Issue 4 - Hotel Tax

Tourist Tax Hike a Hidden Cost to Local Economy, Jobs

On the Nov. 5 ballot, Santa Barbara County voters will be asked to decide whether to increase the transient occupancy tax to 14% from 12%. The tax, or TOT, is added to hotel stays, and is a general tax in which the revenue goes into the county’s general fund and can be spent with no restrictions. This commentary is not to suggest how anyone should vote on Measure H, but rather to ensure that everyone understands the trade-offs at work.

You see, taxing tourists sounds like a great idea. But it isn’t. Raising the occupancy tax increases the cost of vacationing in Santa Barbara County, and this will put downward pressure on the prices of everything tourists buy while visiting us. This means local business owners — including hotel owners and their employees — will get squeezed. As our tourists pay more to the county, they won’t be willing to pay as much for everything else they buy. Tourists have a limited budget while vacationing and they have many other wonderful destinations to choose from. Raising the tax means Santa Barbara County becomes a less attractive location.

Here is the problem with the rhetoric concerning Measure H. On page SR 011-29 in the Santa Barbara County Voter Information Guide & Sample Ballot, there is a co-authored statement by Supervisors Laura Capps and Steve Lavagnino:

“Measure H is funded solely by tourists staying in 24 hotels outside of our cities (local residents will not face any tax increase).”

Unfortunately, this is not the way economics works. When a tax is imposed, it affects both parties — there is a “wedge” between what the buyer pays and what the seller receives. The buyer of the good pays MORE and the seller of the good receives LESS than if there were no tax. In economics this is known as tax incidence. In this case, yes, the buyer may be a tourist; however, the seller of the hotel room is more likely a local resident.

If demand for a product — whether it be hotel rooms or strawberries — slopes down (people demand less of a good when its price rises), then there will be a decrease in hotel rooms demanded by tourists. Just how big the decline will be is determined by how sensitive tourists are to the price increase. In particular, the more substitutes or alternatives there are for the product, the greater will be the decrease in rooms demanded. Indeed, there are many beach towns and wine destinations throughout California: San Luis Obispo, La Jolla, Napa, Sonoma, and so on.

The supply of any good — hotel rooms or strawberries — is also price sensitive. The lower the price of a good means the supplier gets less and therefore becomes less profitable to offer the same quantity as before, and fewer goods (strawberries or hotel rooms) will be supplied. But this also has knock-on effects. The reduction of rooms could even lead to some hotels cutting services or even shutting down; again, this depends on the price sensitivity of rooms. In turn, the hotels may hire fewer workers, increasing unemployment. In addition, while the proposed tax increase is only for hotels in the unincorporated areas of the county, it is surely the case that the tourists also visit our cities for shopping and eating. The decrease in tourism will then have an adverse effect on our local cities’ restaurants and shops.

It is also not clear if increasing tax rates do indeed increase tax revenue. Demand for rooms may fall enough such that tax revenue also falls. In the worse-case scenario, tax rates fall, hotel owners are hurt and fewer tourists might lead to lower employment. In the best case, tax revenues rise but hotels will certainly be hurt. It is poor thinking to believe that locals will not be harmed. They will. Hotel owners and their employees definitely will. The only question is by how much?

Originally published on Noozhawk on October 15, 2024.