Empty hotel rooms are leaving gaping holes in state and local budgets.
A sharp decline in travel during the COVID-19 pandemic will cost governments roughly $17 billion in revenue from taxes on hotel occupancy, corporate profits and other levies in 2020, according to a study by Oxford Economics.
The impact has been especially large in California, Florida, New York and Nevada, which are each facing shortfalls of more than $1 billion. Those figures don’t include taxes generated by tourist spending outside hotels, another source of local funding.
“These taxes are a significant source of revenue for schools, public safety departments and other services,” said Chip Rogers, chief executive officer of the American Hotel & Lodging Association, which commissioned the research. “Local government have used hotels as a significant source of revenue and that’s a challenge if hotels aren’t operating fully.”
Lodging taxes have long been popular with lawmakers because they’re mostly borne by out-of-towners. While the levies are often used to fund spending on general items, from street cleaning to fighting fires, some cities earmark hotel taxes for specific initiatives that will see an out-sized impact from declining travel.
Houston, for instance, has earmarked hotel taxes to pay for public arts programming. More commonly, governments have used lodging taxes to fund sports stadiums, convention centers and marketing efforts to attract visitors to a given city.
Two years ago, the public entity behind the Washington State Convention Center in downtown Seattle raised more than $1 billion in debt backed by lodging taxes to fund an expansion. At the time, the deal was a sign of confidence in the booming tech town’s economy. Now, the project faces a $300 million funding shortfall and is at risk of being mothballed.
The project needs help from the federal government to help bridge a drop in tax revenue that could last for five to eight years, according to Matt Griffin, the principal at Pine Street Group, which was hired to oversee development of the $1.8 billion project.
“We’re in a pickle, for sure,” Griffin said. “I don’t want to try to sugarcoat it.”
Bond investors in the project have been on a wild ride. Subordinate debt due in 2058 fell to as little as 79.9 cents on the dollar in May, but had recovered to 99 cents as of Wednesday. Still, the long-term outlook is negative, according to S&P Global Ratings. On June 12, the ratings firm downgraded the subordinate bonds on the project, citing a “substantial deterioration” in lodging tax revenue because of fewer hotel stays.
Nationally, the projected $17 billion shortfall in tax receipts is just the tip of a much larger problem. Hotels generated $40 billion in direct tax revenue for state and local governments in 2018, according to an earlier research by Oxford Economics. That total increased to $94 billion after including indirect and induced impacts — like sales taxes collected when hotel guests shop in local stores.
Property taxes, another important source of local revenue, could also see shortfalls if struggling hotel owners skip payments. In New York, an epicenter of the pandemic, the lodging industry has spent months lobbying city officials to defer taxes or reduce levies to reflect low occupancies, said Vijay Dandapani, chief executive officer of the Hotel Association of New York City.
New York hoteliers are in especially dire straits, as the city’s tourism industry depends on international flights, large conventions and cultural amenities — from Broadway shows to high-end restaurants — that will struggle to rebound in the age of social distancing.
In a normal year, property taxes consume roughly 15% of hotel revenue, Dandapani said. With revenues down, many hotel owners will be unable to cover their bills without forbearance from the tax collectors.
“There’s going to be massive levels of defaults,” Dandapani said.