The money doesn't belong to the hotels

Yesterday City Council voted unanimously to commit up to $600 million towards the construction of a new Convention Center. The total cost of the project is estimated at $1.6 billion.

I doubt there's any way we can change course now, but it's still a tragicomedy worth recounting for the history books.

Like the I-35 expansion, the Convention Center reconstruction is moving forward largely because it is being paid for by what local leaders perceive as "free" money. In the case of the highway expansion, it's federal dollars. With the Convention Center, it's hotel occupancy taxes (HOT), which hotel guests pay.

Currently, if you spend a night at a hotel, you'll pay a 17% tax on your room fee. The city takes 11% and the state takes 6%.

There is much debate about how the city can spend its portion, but what is undeniable is that the state law on hotel taxes was written for and by the hotel industry. I know that because many years ago Scott Joslove, president of the Texas Hotel & Lodging Association, told me that he'd written it.

The law requires any hotel tax dollars to be spent "in a manner directly enhancing and promoting tourism and the convention and hotel industry."

The legal interpretation of the law promoted by the hotels, at least in Austin, is that cities may spend up to 30% of the revenue on historic preservation projects and cultural arts programs, but the rest is largely restricted to supporting and promoting the Convention Center. The Convention Center is what it's all about –– that's what the hotels want to spend all the money on.

To the hotels, this makes sense. They see the hotel tax revenue as their money.

But of course it's not their money! And if you are tempted to agree with them that it's their money, just try this neat trick: instead of thinking of it as a hotel tax, think of it as a tourist tax or a tourist toll.

Austin is a major tourist destination and it makes perfect sense that local government would try to make some money off the roughly 30 million trips people make here each year. It's a way to raise money that doesn't involve further burdening local property taxpayers.

At the risk of stating the obvious, these 30 million visitors aren't coming for the goddamn hotels! Most hotels suck. You typically want to spend as little time there as possible.

The hotels serve a function within the tourism economy, and therefore offer a convenient mechanism for collecting the tourist tax. They are essentially a toll booth operator. If we're feeling generous we could give them a 1% commission, but otherwise why the hell should they get any more when we have actual problems to deal with in this city?

There are other ways that states and cities try to capture dollars from tourists. For instance, Texas levies a tax on car rentals. Would any sane person argue the state should dedicate the great majority of that money "in a manner directly enhancing and promoting" the rental car industry?

It's so brazen on the part of the hotel industry. It's so stupid on the part of the government. How are you letting the hotels take our money? It's our money. Not theirs. Ours!

To be clear, this is mostly the state legislature's fault. The law they let the hotels write to rip us off is the original sin. The city government is more like an accomplice after the fact. With a few exceptions, our city leaders have warmly embraced the hotels' narrative that it is their money and it is in fact good for all of us if we let them spend it on generating additional business for themselves.

And the hotels have decided that the best way to generate more business for themselves is for the city to subsidize conventions and trade shows. Mostly that happens by building and staffing the convention center, but it also takes the form of direct subsidies to hotels –– the city will "buy down" the room rates of downtown hotels to entice conventions to town.

The Convention Center's share of overall visits to Austin is tiny, but the hotels see it as the surest return on investment.

Even if building a bigger convention center only increases total visits to Austin by a little bit, it's a safer bet for the hotels than anything else that could also serve to increase tourism, such as parks, trails, arts, museums, live music. The link between those things and "heads in beds," as they say, is less tangible than a five-year commitment from the American Dental Association to hold its annual convention here.

The problem, of course, is that all those other things are intrinsically valuable to the public, while the Convention Center's only value proposition is its purported economic impact.

In the rare instances when they're confronted with the injustice of the system they created, the hotels try to argue that what's good for them is good for us.

The numbers say otherwise. Simply put, even as the Convention Center's business has plateaued or even declined over the past decade, hotel tax revenue –– excuse me, tourist tax revenue –– has soared.

A decade ago, in 2014, attendance at events held at the Convention Center was 463,000 and the city collected $70.6 million in hotel tax. In the most recent fiscal year, attendance was actually lower –– 442,000 –– but the city collected $163 million in hotel tax.

Part of the big increase is due to City Council raising the hotel tax in 2019 to fund the new Convention Center, but even if that hadn't happened, the city would have collected $133 million, nearly double from 2014.

Yes, say the hotels, but we could have collected even more tax revenue if we had a bigger Convention Center that could attract even more events! For instance, one expansion booster told me we could have collected $200 million last year with a bigger convention center.

There are two problems with this argument.

Problem 1: Whatever they're projecting in additional business is almost certainly overstated. Hardly any of the rosy projections pushed by the hotel industry and a handful of allied consultants ever materialize. The consultant report from 1997 that was used to justify the existing convention center projected that it would be attracting over 800,000 attendees a year by 2005. Whoops.

Now, in defense of whoever did the projections in the 1990's, things were different back then. Conferences and trade shows were still cool. But since then they have been in long-term decline, which was accelerated by the pandemic. From the NYT:

...Last year, conferences and corporate meetings generated about $119 billion in economic activity, down from the $139 billion added to the U.S. economy in 2019, according to the U.S. Travel Association.

And yet, in cities around the country, the hotel and convention center industry is still able to convince gullible political leaders to commit billions of public dollars to chase after a piece of the ever-dwindling pie.

Problem 2: The more important point is that, in the highly unlikely even that their projections are accurate, I would rather have 100% of $163 million than 30% of $200 million.

I mean, if we didn't have a convention center at all, how much lower would HOT revenue be? Whatever the figure is, I doubt that it would be lower than the measly 30% of the current revenue that we're settling for right now.

Indeed, the next few years, as the Convention Center is demolished and rebuilt, will serve as an illuminating case study on the actual effect that it has on the local economy. The city has said that although some conferences will stay away from Austin during these years, many will still be accommodated at other local spaces –– the Palmer Events Center, hotel conference rooms, etc.

Do you think during this time when we have NO convention center in Austin hotel tax revenue will plummet? I certainly wouldn't bet on it!

It's time to change the law

No city in Texas, particularly not one that has such a thriving tourism economy that is independent of the decrepit trade show business, should continue to accept this farce. This is cold blooded crony capitalism at its worst.

The city should seek to spend as little of its tourism tax revenue as legally possible on the Convention Center. Even though the hotel lobby wrote the law, there are some legal minds (including... sigh...Bill Bunch) who argue that the city is far less constrained in its use of HOT funds than the hotels claim. I will examine the competing legal theories in a future newsletter.

But more importantly, the city of Austin should make it a legislative priority to change the law at the state level. It should team up with other cities that are also strapped for cash and desperate for ways to boost revenue for public services without raising property taxes.

There is definitely a way to build a bipartisan coalition for ending the rip off. Conservative State Rep. Ellen Troxclair was a big proponent of reform during her time on City Council.

But the first step is for you, the public, to wake up and realize just how badly you've been getting swindled all these years.

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