EFFECTS OF A ROOM TAX ON RESORT HOTEL/MOTELS

Local governments concerned about the costs of providing public services in a resort area may deal with the situation by imposing an occupancy tax on hotel/motel rooms. The impact of such a tax depends upon the elasticity of demand for the rooms. If demand is elastic, the tax will fall primarily on hotel/motel owners, causing them to bear a greater portion of the burden of local government. With an inelastic demand, the tax burden will fall primarily on room occupants, thereby compensating local residents for some of the external costs of the resort activity. Under Musgrave's classification, a hotel room occupancy tax is a discriminatory tax since it fits the category of a selective excise tax. When considering such a tax, local officials must forecast how much revenue the tax will generate and what the impact of the tax will be on the motel industry specifically and on the travel industry in general.