By Connor Duckworth, Client Advisor
As Americans slowly emerge from the pandemic and head back to work, local municipalities across the nation face revenue shortfalls from tax-related expenditures. While the recovery process has certainly begun, Americans are not increasing their spending as quickly as previously predicted. The U.S. personal savings rate (the percentage of people’s income remaining each month after taxes and spending) skyrocketed to a record 32.2% in April, up from 12.7% in March, according to the U.S. Bureau of Economic Analysis. Stimulus checks that were expected to spur economic activity have, instead, largely been stockpiled into savings accounts. As the economy and job market continue to recover, municipalities should pay close attention to what is expected in the next few years to come.
Lodging Taxes are known by various acronyms across the U.S. including Transient Occupancy Taxes and Hotel Occupancy Taxes. Lodging tax revenue administration programs are used to collect the “bed tax” of visitors that spend time at a hotel, motel, bed and breakfast, or short-term rental (STR). Lodging tax revenues derived from the tourism industry plummeted in early 2020 as the pandemic began and travel and tourism screeched to a halt. Overall, lodging tax revenues were down nearly 50% in 2020 in California, with hotels hit the hardest. Short-term rentals also felt the impact, suffering a 22% decline from the prior year. The data indicates that people felt more comfortable staying at a rental property home over over hotels where the risk of exposure to COVID-19 was higher. Further good news appears to lie ahead for STRs as predictions foresee a quicker recovery in bookings and a growth rate of 10.5% since last year’s stay-at-home measures were implemented. Business travel will be slower to rebound, but leisure travel may see an increase of 10-15% in the 2021-2022 fiscal year.
In addition to significant revenue losses, the lodging market was equally impacted by massive job losses. With hotels not being able to sustain cash flow, many employees were furloughed or laid-off. Chip Rogers, President and CEO of the American Hotel and Lodging Association said, “COVID-19 has wiped out 10 years of hotel job growth. Yet the hallmark of hospitality is endless optimism, and I am confident in the future of our industry.” With the job losses come a loss of knowledge and expertise in the industry, which will be hard to quickly replace. This loss of knowledge will also impact local municipalities, as inexperience regarding tax filings, reporting, audits, and procedures can contribute to misallocation or under-collection of critical local government revenue.
Employ the following measures to help your lodging community recover from the pandemic:
- Penalty waivers and tax deferrals
- Grant coordination – securing federal and local funding for those hit hardest
- Restrictive health measures – more intense cleaning measures, change of operational procedures, limitation of food and beverage services, housekeeping, pool activities
- Conversion of properties to low-income housing
- Implementation of short-term rental compliance programs
With the reopening and loosening of safety measures, local governments should continue to monitor lodging provider tax returns to identify opportunities to provide support. An increased focus on compliance and auditing will likely be needed to ensure accurate returns and help rebuild lodging provider expertise regarding proper filing procedures. Short-term rental compliance and audits should also be diligent to provide proper reporting and equitable collection of lodging taxes and compliance with local ordinances. With these measures in place, municipal loss of lodging tax revenue will continue to diminish as the tourism industry heads toward recovery.
Business License Tax and Revenue
Similar to lodging taxes, business license revenues have seen declines since the onset of the pandemic. The stay-at-home measures temporarily shut the doors of millions of businesses and forced many to go out of business entirely. Unemployment rose drastically, especially impacting small business employment.
The way that business is conducted has likely changed permanently. Many businesses that transitioned to remote operations will continue to allow some, if not all, of their workforce to continue to work from home or a hybrid form of work. Commercial properties, including office space and small manufacturing, will have the toughest time recovering as working from home becomes a permanent trend. As remote business operations continue, an apportionment predicament occurs. Municipalities who allocate business license taxes based on gross receipts should monitor and prepare for solutions to counterbalance apportionment. Apportionment was not common prior to the pandemic, as most businesses operated out of a brick-and-mortar location within a municipality and all gross receipts or revenue were calculated from that location. Since transitioning to remote working, some revenues are collected from the municipality where the remote worker is located. Understanding the local tax and municipal code is pertinent to achieving fair and equitable reporting.
Several actions to adapt to these recent changes are:
- Tax deferrals and waivers – Clearly educate the business community regarding any changes to these programs, particularly regarding expiration.
- Tax studies and ordinance reviews – An out-of-date tax code will make it increasingly difficult to equitably tax business activity, particularly with the new challenges created by an increasingly distributed work force.
- Monitor related revenue sources – Keep an eye on sales tax reporting and gross receipts as certain industries are quicker to recover.
- Ensure all data is captured – Review applications, renewals, and supplemental forms to ensure that all appropriate data is collected. Business license programs are an excellent source for data which can help municipalities understand and create strategic plans around their jurisdictions business activity and support economic recovery.
- Monitor new legislation – Stay up to date with new laws and regulations that take effect and adapt your business license program as needed.
As main streets across America open their doors with a promising future ahead, both the lodging industry and local businesses are expected to grow in revenue.
About HdL Companies
With more than 500 cities, counties and special districts as clients, HdL is the nation’s leading provider of proprietary revenue recovery, audit and administration services encompassing all general sources of municipal tax revenue. To learn more about HdL and its revenue recovery services, visit www.hdlcompanies.com.