Hammer therapy

The room tax hike will cause nothing but headaches

By Steven Miller
  • Wednesday, March 11, 2009

"Wow! Did you see these numbers? Tourist visitation to Southern Nevada over the last year is down huge amounts, and the collapse is accelerating! The entire state economy is really at risk!"

"Yes, it's awful. Luckily I'm in the Nevada Legislature, and we lawmakers have taken bold and decisive action."

"What did you do?"

"We passed bold and vigorous legislation."

"What does the legislation do?"

"It mandates that all of us in Clark and Washoe counties hit ourselves on the head with hammers."

"What?!! Are you serious? That won't help—it will only make things worse!"

"Now, now. Don't react out of outworn and discredited ideologies. Hitting yourself on the head with hammers is the very latest bold and original thinking coming out of Washington."


"And don't forget, Nevada voters asked us to do this. Last fall they approved that ballot measure—the one sponsored by the teacher union and certain gamers."

"Voters were told that question was only advisory and that it was a question lawmakers would decide. Voters weren't telling you to do something so stupid!"

"Listen—we won the election, and we have a mandate to bring change to Nevada. And you can't deny that bloodying up everyone in the state's largest counties is definitely change."

The above skit, in certain quarters, will doubtlessly be seen as unfair. But is it, really?

At a time of accelerating economic implosion and spreading joblessness in Southern Nevada, can the imposition of a 3 percent room tax hike on the region's resorts be anything but astonishingly reckless and self-destructive?

Proponents of the new, higher, resort-industry tax burden assured voters, of course, that "tourists" will pay the tax. But this was and is specious nonsense.

The question of just who ends up paying such a tax is answered by economists slightly differently, depending upon which of two particular schools of analysis they favor. But regardless of school, the tax that the current crop of Nevada politicians just placed on the state's primary industry still will be recognized as catastrophic.

Economist A will say that, yes, resort owners will, to some degree, be able to pass on the new taxes in the form of higher room rates to tourists coming to Southern Nevada. Which of course means that when prospective visitors to Vegas see those new, higher rates on Expedia Travel or elsewhere, more and more of them will say to themselves: "Nope—I'm not going to pay that. I'll go elsewhere—or spend my money on something else entirely."

The consequences would not stop there. Because the sales taxes tourists pay contribute significantly to state and local government treasuries, the increasing disincentive that Nevada politicians have just placed on tourists coming here will have a substantial impact on sales tax revenue, also. Indeed, the new levy could cost the state more revenue than it raises.

Now let's turn to Economist B, who is more focused on market dynamics and aware of the fact that Nevada room rates are not really determined by the hotels but by the dynamics of market demand. Economists in this school understand that resort owners dynamically auction their rooms off for whatever prices, on a given date, will maximize total room revenue. When the demand for Vegas rooms is high, rates will be high, and when demand is low, rates will be low. 

Under this scenario, the new higher room tax rates are simply a big new cost imposed on the tourism industry. Which means: The money the politicians will get will be coming out of the hides of employees, suppliers and current investors. You would think a political party that constantly prates about working people, jobs and social services would understand the damage to all three that this big tax increase means. But in this new era of "change," economic illiteracy clearly plays a central role.

The higher room taxes in Southern Nevada must also destructively impact the state's economic future. For investors, the new politically imposed costs necessarily make investment in Nevada's tourism industry less attractive, rewarding them for taking their capital investments elsewhere. Always dispassionate and analytical, these investors will not miss the fact that the tax-consuming element in the Silver State has now gained complete control over the state political process and that the "Michiganization" of Nevada is well under way.

So, seen in such a light, is the metaphor of hammering yourself on the head with a hammer really that far afield?

Steven Miller is the vice president for policy at the Nevada Policy Research Institute.

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