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Can Springfield buck trend? Study says room-tax increases hurt sales

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by Paul Flemming

SBJ Staff

A new national study commissioned by the American Hotel & Motel Association concluded that the addition of a 2-cent increase in the taxes on hotel rooms results in a 5.1 percent reduction in room sales.

Tracy Kimberlin, executive director of Springfield's Convention & Visitor Bureau, said he disagreed with the findings of the study and said the city's February vote to increase its room tax by 2 cents will result in more visitors to Springfield. He said a number of factors specific to the Springfield market lead him to his conclusions.

Figures collected by the Convention & Visitors Bureau show the hotel market in Springfield is stagnant in sales while more rooms are available. The city's hotel occupancy rate dropped to 53.2 percent in 1997.

"These projects (funded by the room-tax increase) couldn't open soon enough," Kimberlin said. City officials said such attractions as Civic Park, the wildlife museum and an expo center will open in the next two to three years. The tax increase will begin being collected in the next few months.

"Econometric analysis reveals that, on average, an additive (2 percent) increase in the combined tax on hotel and motel rooms ... will cause about a 5.1 (percent) reduction in room sales and associated visitor spending per year. This will spill over into every sector of the economy."

"I understand where (the industry group) is coming from," Kimberlin said of the American Hotel & Motel Association study. "They don't want to be singled out as an industry" to bear the tax burden for a larger community.

The study itself emphasized some of Kimberlin's points against its conclusions.

"This average impact can vary in different markets depending upon the current level of tax, current room rates and the strength of demand for rooms in a particular area," the study's summary said.

Also "the negative impact of bed taxes can be mitigated if they are used for travel promotion. Non-travel earmarked uses of bed taxes do not benefit tourism and act only as a travel deterrent by increasing a guest's cost without attracting more guests."

"Here in Springfield, that has never been the case," Kimberlin said. "We allocated 100 percent (of room-tax revenues) to promoting overnight visitors. These expenditures do nothing but increase travel."

"It would have to be spent in a remarkably effective way," said Dr. Charles de Seve, president of American Economics Group, which conducted the study.

He said that even when travel promotion is effective, it does not eliminate the loss of business, it overcomes it.

"We must emphasize that the impact of a tax change on sales can be masked by other factors in the market, including the business cycle," the study's summary said. "Although it requires complex econometric technique to isolate the tax impact, its force is real, even when not easily apparent in the data. Thus, strong markets do not disprove the negative tax effect; hotels would realize even greater room revenue at lower tax rates."

The Impact of Room Taxes On The Lodging Industry is now in summary form. De Seve said the study reviewed 10 years of monthly data in more than 80 markets throughout the country. He said the full report, more than 100 pages long, will be complete in the next few weeks.

The study, which combined all the taxes applicable to rooms in each market, including sales tax and room taxes, said the national average of taxes on rooms is 11.65 percent. The average tax amount is about $9.15 per room per night. In Springfield, including the room-tax increase and sales taxes, the figures are 10.6 percent total tax rate and an average tax of $5.04.

The local figure is based on an average daily rate of $47.50 charged for rooms here, according to 1997 year-end figures from the Convention & Visitors Bureau. Nationally, the American Economics Group study showed the average room rate in 1997 was $78.54.

"Another thing about Springfield is that we're so far below the norm, I have to think it's not going to have the same effect," Kimberlin said.

At the end of 1997, Convention & Visitors Bureau figures, representing the reports of about 42 hotels in town, showed that in the last two years there has been more than an 8 percent increase in the number of rooms in town. At the same time, the number of rooms sold is down about 1 percent since 1995. During the same period, average room rates have increased about 1.4 percent.

In 1995, there was the equivalent of about 4,652 hotel rooms in Springfield. That number increased to about 5,033 in 1997. Rooms available will continue to increase statistically in 1998, even though construction of new hotels has ceased, Kimberlin said. Properties that opened in the middle of 1997 will be counted for the whole year in 1998 and increase that figure.

In 1995, Convention & Visitors Bureau figures showed that 987,896 room nights were sold. A room night is one room occupied one night. In 1997 977,731 room nights were sold.

The average room rate in Springfield in 1995 was $46.82, as opposed to $47.50 in 1997.

"Next year's (1998) occupancy will increase," Kimberlin said. "I do think we'll see an increase in demand even before" the new projects funded by the room-tax increase are finished.

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