It News: The Best and Worst U.S. Cities for Travel Taxes

The Best and Worst U.S. Cities for Travel Taxes

How Much of Your Vacation Dollar Goes to Levies on Hotel Rooms, Rental Cars and Flights by Municipalities
By SCOTT MCCARTNEY

17, 2012
In Chicago, the tax on a case of Miller Lite beer runs about 9%. That pales in comparison with the 16.4% tax on a hotel room and the 23% tax on car rentals at O'Hare International Airport.

Travel is one of the most heavily taxed activities in the U.S., even though most cities and towns try hard to encourage visitors and tourism. Travelers don't vote where they travel, so cash-strapped cities and states continue to push fees and taxes onto hotel rooms, rental cars and airports. Cigarettes are about the only thing taxed more heavily among consumer purchases.

Often the money is used not only to build and run facilities for travelers, such as convention centers and airports, but also to help finance general coffers and pay for sports stadiums and youth ball fields. In some cities, taxes on visitors help fund arts facilities and school systems, according to a study published last month by the Global Business Travel Association, a trade and lobbying group for corporate travel managers.

The impact can be significant: GBTA said travelers pay taxes that total, on average, 57% more than if they just paid the normal general sales tax.

Car-rental companies and airlines say heavy taxes on their services damp demand. With rental cars, some consumers, particularly leisure travelers, are discouraged from travel or opt for smaller cars to hold down the price of a rental, where taxes can sometimes exceed the car cost.

"Taxes clearly have an impact on consumer behavior," said Richard Broome, spokesman for Hertz Corp.

A survey last year by the U.S. Travel Association, a nonprofit industry group, found 49% of respondents had altered plans because of high travel taxes, such as by staying in less-expensive hotels and spending less on shopping and entertainment. Ten percent of people surveyed said they had changed city choices for trips because of taxes.

Travelers in some destinations can reduce some of the tax outlay by booking hotels outside of city centers, renting cars at non-airport locations and taking meals away from airports and hotel restaurants. However, the savings would usually be marginal and more trouble than they are worth.

Among major destinations, the tax on a day's travel spending can range from as little as $22.21 in Fort Lauderdale, Fort Myers and West Palm Beach, Fla., to as much as $40.31 in Chicago, GBTA found. That is calculated by keeping the cost of hotels, car rentals and meals the same in each city so the difference reflects the tax structure, not higher or lower travel costs. Some cities that depend heavily on tourists, such as Honolulu and Orlando, avoid imposing too many taxes on visitors.

Car-rental companies have fought local proposals to raise taxes on rentals, narrowly losing an effort in June to stop an 11% increase on car rentals in San Mateo County, Calif., at the San Francisco International Airport. "It seems like increasing travel taxes is one of the first places local politicians go when they need revenue," said Mr. Broome.

Airlines say taxes have a significant impact on air travel because they raise ticket prices so substantially. High prices deter buying and airline tickets are taxed at levels similar to alcohol and cigarettes, where the government imposes taxes to discourage use.

There are a total of 17 potential different taxes and fees levied by the federal government and airports on airline tickets. Passengers pay a federal excise tax to help fund the Federal Aviation Administration, a security fee to help fund the Transportation Security Administration, various fees for international inspections and fees charged by airports for passing through terminals.

On a typical $300 domestic ticket with one connection, the airline fare is really $238.88 and taxes and airport fees are $61.12—more than 20% of the $300 cost comprises taxes and government fees. By comparison, a pack of cigarettes that costs roughly $12 in Chicago has $5.67 in federal, state, county and city taxes, or about 47% of the cost.

This year the Department of Transportation began forcing airlines to include taxes in any price quote for airline tickets. Under pressure from consumers to show full prices, rental-car companies began including taxes prominently when people book reservations, showing an estimated total price for each rental. Hotel companies are starting to display taxes more clearly: Marriott includes taxes in hotel price quotes when customers are asked for name, address and credit card.

Yet hotel companies say higher taxes don't have a big effect on bookings. That is one reason the taxes keep coming: Cities, counties and states have so far been able to raise more money without crimping business or angering local voters.

"We really don't see an impact on business due to hotel taxes," said Marriott spokeswoman Laurie Goldstein.

When Chicago raised its portion of the hotel tax to 4.5% from 3.5% earlier this year, Mayor Rahm Emanuel predicted continued increases in tourism—and so far he appears to be correct. Chicago hotel occupancy rates are up slightly so far this year, according to Smith Travel Research. The tax increase "will help increase revenue that supports tourism, not deters it," the mayor said in a statement at the time. The city didn't respond to requests for additional comment.

The hotel-tax increase in Chicago, which had the highest total tax burden for travelers of any city in the survey, raised the total hotel levy there to 16.4%. That includes a 2% tax to help pay for the Chicago White Sox stadium, 2.5% to help pay for the McCormick Place convention center and state taxes as well. Chicago's rental-car tax is even higher. The tax on a $56, one-day car rental at the airport raises the cost by 23%.