The room tax

Today's Las Vegas Review-Journal editorializes on the Nevada State Education Association's efforts to push through a 3 percent increase to the room tax, with much of the revenue to be allocated for public education funding.

The paper's editors are justifiably skeptical that such a move would be wise, and for the most part their analysis is dead-on accurate.  They rightly challenge those who consistently argue that greater spending levels are the only path to improved educational quality in the Silver State, asking: "Will this new money help improve student achievement?" NPRI's Steve Miller and Patrick Gibbons have already offered their own insightful analyses that go a long way toward answering that question.

I would take some exception to another point the Review-Journal's editors raise, however. They write of the room tax push that "[s]ome gaming companies are on board, preferring a higher room tax – which can be passed on to visitors – over previous union threats to seek a higher gaming tax, which hits the bottom line."

As NPRI has pointed out, it is just not true that room taxes can simply be passed on to visitors. As Doug French explained in a commentary on the room tax about a year ago:

The common view is that room taxes "soak the tourists." Which would be okay. But do they? Economist Murray Rothbard explained in Power & Market that: "No tax can be shifted forward. In other words, no tax can be shifted from seller to buyer and on to the ultimate consumer."

Most people believe that tourists pay the room tax because the tax is on tourists' bills when they pay for their rooms. This view sees the tax as merely another increase in the cost of production (like labor or supplies) which is just passed on to tourists as an increase in room rates. But room rates are not determined by the costs of making room nights available. Daily room rates are determined by the demand schedule for those rooms and the supply of rooms available. The room tax does not affect the demand schedule. As Rothbard points out, "[t]he selling price is set by any firm at the maximum net revenue point, and any higher price, given the demand schedule, will simply decrease net revenue. A tax, therefore, cannot be passed on to the consumer."

Each room night is unique. Although the hotel room may be the same on different nights, the demand for that room will vary depending upon the date and the availability of other similar rooms. That's why room nights are priced much higher during convention season or New Year's Eve than on an average 100-degree August night with few conventioneers in town. If the hotels could have passed along the room tax in the form of higher room rates they would have raised rates already without the room tax.

Higher room taxes, in other words, would in reality be a direct blow to the state's most crucial economic engine.  Given today's economic climate, that's all the more reason to oppose the idea.

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