Arts & Entertainment, etc. and ICVA and Conventions and Local Government and Hospitality taxes and Taxes and Regional Taxes and Government & Economic Development and Tourism & Hospitality and Government and Visitor Spending and Sports Business

Raising already-lofty lodging levy could cause convention planners to bypass Indianapolis

March 2, 2009
Raising Indianapolis' tax on hotel rooms — already one of the highest rates in the nation — could be the tipping point that causes conventioneers to bypass Indianapolis, some industry experts say.

Marion County hotels already pay 16 percent in sales taxes — the 9-percent innkeeper's tax, plus the 7-percent state sales tax. An increase in the innkeeper's tax would push the combined rate to a level matched in the Midwest only by Cincinnati.

Indianapolis officials say they are considering seeking to increase the hotel tax and the city's food-and-beverage tax 1 percentage point each, a move they say would raise $22 million annually — putting a huge dent in the $37 million annual budget deficit the Capital Improvement Board expects to begin incurring in 2010.

Most of that, $18 million, would come from the increase in the food-and-beverage tax, which applies to sales at restaurants and bars.

Meeting planners say hiking that tax would be unlikely to generate significant pushback from conventioneers, since the costs would be shouldered by anyone making retail food-and-beverage purchases countywide.

On the other hand, convention planners say they do scrutinize innkeeper's taxes before choosing convention sites. Hiking such a tax might generate less resistance from rank-and-file Indianapolis residents, since the hotels that directly benefit from conventions and pro sporting events would shoulder the cost.

But having one of the most expensive tax rates in the region — not to mention the country — ultimately drains convention and meeting business, said Joe McInerney, CEO of the Washington, D.C.-based American Hotel & Lodging Association.

"You end up killing the goose that laid the golden egg," he said. "It could put you out of the marketplace."

Cash-strapped CIB received more than half of the $80 million generated last year by Marion County's hospitality taxes — the innkeeper's tax, a 2-percent food-and-beverage tax, and 6-percent rental-car tax. In addition, it garnered $6.7 million from the county's 6-percent ticket tax.

But the quasi-governmental agency, which operates the city's sports facilities and the Indiana Convention Center, says it needs more funds, in part to cover operating deficits at Conseco Fieldhouse and Lucas Oil Stadium.

Board President Bob Grand said raising one of the hospitality taxes is a possible solution, although a ticket tax is gaining momentum and is favored by Mayor Greg Ballard as part of the solution. A 1-percentage-point hike in the ticket tax — which is applied to events at CIB venues — could raise an additional $1.5 million. Any proposal would need approval from the General Assembly.

Hospitality taxes always have been easy targets for municipalities searching for extra money. Indianapolis is one of 24 cities or counties in the state that already have food-and-beverage taxes, for example, and a handful more are considering asking state lawmakers for permission to levy the tax or extend an existing one.

None of the proposals from other Hoosier communities, however, scares hospitality industry veteran John Livengood as much as a hike in Indianapolis hospitality taxes.

"That's the one that haunts me; that's the one that keeps me up at night," said Livengood, executive director of the Restaurant & Hospitality Association of Indiana. "It just boggles my mind. I don't get it."

Raising millions

So far, raising hospitality taxes in Marion County has had the intended effect — boosting revenue. In 2008, the Marion County innkeeper's tax generated $40.4 million, the food-and-beverage tax $36.3 million, and car rental fees yielded $4.6 million. The is used to help fund the Indianapolis Convention & Visitors Association, as well as to pay bonds on the stadium, the convention center and Conseco Fieldhouse.

The innkeeper's tax recently rose from 6 percent to 9 percent to help fund the $275 million expansion of the Indiana Convention Center, which is scheduled to be finished in 2010. And legislators in 2005 approved doubling the food-and-beverage tax to 2 percent to help fund construction of the $720 million Lucas Oil Stadium.

The General Assembly last year increased the state sales tax from 6 percent to 7 percent. With that increase and the increase in the food-and-beverage tax, restaurants now pay 9 percent in sales taxes.

Since 2005, revenue generated by the innkeeper's tax has climbed nearly 40 percent, and revenue from the food-and-beverage tax has risen nearly 38 percent.

All adjacent counties, except Morgan, passed their own food-and-beverage taxes in 2005 to help fund construction of Lucas Oil Stadium. Half goes to stadium costs and the other half is kept by the counties.

Hiking the surrounding counties' food-and-beverage tax from 1 percent to 2 percent is expected to raise another $5 million.

"If we're going to get this done," Grand said, "everybody's going to have to help."

Don Welsh, executive director of the Indianapolis Convention & Visitors Association, acknowledges as much but prefers that hospitality taxes be left alone.

Increasing the innkeeper's tax might not affect convention business now, when the average room rate is a modest $137, he said. But the 2010 opening of the 1,300-room hotel complex anchored by a high-end JW Marriott is expected to push average room rates above $150. That's when room taxes start to become more of an issue, Welsh said.

"Clearly, we're pushing it at 16 percent," he said, referring to the innkeeper's tax combined with the regular sales tax. "But we do not have meeting planners saying, 'Oh, by the way, if your taxes go up, we're not going to consider you.' They look at the whole package."

He said that facility rent expenses, the tight proximity of convention buildings to hotels and restaurants, and the ability to negotiate rates on meeting space are among the factors planners consider.

Carol McCormack, a local planner who books meetings around the country for clients of Cleveland-based Experient Inc., concurred. Paying a few more dollars for each room often is not enough to break a deal, she said.

Closing the gap

CIB members in February approved nearly $6 million in budget cuts, including reductions in advertising spending, shrinking the board's projected deficit from $43 million to $37 million. They are expected to discuss additional options to close the remaining gap at their March 9 meeting.

The organization divulged in January that it anticipates incurring $15 million in operating expenses for Conseco Fieldhouse next year. CIB's shortfall also includes a $20 million operating deficit for Lucas Oil Stadium, which opened last fall.

Proposals to raise hospitality taxes often generate less taxpayer resistance than efforts to increase other kinds of levies. They're often pitched as a tax on overnight visitors, or as such a small increase on restaurant bills that diners would barely notice.

But Sotiris Avgoustis, chairman of IUPUI's tourism, conventions and event management department, cautioned that escalating taxes can have damaging consequences.

"We are at the point now that if we continue to increase the taxes, we will find ourselves in trouble when portraying our city as competitive," he said.

And once they take effect, they're likely to remain on the books long after they've served their original purpose.

Marion County passed the first food and beverage tax in the state in the 1980s to help fund construction of the RCA Dome in hopes of luring an NFL team to Indianapolis. That tax, which never was rescinded, established a precedent for other communities to follow.

"Local officials say it's the only option they have, but it isn't," Livengood said. "It's just that it's been done before."

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