Lodging tax a hot topic in hotel sector
By PAM GEORGE
Special to Delaware Business Times
A lodging tax is very much on the minds of area hotel operators and legislators involved in House Bill 377.
Passed by House of Representatives and headed to the Senate, the bill allows a county government with a population or more than 500,000 residents to impose and collect a lodging tax of up to 3 percent – on top of the state’s 8 percent lodging tax.
New Castle County isn’t the only jurisdiction wanting a piece of the pie.
HB 395 permits a municipal government to impose and collect a lodging tax of no more than 3 percent on hotel and motel rooms in the incorporated areas of the municipality.
Delawareans might shrug. After all, hotel guests are affected by the increase, and many are not from Delaware.
But Delawareans are affected by tourism, which in 2016 contributed $3.3 billion to Delaware’s gross domestic product, according to the Delaware Tourism Office. Those who oppose the bill maintain that it could affect that revenue.
A multipurpose tax
The state currently collects an 8 percent lodging tax on hotels, motels and tourist homes – accommodations with at least five permanent bedrooms for customers and no cooking facilities for guest use.
The revenue is divided four ways. The state’s general fund gets 5 percent. The state’s tourism office and beach preservation fund each get 1 percent. The rest is split between the convention and visitors bureaus in each county.
Last year, the state legislature’s Joint Finance Committee planned to cut funding to the tourism groups in the proposed 2018 budget.
However, the three CVBs depend on funding from the lodging tax to operate. After some hard lobbying on the part of the tourism industry and CVBs, the plan was nixed.
HB 377, meanwhile, addresses what New Castle County Executive Matt Meyer calls “an inequality in our county tax system.”
More than 10 years ago, the state legislature allowed the city of Wilmington the ability to add a hotel tax of up to 3 percent. The city raised it 2 percent to support its infrastructure, including EMS services.
“We fully expected that to be temporary and disappear,” said Bill Sullivan, managing director of Courtyard by Marriott-Newark at the University of Delaware and a professor with the University of Delaware Hospitality Business Management Program in the Lerner College of Business and Economics.
With the General Assembly’s approval, however, the increase remained.
HB 377 would allow the county to have the same authority. “It’s the right thing to do, and legislators on both sides of the aisle recognize that,” Meyer said.
Why? Hotel visitors use county services. According to statistics supplied by New Castle County, there are more than 1,900 emergency calls to hotels and motels each year.
“If homeowners aren’t using the service, they shouldn’t bear the brunt of the cost,” Meyer said.
Visitors also use county parks, although the county does not keep records on how many park users are in state or out of state.
What’s more, the county is too dependent on real estate – 84 percent of the revenue is from property and realty transfer taxes, which are unstable.
Without the additional income from a hotel tax, county residents might experience a bump in county taxes.
A matter of perspective
The average businessperson or pleasure traveler is rarely concerned with a hotel tax, Sullivan acknowledged. Many, though, are surprised by it, added Brad Wenger, general manager of the Hilton Wilmington/Christiana.
“We’re hanging our hat on being a tax-free shopping state, but it’s a surprise to people who are traveling here,” he said. “They feel it’s a mixed message.”
These travelers equate tax-free with all aspects of the tourist experience. When the front desk explains the charge, most customers take the lodging tax in stride. That might change with an increase, Wenger said.
The primary pushback will come from groups, conventions, conferences and youth sports teams, Sullivan said.
When you’re booking up to 70 rooms, the lodging tax becomes a sizeable amount of money. “Planners recognize that as a market loss,” Wenger agreed.
New Castle County Executive Meyer said the hotel tax increase in Wilmington has not hurt that city’s properties.
“The hotel industry in Wilmington is booming,” he maintained. The Residence Inn on Market Street recently opened. The 114-room Hyatt Place Hotel is under construction on the Wilmington Riverfront, and two more properties are in the works.
Wenger disagrees with the idea that the hotels have not been affected by the boost. He knows of one property that has declared bankruptcy.
“It’s not a big rosy picture for all the hotels in downtown Wilmington,” he said.
Even with the 10 percent in total lodging and sales tax, Wilmington is still competitive with hotels in surrounding areas, Meyer said.
In Philadelphia, the total amount is a whopping 16.25 percent. It is 14.62 percent in Cherry Hill, New Jersey.
“We’re way below nearly all of the neighboring jurisdictions, and the increase we’re proposing would not be a significant increase, Meyer said.
Wenger agreed that the current 8 percent tax in New Castle County is competitive. Nevertheless, more could start to level the playing field, he said.
Dipping into other revenue streams
The increase in Wilmington and, if passed, in New Castle County, has made municipalities sit up and take notice.
Giving incorporated areas the ability to institute a tax rate of up to 3 percent is the focus of HB 395.
That legislation is more affected by input from stakeholders in Sussex County, where municipalities already receive taxes from vacation rentals.
In these cities, Realtors and hotel operators are already concerned that the combination of fees is driving people to unincorporated areas.
Hotel operators wonder why towns, counties and the state interested in more revenue don’t direct their attention to short-term rentals including Airbnb, VRBO and traditional bed-and-breakfasts.
At least 20 states, Washington, D.C., and large metro areas including New York City have included short-term rentals under their lodging tax laws.
In Delaware, a 2017 bill languished in the House Revenue and Finance Committee. Once again, there were those in Sussex County coastal towns who opposed it for fear it would deter visitors, said Mayor Paul Kuhns of Rehoboth Beach.
“It is a concern,” he said of the growth of Airbnbs. “I would think it would be something the county would look at.”
That may be the case as budgets deficits widen.
Indeed, the county plans to put any revenue from a hotel tax into a general fund. Hotel operators, however, would like to see a portion of it go toward marketing the area, as is the case with the state lodging tax.
In the end, Wenger said, the General Assembly needs to realize that the more it allows municipalities to tackle lodging taxes on their own, the more it will water down the positive effects of economic development.
Photo by Ron Dubick