodging tax revenue. The counties are no longer required to spend the revenue on tourism promotion. Colorado legislators passed a bill to allow county lodging taxes to support affordable housing to combat rising costs in areas with heavy tourism.

Business Tourism

Whereas domestic leisure travel is on the rise, domestic business travel continues to struggle and currently accounts for only 14% of travel spending, down from 26% in 2019. Between 2020 and 2021, $391 billion in travel spending was lost as employers halted business travel. The revenue that came from business accommodations, airfare, car rentals and event spaces plummeted at the start of the pandemic. Business travel has since resumed, but it has changed. Businesses may be forced to reduce the size or change the location of events to comply with COVID restrictions. Companies also continue to rely on videoconferences and meetings.

There are conflicting opinions on the recovery of business travel. Deloitte reported likely improvement of corporate travel demand in the first half of 2022 but warned that travel was unlikely to reach near 2019 levels. The U.S Travel Association found that 8 in 10 travel managers reported changes to business travel policies, including fewer business trips. The association forecasts business travel will not reach pre-pandemic levels until 2024. Yet, American Airlines and Delta Air Lines report promising business travel numbers. Hotel companies also show more optimism in business travel recovery. Hilton expects business travel to reach pre-pandemic levels by the end of 2022. 

Considerations for Legislators

Policymakers seeking to capitalize economically on tourism can consider several approaches:

• Examine travel trends. Being prepared puts states in a better position to mitigate the negative impacts of increased tourism. Every state has a tourism office that collects travel data. Collaboration with that office will help policymakers develop effective tourism policies.
• Ensure interagency coordination. Collaboration among the agencies with a role in tourism—state tourism offices, history preservation agencies, state park offices, transportation departments—can benefit state tourism.
• Assess the taxes imposed on tourist activities. The World Travel and Tourism Council warns that high tourism taxes can have a negative impact on revenue collected by deterring travelers from visiting a destination or leading to shorter stays to cut costs. Likewise, organizations and businesses planning large events or conventions may be discouraged from visiting destinations with high tax rates. Local businesses dependent on tourist spending are also affected by high tax rates. Consumers may choose to spend less locally to offset the costs of accommodations, car rentals and airfare. On the other hand, tourism taxes can allow local governments to pay for services in the community.

Below are tables of state tax rates on lodging and car rentals.

Mandy Rafool is the director of NCSL’s Fiscal Affairs Program; Andrea Jimenez is a policy analyst in the program.