Pundit has a short
post on the irony of two stories
in the Arizona Republic. One laments
the low rates that local hotels and resorts
are receiving while the other talks about a proposed
increase in hotel taxes (bed tax) in Scottsdale.
From an educational standpoint the timing of these articles couldn't be better.
In Microeconomics we're just starting into elasticity, and we'll follow it
up with tax incidence - both of which are apparent in the articles.
First the basics. The demand for hotel rooms, especially at resorts is price
elastic. It's perceived as a luxury with lots of available substitutes. Meanwhile,
the supply is perfectly inelastic. Hotels and resorts have a fixed number of
rooms to rent per night, and they really want to keep them full. Some revenue
is almost always better than no revenue for a room.
What happens is hotels and resorts tend to adjust room rates to try to keep
the place full. When demand decreases, as it has with the recession, they lower
rates one way or another.
The all-suite resort is dangling some enticing peak-season rates to grab guests,
however. One offer: $279 a night with $100 in resort spending money thrown
in each night.
Jesse Thompson, director of sales and marketing for the Hotel Valley Ho,
will remember last year as "the least profitable one to date." The
194-room boutique hotel reopened in late 2005, in time for the boom years
of 2006 and
Thompson said the Valley Ho's occupancy wasn't horrible last year, but room
"That's what killed everybody," he said. "The rates were
so impacted that the revenues just aren't there."
The average daily rate in metro Phoenix fell 15.4 percent, to $105.72 from
$124.93. Scottsdale saw a steeper decline, at 18.2 percent.
The second piece you need to know is that the tax incidence (who really pays
the tax) depends on the elasticities. Whoever is more inelastic
of resorts, where the supply is perfectly inelastic, the resort bears the entire
cost of the tax. Look at it this way. If a hotel wants to fill
up, it has to lower it's price. If a tax increases the price, the hotel just
it's price even further. The consumer doesn't care if they are paying the hotel
or the city. It's still a cost for the room for the night. If it is lower somewhere
else, that's where they will go.
There is an assertion in the article that people only look at the
room rate, not the total cost with taxes.
Michael Hughes, vice president of research for "Tradeshow Week" magazine,
said that "most event organizers do not look at hotel tax rates when
comparing cities. And most attendees do not factor in taxes when making a
attend an event."
Voters are less likely to oppose a bed tax increase because it's paid by visitors,
Web developers tell us that this is not true. They note that people booking
online go very deep, right up to the point of paying for the room, and then
bounce out. What these consumers are doing is looking at the total cost, including
taxes, and then looking elsewhere. (We've learned this from booking airline
tickets online. Just think about the extra fees compared to the air fare.)
Might I also note that if I'm a corporate manager that employs an event planner
that doesn't take room taxes into account, I'm going to fire that event planner.
In simple terms, what Scottsdale is proposing to do with its increased bed
tax, is tax the resorts. When the resorts are hurting for business, and going
out of business, this doesn't make a lot of sense.