No room to complain

Doug French

The same folks who have been pounding the table demanding Gov. Jim Gibbons fix the highway funding problem in (especially southern) Nevada are now calling his funding plan “dead on arrival,” “not based upon sound policy” and “phony.”

The principal criticisms are that he didn’t raise taxes to find the money for roads, and that the Las Vegas Convention and Visitors Authority (LVCVA) would over time have less money — to produce and buy air-time for ever-spicier “What Happens Here Stays Here” commercials, and to offer 3.2 million square feet of convention space at money-losing, below-market rental rates.

The Governor’s plan re-directs four percent of the LVCVA’s room-tax revenue to road construction this year and increases the share going to transportation by four percent per year until it reaches 32 percent.

Some Sunday paper pundits believe that Las Vegas would dry up and blow away if not for the LVCVA spending money to promote the city. They honestly believe that without this government-funded marketing, all those neon lights would be on, but nobody would be home.

These columnists believe that prosperity comes from government, and that only enlightened bureaucrats can make the important decisions that create that prosperity. Never mind the brilliance and guts of Sheldon Adelson, Steve Wynn and George Maloof. Apparently the city’s future is now in the hands of LVCVA President Rossi Ralenkotter, a guy who’s received a check from taxpayers for the last 31 years.

But the tail does not wag the dog. The LVCVA is budgeted to receive $214 million from room taxes in 2007, comprising 80 percent of its budget. The other 20 percent comes primarily from renting 3.2 million square feet of convention space. However, since it’s not pressed to operate profitably, the convention authority leases its space for 25 cents per usable square foot per convention day and zero cents per day for set-up days up to the number of convention days leased. It hasn’t raised its rates since 2002 and won’t raise its rates again until 2009. These rates vastly undercut private operators such as Mandalay Convention Center and Sands Expo.

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.

An excise tax, Rothbard summarizes, “cannot be considered a tax on consumption in the sense that the tax is shifted to consumers. The excise tax is also a tax on incomes , except that in this case the effect is not general because the impact falls most heavily on the factors specific to the taxed industry.”

So instead of hotel corporations and entrepreneurs collecting $214 million for their shareholders, suppliers, lenders, employees and marketing, they are forced to hand that money over to the LVCVA to lease more space to existing conventions at the expense of private competitors, instead of marketing new convention business.

Considering all this, re-directing some of that money to the building of roads doesn’t sound like a bad idea at all.

Doug French is executive vice president of a Southern Nevada bank and a policy fellow of the Nevada Policy Research Institute.