Are tax credits or incentives unique to the tourism industry?

It is not uncommon for governments to provide tax relief in various forms including tax credits, deductions, or waivers to targeted industries. For example, it is common practice for governments to forego or substantially reduce property and other forms of business taxes to encourage companies to locate facilities in their state, county, or community. When faced with an economic slowdown, governments are especially prone to offer both general and specific targeted forms of tax relief (e.g., accelerated depreciation of capital assets) to stimulate business investment and economic activity. It is also common for governments to single-out industries in distress for tax relief in various forms. The specifically targeted sectors in this case are the transportation and lodging; however, stimulating demand in these two sectors will benefit other sectors that provide complimentary products and services.
 

How does this tax incentive compare with tax incentives on other purchases?

At this time, there are few similar tax credits available at the consumer level. One example of a similar credit being offered at the consumer level are energy tax credits for homeowners who install specified energy efficient products in their homes. The "Energy Tax Policy Act of 2001" offered a tax credit of up to $2,000 to homeowners who installed insulation, exterior doors and windows, skylights, metal roofs, solar water heating systems or rooftop photovoltaic systems. The credit was also extended to include the purchase of energy-efficient hybrid vehicles. In addition to tax credits, one obvious and long standing tax relief opportunity is the deductibility of home mortgage expenses.
 

How does the nominal and effective tax burden on this industry compare with other economic activities in the economy?

The transportation (primarily airlines and rental cars) and lodging sectors specifically singled out in this proposed legislation are among the most heavily taxed in the U.S. economy and have been popular targets for increases in taxes over the past several years. The WTTC Tax Barometer tracks tax rates in 52 cities worldwide, including seven in the United States: Boston, Chicago, Honolulu, Los Angeles, Miami, New York, and San Francisco. The latest edition of the Tax Barometer (December 2001) shows that in these cities:

1) Taxes on car rentals have risen an average of 73% since 1994. Taxes on a five-day car rental now average nearly $35.00, compared with $20.00 in 1994.

2) Tax rates have risen an average of 10% in six of the seven cities; New York is the only city to have lowered its tax rate. Total taxes paid for four nights of lodging now average over $80.00.

3) Taxes on airline tickets have risen nearly 77% since 1994. Air passengers now pay over $53.00 in ticket taxes, compared to $30.00 in 1994.

Principle No. 1 summary: Is this an equitable taxing scheme?

The Principle of Equity becomes more complicated when it is applied to a tax credit rather than to a tax itself. The idea of a targeted tax credit is by its very nature inequitable; it does not treat all industries fairly as they are generally aimed at a specific sector of the economy. There are very few tax credit plans that provide across the board advantages to all industries. It is common practice for governments to provide tax credits or other incentives to industries under temporary stress, especially when the stress is due to natural or political disasters beyond the industry’s control. Because the Principles are based upon assumed “normal” economic conditions, a broader concept of equity may be appropriate. In this regard, the bill’s adherence to the Principle of Equity can be argued from either side.

“Taxes must generate revenue without a significant impact on the demand for a good or service (unless the tax is designed to modify behavior). At a certain threshold, the revenue gained from a tax increase can be lost because of reduced demand. Even more, the decrease in demand sends a debilitating wave throughout the economy as suppliers are affected. The negative impact swells, because of the subsequent loss of tax revenue in many sectors.”
 

Is this tax credit designed to modify behavior?

The tax credit in this instance would result in reduced personal income taxes paid to the federal government. Its purpose is clearly tied to the objective of modifying travel behavior as indicated by its title– the “Travel America Now Act of 2001.” The tax credit provides a financial incentive for Americans, traumatized by the events of September 11, to take a trip as a first step toward returning to their “normal” travel behavior pattern.

What will be the monetary impact on total trip costs (lodging, car rental, meals)?

The credit is equal to $500 for an individual or $1,000 for a couple filing a joint return. The credit applies only to travel and lodging costs associated with personal travel on an trip of at least 100 miles (one way) that includes an overnight stay in a commercial lodging facility. It is important to note that individuals spending less than $500 for travel-related expenses would be reimbursed for only these costs and not the full $500.

Principle No. 2 summary: Is this an efficient taxing scheme?

In time, if the public becomes convinced that it is safe to travel, demand for travel will revert to being a function of a classical set of variables including price, income, tastes, competing products’ prices, and so on. Prior to September 11, travel demand was softening due to an economy which had been officially declared to have entered a recession in March of this year. A plausible (but not necessarily convincing) case might have been made for reducing travel taxes as a targeted fiscal stimulus public policy action. Since the primary focus of this legislation is on behavior modification, in essence to encourage a traumatized public to begin traveling again, the efficiency of this proposed legislation should be assessed on its prospects for achieving behavior modification. If we can assume that government’s actions to combat terrorism and improve safety are working and reasonable amounts of resources are being invested towards these ends, then we could assume that travel is as safe as it has been (if not safer), and the recovery of the travel industry is unduly hampered by negative consumer psychology. The choices for addressing the symptoms of negative consumer psychology are few and include education, promotion, and/or putting travel on sale. The latter is most likely to produce the most immediate response, and therefore can be considered efficient.

“Complicated taxing schemes eat up revenues through administrative costs. These costs include both those borne by government in the process of collecting and enforcing taxes, and those borne by taxpayers. One objective of good tax policy is to achieve the highest possible ratio of revenues generated per dollar invested in collecting the tax. Special note should be made to consider the taxpayers’ costs of compliance in calculating this ratio. Simplicity in taxing also dictates that governments should make it clear what the tax rates are, and how the revenues are to be used.”
 

Is this a complicated taxing scheme?

Claiming the tax credit would be a relatively simple additional element when individuals file their federal income tax forms. One only needs to follow the trip eligibility requirements set forth in the proposal and provide proof of purchase to claim their credit.
 

What will be the government’s cost of collection?

The cost of processing tax credit claims would be a minimal added burden for the Internal Revenue Service. In terms of the total cost to the government, however, Senator Kyl estimates the tax credit could cost the government up to $10 billion.
 

What will be the taxpayers’ cost of claiming the tax credit?

Those who employ a tax preparer are unlikely to incur an additional fee to claim their credit. Those who prepare their own returns should find claiming the credit to be only a minor added inconvenience.
 

Is what one needs to qualify for the tax credit clear?

The criteria for qualifying for the tax credit are few and easy to understand. One must take a personal trip during a specified timeframe that: 1) is at least 100 miles from their residence, and 2) involves an overnight stay at a commercial lodging facility.
 

Principle No. 3 summary: Is this a clear and simple taxing scheme?

What one needs to do to qualify for the tax credit is clear and making one’s claim is simple and inexpensive. Government’s cost to implement the policy is quite low.

“Fair revenue generation arises from the concept of equity. In the evenhanded capturing of tax revenue, it is unreasonable to assess special fees or levies on specific goods or services. These types of taxes are often cloaked by language and terminology to hide their real intent. Although special charges and fees may appear on face value to be modest, they can quickly accumulate and become an unreasonable burden to a sector.”
 

Is this tax credit a special incentive?

The credit is a special incentive to encourage Americans to begin traveling again, and applies only to the transportation and commercial lodging sectors of the travel industry.
 

What other tax credits or incentives are already in place in the travel industry sector?

There are currently no similar government-sponsored incentives in place in the travel sector. However, many individual travel businesses such as airlines and hotels have offered reduced rates or packages to encourage the public to resume their normal travel routines.
 

What percentage of the tax credit will be used in ways that will benefit tourists or the tourism industry?

To qualify for the credit, one must be a tourist and have consumed transportation and commercial lodging services. Thus, nearly 100% of the initial benefit will accrue to tourists and the commercial lodging and transportation sectors of the tourism industry. Increased traffic will benefit the full range of tourism industry businesses and all sectors of the economy as the new dollars course through the economic system.
 

Does the tax credit proposal have a reasonable timeframe?

As currently written, the window for earning the credit is too short to be meaningful; only trips taken between the bill’s enactment and the end of the year 2001 are eligible for the credit. However, we believe the eligibility period will be about 12 months based upon the tenor of related bills that have also been introduced. It is recommended that the time limits be extended to at least six months after the bill’s enactment.
 

Will the tax credit be renewed?

The current intent is for the law to terminate after a relatively short life. However, if the travel industry’s recovery is slower than expected, it is conceivable that attempts may be made to offer the credit in future years.
 

Principle No. 4 summary: Is this a fair tax credit?

This credit only targets sectors of the tourist industry that were hit the hardest by the terrorist acts of September 11 and by the threats of future terrorist acts. On the surface, one could legitimately question this proposed legislation on the economic principle of fairness. However, such questions become minor when one considers the importance of rebuilding sectors that are central to the overall recovery of the U.S. economy, and especially when one considers fairness in the broader sense. These sectors have been disproportionately impacted by catastrophic events largely beyond their control. We have seen a massive public response in support of victims of the attacks in New York. This legislation can be seen as benefiting economic victims who have suffered more than most others.

“Tax incentives and disincentives should be imposed with the underlying goal of stimulating growth. Taxes that support infrastructure will ideally result in the attraction of investment and new employment. However, when taxes become excessive, economic growth often grinds to a halt.”
 

Is the goal of this tax credit to stimulate industry growth?

The stated goal of this bill is to encourage Americans to travel, which would in turn stimulate economic growth. The intention here is to help the industry recover from the tragic events of September 11.
 

Principle No. 5 summary: Is this tax credit an effective stimulus to industry growth?

Industry growth is the one of the bill’s main objectives. The bill provides an incentive for Americans to resume their normal travel habits in an effort to facilitate the industry’s recovery. Growth above and beyond the industry’s pre-September 11 level is not one of the bill’s stated objectives, but the tax credit incentive is clearly an attempt to stimulate an industry undergoing unforeseen hardships.