In The News › The $165 million question: How best to invest New Orleans’ tourism tax revenue?

The $165 million question: How best to invest New Orleans’ tourism tax revenue?

By Robert McClendon

NOLA.com | The Times-Picayune

August 3, 2016

New Orleans has been courting tourists since the Civil War Reconstruction ended. For a long time, the city’s mystique was enough to attract a steady stream of visitors.

That changed in 1959 when the Chamber of Commerce began to modernize its efforts to market the city, quadrupling the budget of its fledgling tourism department.

First in line to help them do it was Mayor deLesseps “Chep” Morrison, who pledged $15,000 in city money.

It was an early case of the city subsidizing the tourism industry. Over the next 40 years, lawmakers sliced off chunks of the city’s tax base, redirecting the proceeds to a growing roster of special commissions dedicated to bringing in more visitors.

Today, there are about 15 special tax dedications and exemptions benefiting a half dozen entities created to promote tourism through leisure travel, conventions and professional sports. Combined, the subsidies were worth about $154 million in 2015, roughly 28 percent of the city’s general fund budget that year, according to a NOLA.com | The Times-Picayune analysis of public records.

A recent Bureau of Governmental Research study found that for every dollar in locally generated tax revenue in 2015, 14 cents went to boards and commissions dedicated to tourism.

Many of the largest handouts were originally dedicated to projects that have long since been completed or never came to fruition. But tourism boosters continue to collect those revenues, allowing some entities to build massive reserves even as city leaders appeal for new taxes to repair crumbling streets and hire more police officers.

Critics are beginning to question whether some of the money might be better spent elsewhere.

Tourism boosters say that would be a disaster. Cutting off support from local government would threaten the entire local economy, ultimately resulting in a net loss in tax revenue, they say.

An estimated 9.8 million people visited the metropolitan area in 2015, leaving more than $7 billion in the hands of area hotels, restaurants, bars, tour guides and musicians, according to a University of New Orleans study the industry commissioned. More than 70,000 area residents work in hospitality with about half that directly attributable to tourism, making it by far the largest job creator in the region — almost twice the size of the oil and gas sector in 2014.

And it’s not just the private sector that benefits.

Hotel taxes added a combined $39 million to city, transit system and local school budgets. UNO’s data suggests visiting diners added another $20 million in tax revenue, with the overwhelming majority of that benefiting city government.

Stephen Perry, president and chief executive of the New Orleans Convention and Visitors Bureau, called the decision to devote taxes to tourism “the greatest deal in the history of the city.” As a result, facilities such as the Superdome and Morial Convention Center were built without having to rely on city resources, he said.

Where the money goes

The web of local subsidies has grown so complex that few know the full extent to which tourism in New Orleans benefits from tax support.

Hotel stays, the single largest source of the subsidies, are subject to a dozen taxes, each established under a different state statute or city ordinance to benefit one of eight different entities. Some of the taxes are further broken down and redistributed among the recipients, obfuscating the true scale of the dedications and who benefits from them.

The BGR study estimated that the hotel taxes generated $165.9 million in 2015. After accounting for all the pass-throughs and levels of distributions, the watchdog group estimated that about $126.8 million — 76 percent — went to tourism-related entities. The remaining 24 percent went to public services such as city government, transportation and education.

No other major American destination city devotes a smaller share of its hotel taxes to local government than New Orleans, according to a recent study by the Las Vegas Convention and Visitors Authority. On average, the 17 cities in the study dedicated 65 percent of hotel taxes to basic services. New York dedicates 100 percent to its city government.

In addition to the hotel taxes, there are other special taxes and local sales tax exemptions that benefit tourism that were not included in BGR’s examination. When they are included, the total dollar value of tourism subsidies was an estimated $154 million in 2015.

Benson benefits most of all

The single largest beneficiary of the local subsidies is probably Tom Benson, owner of the New Orleans Saints and Pelicans, and Louisiana’s richest man with a net worth of $2.2 billion, according to Forbes.

Benson is often thought to benefit primarily from state money because his teams play in venues the state owns through the Louisiana Stadium and Exposition District. The governor appoints the LSED’s board, which the Legislature created in 1966.

Taxes generated in New Orleans, not state appropriations, pay for the bulk of the LSED’s operations.

Lodging taxes collected from New Orleans hotels generated $53.4 million for the LSED in 2015, and a cut of local slot machine taxes added another $3.1 million.

Revenue produced from the stadium and arena has historically been exempt from sales taxes, too. That saves event promoters and Benson’s organization roughly $8.5 million per year in local tax overhead, a conservative estimate based on documents obtained from the LSED.

In all, events at LSED venues cost local taxpayers about $65 million in 2015.

Greg Bensel, a spokesman for the Benson organization, defended the teams’ arrangements, saying many aspects of them are standard in NFL and NBA leases, and that the city benefits from the public ownership of the facilities.

“It is important to remember we are a major business in a very competitive industry, and it is standard for governments/taxpayers to try and establish favorable conditions/policies in order to retain businesses and help them flourish, whereby the city in which this business is being conducted benefits,” Bensel said in a statement.

It’s not possible to say exactly how much of the $65 million in LSED subsidies benefits Benson. The district oversees six properties, not just the Smoothie King Center and the Mercedes-Benz Superdome, which routinely host major events such as the NBA All-Star Game and college football bowl games. Like Benson, those events use the facilities rent-free and are not subject to sales tax, so they benefit from the local subsidies as well.

That being said, revenue figures show that the Saints and the Pelicans benefit the most from the local subsidies because they generate the overwhelming majority of the revenue produced at LSED venues.

Last year, the teams grossed about $115.8 million from tickets, concessions and parking, the major sources of revenue tied directly to their use of the stadium and arena. Concerts and other events generate about $40 million a year, according to LSED figures. Even blockbuster events such as Wrestlemania pale in comparison. The 2014 pro wrestling extravaganza grossed the most ever for a special event at the Superdome — $10.9 million.

Benson’s portion of the city’s forgone taxes alone was worth about $5.9 million in 2015, enough to fund the city’s entire legal department.

About $73.4 million in hotel taxes generated locally in 2015 went to entities dedicated to marketing the city or hosting conventions. Together with a handful of other taxes, some of which New Orleans residents pay, they received about $90 million, according to the Bureau of Governmental Research.

Lastly, New Orleans retailers benefit from the city’s participation in Louisiana Tax Free Shopping, a program that allows international travelers to have their sales taxes refunded when they buy from qualifying shops. The city lost out on $738,000 in taxes as a result of the program in 2015.

Big returns

Those who benefit from the tax revenue point to the billions of dollars in economic activity they say the government support generates.

Roger Dow, president and chief executive of the industry’s biggest lobby group, the U.S. Travel Association, called investment in tourism the single most effective economic development choice a city can make.

It’s not clear exactly how much of the local economy depends on tourism, but UNO’s visitor survey hints that the impact of tourism dollars is massive. Direct spending by visitors to the New Orleans area — the total value of all their restaurant checks, bar tabs, hotel bills, tchochke receipts and the like — came to $7.05 billion.

Dow pointed out that tourism is a labor-intensive industry; a huge portion of the direct spending goes to salaries. That means more of tourism’s economic impact is captured by the local economy, rather than “leaked” to other communities by way of corporate profits or investment in equipment and materials, which are likely to have been manufactured elsewhere.

“No other industry has an immediate feedback to the economy like that,” Dow said. “When you spend the tax (on tourism promotion), it comes right home.”

It’s not unusual for economic impact studies to conclude that the total value added to the local economy, once the dollars are re-circulated, is twice that of the direct spending, sometimes more.

Perry, the CVB chief, said investments in physical venues — the Superdome led the way in 1975, followed by the Ernest N. Morial Convention Center in 1984 and Smoothie King Center in 1999 — have been critical to the city’s success because they allowed the New Orleans compete with larger destination cities for major events.

Since the Superdome was completed in 1975, it has hosted the Super Bowl seven times, five Final Fours, a papal visit, and two of boxing’s most iconic bouts: Muhammad Ali’s rematch against Leon Spinks, his last professional win; and Sugar Ray Leonard’s famous “No Mas” defeat of Roberto Duran.

The Smoothie King Center has hosted two NBA All-Star weekends, a regional round of the NCAA Division I men’s basketball tournament, two women’s Final Fours and three Arena Football League championships.

All of that is in addition to perennial events such as the Sugar Bowl and Essence Festival — and the 300 or more monster truck rallies, concerts, circuses and weddings held at the LSED’s New Orleans venues.

Had New Orleans leaders not stepped out on a limb to back the construction of the Superdome, all of that goes away, said Doug Thornton, vice president for stadiums and arenas at SMG, the company that operates LSED venues and other arenas in the U.S. and Europe.

“The Superdome is what put us on the map as a sorts and tourism destination,” Thornton said. “Without it, nothing happens. We are just a sleepy town on the bayou.”

Thornton conceded that Benson’s organization is undoubtedly the largest beneficiary of taxpayer support for LSED venues, but he said the public financial backing necessary to keep the Saints and Pelicans in New Orleans has generated a huge amount of economic benefit for the city as a whole.

A UNO study of the 2007-2008 fiscal year found that professional sports and special events at LSED venues generated $763.9 million in direct spending. The secondary effect of that money washing through the state’s economy generated another $730 million, bringing the total economic impact to $1.5 billion, according to the study, which the LSED commissioned.

Economic impact hard to pin down

Heywood Sanders, a professor of public policy at the University of Texas at San Antonio, said in an interview that economic impact studies and visitor surveys should be approached with caution, especially when the industry pays for them and they are presented without a detailed explanation of the methodology and all of its underlying assumptions and projections.

It’s very difficult to demonstrate that leisure travelers would not have visited a city but for government-funded marketing campaigns, Sanders said. Visitor profiles and impact studies are similarly fraught because their figures rely on a “daily spend” metric that is very hard to estimate accurately, he said.

The estimate of daily tourist spending is usually based on surveys completed by a tiny fraction of the tourists drawn to a city, and respondents often just guess at how much they are spending.

UNO’s visitor profile was based on 11,000 online surveys sent to visitors after they returned home. The Convention and Visitors Bureau provided only the executive summary of the profile study, not the full document that presumably would have included a more detailed explanation of its methodology.

Even if the spending estimated in the visitor profile is 100 percent accurate, Sanders said, it’s very difficult, if not impossible, to demonstrate how much of that economic activity is attributable to the government’s subsidy of the industry.

“New Orleans has attracted visitors from its founding,” Sanders said. “There is no question that people would visit New Orleans for a variety of purposes. The extent to which the visitation currently is a function of the level of spending of hotel- and tourism-related taxes is an intriguing but not necessarily answerable question.”

Dow, the U.S. Travel president, challenges this critique.

“There’s this belief that people will come here anyway,” he said, but the tourism market is hyper competitive. “If you take the pedal off the gas, someone else is going to fill that void.”

Dow pointed to states that cut tourism spending only to see their economies suffer as a result. He cited a U.S. Travel-produced report,“The Power of Travel Promotion,” that used Connecticut and Washington as examples but didn’t reference any third-party data to underpin its conclusions.

Rethinking the business plan

The city’s skyrocketing tourism subsidies, funded by increased hotel revenues, haven’t gone unnoticed.

Mayor Mitch Landrieu has generally been a champion of the industry since his days as lieutenant governor, but he said in a recent interview that the status quo is not sustainable. The city has a litany of unmet needs, and New Orleans voters recently rejected a property tax increase, leaving hotel taxes as one of the only substantial revenue sources available, he said.

Accessing them has proven difficult. The hotel taxes are portioned out in state law, and state legislators have thus far shown little appetite for increasing the city’s share.

“We need some of those resources moving back into our pockets,” Landrieu said. “Politically, that is very hard to get done. They have not been open to letting us have what we need.”

Most recently, the Landrieu administration attempted in 2014 to add a 1.75 percent occupancy tax on hotel stays to pay the cost of implementing federal consent decrees and other city debt. The industry lobbied against the bill and blocked it.

New Orleans’ hotel taxes have been added piecemeal over decades with no coordination and, in some cases, no referendum from voters, said Amy Glovinsky, BGR’s president and chief executive. Most of the revenue is spent by appointed boards with little public input or discussion because it doesn’t show up in the city’s budget.

“The city’s takeaway is dwarfed by special interest groups,” Glovinsky said. “I don’t think the public understands. There is no visibility.”

Perry said BGR’s report fails to take into account the potentially catastrophic consequences cutting hotel taxes would have on the economy. He estimated that redirecting just a fraction of the taxes currently dedicated to the local tourism industry could result in the loss of $30 million to $50 million in additional taxes that investment would generate.

They make possible the industry’s support of added law enforcement in the French Quarter and various incentives, such as the enticement recently used to secure a direct flight between New Orleans and Germany, he said.

Hotels overwhelmingly backed the special taxes and industry assessments on them because they were earmarked for endeavors that would drive revenue back to their bottom lines, Perry said. The benefits offset the cost of the extra taxes.

Sanders, the University of Texas San Antonio researcher, said industry boosters want hotel taxes invested in tourism because it serves their own interests, not because the argument has any rational economic basis.

“A hotel tax is a public revenue source that can and should be used for any desired public purpose,” he said. Nobody would claim that sales taxes should fund Wal-Mart’s advertising budget because it pays sales tax, Sanders said.

Kevin Fox Gotham, a Tulane University sociologist who has studied tourism in New Orleans extensively, said subsidies for the industry are rarely questioned because they make intuitive sense.

“You sort of think, ‘Of course it’s money well spent because the tourism sector will use that to invest in infrastructure to bring in more and more people. The more people you bring in, the more money people will spend, and those benefits will trickle down into other institutions in the city,’” Gotham said.

The problem, Gotham said, is that isn’t necessarily the case. His research has shown the expansion of tourism can lead to gentrification, as the influx of cash from tourists attracts investment in shops and other infrastructure catering to visitors. The process transformed the French Quarter decades ago, Gotham said, and it continues today in other neighborhoods.

Tourism is also a predominantly low-wage industry, particularly in New Orleans. Statistics from the Data Center show it is the largest employment sector but also among the lowest-paying.

The economic structure of the industry creates a few winners at the top and a wide base of labor on the bottom, Gotham said.

By pumping money into the industry, he said, the city is actively funding one of the primary drivers of inequality among its residents.

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