Funding the Future of Tourism in the U.S. and Canada

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by Chris Adams
Head of Research & Insights

Implementing Global Best Practices in Tourism Taxation & Funding

While customized for U.S. and Canadian cities, many of these ideas are applicable to other destinations including states and provinces across North America and destinations around the world. 

Many cities across the U.S. and Canada are grappling with an unprecedented drop in funding. With COVID-19’s dramatic impact on bed and lodging taxes, cities are looking to build more resilient, sustainable and robust funding sources post pandemic. North American cities are also looking to build back better. To renew a tourism industry which is more sustainable, better managed and offers deeper and broader based benefits to their communities and industry.

The core foundation of this renewal will be adequate funding from tourism – specifically the right mix of visitor taxation, levies and public and private funding sources.

There are clear best practices from across the globe to learn from. In 2020, Miles Partnership helped facilitate (with other agency and industry partners) two of the largest ever studies into tourism taxation and funding options and opportunities. These two major studies looked at North America and Europe respectively and are collectively called "Funding for Tomorrow" (see detailed links below). This exhaustive review of visitor taxation and fees across thousands of destinations provides a great starting point to develop taxation and funding that is "future-focused," in short; "Funding for Tomorrow".  

As a starting point for U.S. and Canadian cities (and many other destinations across North America and around the world) here are eight initial recommendations for action on sustainable, resilient and regenerative tourism taxation and funding:

1. Tourism Improvement District – A ‘Future Focused’ Funding Model.  The Tourism Improvement District (TID) model emerged from our research as the best option for managing tourism taxation and funding models in a focused, well governed and transparent structure. Bed and lodging taxes (often called a Municipal Accommodation Tax in Canada) is one of the oldest and most common visitor funding models in the world. However, the pandemic has highlighted its significant limitations. Chief amongst them is a lack of a dedicated funding structure – which allows the vast majority of bed taxes in many cities to be siphoned off to non-tourism related spending by governments.  This is in essence "taxation without representation" and is a global challenge with tourism taxation of all types but especially bed taxes. A major study by Civitas and U.S. Travel identified how 50% of bed and lodging taxes across 200 U.S. cities was reallocated to cities' "general funds".  The solution? U.S. and Canadian cities can look to develop a Tourism Improvement District to replace bed taxes. This model should reflect the global best practices identified in our Funding Future including dedicated funding, the ability to target a broader range of accommodation (including short-term rentals) and visitor-related businesses (including restaurants, attractions and activities) with an independent governance structure that reflects the range of critical tourism stakeholders – government, industry, residents etc.

2. A new Public-Private Partnership. City tourism and conventions started as a public-private sector initiative. The history of Convention & Visitor Bureaus in the U.S. dates back to the late 1800s and was led by the business community. The pandemic has provided an ideal time to review and refresh your membership and industry coop programs. While short term revenue will be limited as tourism and hospitality businesses recover, now is the time to put in place a future focused partnership program. A new partnership program that invites wide participation, has clear benefits to partners, can expand as the recovery proceeds and is focused on the future role and responsibilities of your organization. This includes coop advertising programs that are balanced across all the critical media types and focused on results and performance..  Programs that allow you to engage with businesses in new ways for example business and worker training and capability building (especially for SMEs and minority owned businesses).  Programs that involve industry in your destination management roles including managing visitor patterns and preparing for growth issues such as congestion and resident outreach and engagement. 

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3. Reserves & Resilience Funding. Any taxation and funding model should include specific mechanisms to build resilience and manage the elevated risks of a post pandemic world. Importantly this includes building substantive reserve funds; up to one year’s operating budget that can be tapped in the event of future pandemics, natural disasters or other significant interruptions to tourism. Tourism taxation in the future can also be one part of funding the critical need for investment in resilient infrastructure including improved water and waste systems and projects to minimize and mitigate the impacts of climate change, for example expanding renewable energy or improved flood control projects.

4. Risk Mitigation.  Another element of a resilient future is solving the crisis in insurance especially for major events, conferences and cross border travel. The COVID-19 crisis has brought into sharp relief the risks of events being cancelled and borders being closed at a few days or even hours, notice. These pandemic related risks (eg: event cancellations and border closures) are now excluded by ‘Force Majeure’ clauses in almost all  insurance policies. A national public–private insurance model is urgently needed to mitigate this uncertainty and risk during the recovery from COVID-19.  This could be tackled by individual North American cities or given the benefit of scale in insurance this could be another area for State and Provincial leadership.  See the national scheme Germany has introduced - with other nations e.g.: the UK, other European countries soon to follow.

5. City, State or Provincial Accord for Core Tourism Resources. The implementation of new or enhanced funding mechanisms such as Tourism Improvement District usually sees existing tourism taxation mechanisms such as bed  or sales taxes live on. There continue,  largely captured and used by city or state/provincial governments on "non-tourism" related spending.  To recognize this ongoing revenue from tourism we advocate an accord between the tourism industry and the city and state/provincial governments that recognizes this revenue and helps fund critical, long term industry resources. Such a nonpartisan agreement can provide funding support to critical industry assets such as tourism research and data sets, destination management, tourism industry capability building and a significant fund to support important infrastructure projects that visitors use (eg: water systems, public transport). Any such accord should be responsive to tourism growth ensuring resources are calibrated to changes in tourism activity – and therefore the demands of managing tourism in your city.

6. Regenerative – Climate Change Funding.  A key feature of "building back better" is ensuring specific funding for regenerative tourism projects – both national and regional. This concept is front and center in how destinations across Europe and in other parts of the world (e.g.: New Zealand, Costa Rica) are thinking about their recovery in tourism.

Regenerative tourism looks to reinvest in community and/or environmental projects that enhance the destination that both residents and visitors enjoy. Regenerative tourism can also invest in meeting climate change related goals for tourism.  Here are two ideas for North American Cities: i. A special rental car tax to fund the addition of charging stations in your city and across State and Provincial touring routes and ii. specific, highlighted tourism investments in community assets such as arts and culture, parks and trails that both locals and visitors can enjoy. Such highlighted investments should have significant visitor, public and political relations value. Indeed the ‘Funding for Tomorrow’ research highlighted clear evidence that when tourism taxes are specifically spent on such ‘regenerative’ projects there is a high degree of support from visitors .

7. Outcome-Based Pricing.  Visitor taxation and levies such as accommodation taxes, airport departure/arrival taxes and rental car free should be variable based on demand and supply – moving up or down by seasonality, and even by location. Far higher in peak season(s) or congested ‘hot spots’ in a city (or state/province), far lower in the off season or less visited neighborhoods and regions. This type of ‘regulatory design’ of taxes grew significantly in recent years with a range of European destinations such as the Netherlands, Switzerland and Croatia implementing visitor taxes varying by season, region and even length of stay. Such "outcome-based pricing" sends clear signals to the visitor market on when to visit and that a city is serious about creating a year round, widely dispersed and well managed tourism industry.

8. Long Term Research & Measurement.  Finally, every city needs a sophisticated set of research and data tools to measure the performance of any tourism taxation and funding framework that is developed. This would assess results in implementing these taxes against the stated best practices – would update and inform stakeholders and would help review and refine each funding mechanisms based on real world outcomes. This should include undertaking far more thorough "foundation research" – for example assessing the impact of taxation on visitor demand and analysing the full costs vs. benefits of tourism in your city including the value of different types and mix of visitors.

Final Note: This is only a set of starting ideas. Specific funding and taxation recommendations for your city need to be reviewed and refined in consultation with your stakeholders. This includes consultation with the city and state/provincial government, the various sectors of the tourism industry and across communities. Some targeted research and analysis will likely be needed to inform this process. Strong consultation, supported by good quality analysis and research will ensure tourism taxation when implemented, is well designed and broadly supported.

Tourism needs adequate, sustainable and resilient funding. And this funding is needed now. Urgent action on tourism taxation and funding is urgently needed, both across North American cities and many other destinations around the world, to ensure our industry can both recover quickly and "build back better".

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