Travel remains one of the most heavily taxed activities in the US, even though most cities try hard to encourage visitors and tourism. Travelers don’t vote where they travel, so cash-strapped cities and states continue to tax hotel rooms, rental cars, and airports. Many times the money is used not only to build and run facilities for travelers such as convention centers and airports, but also is used to help finance local coffers to pay for sports stadiums and youth ball fields. In some cities, taxes on visitors even help fund arts facilities and school systems. The impact can be significant – travelers pay taxes that total 57% more than if they just paid the general sales tax.
Car-rental companies and airlines report that heavy taxes on their services have reduced demand. With rental cars, some consumers, particularly leisure travelers, are discouraged from travel or choose smaller cars to reduce the price for a rental where taxes can sometimes exceed the car cost. In this case, taxes have clearly made an impact on consumer behavior.
A survey last year by the US Travel Association found that 49% of respondents had altered their plans because of high travel taxes, such as staying in less expensive hotels and spending less on shopping and entertainment. 10% of the people surveyed say they changed city choices for trips because of taxes. Travelers in some destinations have chosen to book hotels outside of city centers, renting cars at non-airport locations and eating meals away from airports and hotel restaurants in order to decrease expenses. These behaviors generally result in marginal savings and end up being more trouble and inconvenience than they are worth.
Among major destinations, the tax on a day’s travel spending can range from as little as $22.21 in Fort Lauderdale, Fort Myers and West Palm Beach, FL, to as much as $40.31 in Chicago. That is calculated by keeping the cost of hotels, car rentals and meals the same in each city so the difference reflects only the tax structure, not higher or lower travel costs. It’s important to note that some cities that depend heavily on tourists, such as Honolulu and Orlando, have completely avoided imposing excessive taxes on visitors.
Airlines say taxes have a significant impact on air travel as they substantially raise the cost of tickets. High prices deter buying; airline tickets are taxed at levels similar to alcohol and cigarettes. With cigarettes, the taxes are generally imposed to discourage use. Cigarettes are about the only consumer purchase taxed more heavily than travel.
There are a total of 17 different taxes and fees potentially levied by federal government and airpots on airline tickets. Passengers pay a federal excise tax to help fund the DAA, a security fee to help fund the TSA, various fees for international inspections and fees charged by airports for passing through terminals. On a typical $300 domestic ticket with one connection, the airfare is $239, with taxes and airport fees at $61. That is more than 20% of the cost. To put it in perspective, a pack of cigarettes that costs $12 in Chicago has $5.67 in federal, state, county and city tax, about 47% of the cost.
This year, the DOT began forcing airlines to include the taxes in any price quoted for airline tickets. Under pressure from consumers to show full prices, rental car companies began including taxes prominently when people book reservations, showing an estimated total price for each rental. Hotel companies are starting to display taxes more clearly: Marriott includes taxes in hotel price quotes when customers are prompted for their personal information such as name, address and credit card.
Yet hotel companies say higher taxes don’t have a big effect on bookings. That is one reason the taxes keep coming. Cities, counties and states have so far been able to raise more money without crimping business or angering local voters. When Chicago raised its portion of the hotel tax to 4.5% from 3.5% earlier this year, Mayor Rahm Emanuel predicted continued increases in tourism, and so far he seems to be right. Chicago hotel occupancy rates are up slightly so far this year, according to Smith Travel Research. Interestingly, the tax increase is helping increase revenue that supports tourism, not deter it.
The hotel tax increase in Chicago raised the total hotel tax rate to 16.4%. That includes a 2% tax to help pay for Chicago White Sox Stadium and 2.5% to help pay for the McCormick Place Convention Center. Chicago’s rental car tax is even higher: the tax on a $56 one-day car rental at the airport raises the price by a whopping 23%.
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