Last week we took a look at the history of how the TAT or hotel room tax came to be and why it was adopted after many long years of opposition by the hotel industry.
Last week’s column ended with the fact that lawmakers upped the rate of the tax from an agreed upon 2% rate to the 5% rate that was in effect until two years ago. It was also noted that the funds were not earmarked for the convention center as had been proposed by the industry. Instead the funds went into the state general fund for nearly three and a half years.
Along came the state Tax Review Commission which made its preliminary report to the 1989 legislature. It told the legislature that the old grants-in-aid mechanism was completely outdated, having locked the counties into a dollar amount of some $19 million since 1973. With the state coffers flush with cash, the legislature decided to repeal the old grants-in-aid formula and in its place gave the counties a one-time lump sum grant of $70 million. The counties were in hog heaven!
When the Tax Review Commission made its final report to the 1990 legislature, it noted that the TAT best replicated the demands that visitors make on county resources and therefore the counties should be given the power to levy the TAT. In other words, the Commission recommended that the power to tax transient accommodations be turned over to the counties with a maximum cap set on the rate of the tax.
However, lawmakers were not so ready to give up the taxing authority to levy the TAT to the counties. Instead, the 1990 legislature earmarked 95% of TAT collections to be divvied up amongst the counties according to percentages prescribed in the law, retaining the remaining 5% of the collections to cover the cost of collecting the tax. The counties were floating on Cloud NINE!
That was all fine and dandy until lawmakers finally got around to designating a site for the convention center and the problem of financing the center reared its ugly head. The counties were not about to give up their little pot of gold. When the 1993 special session convened to pick a convention center site, they had to come up with the financing. The answer was a hike in the TAT rate from 5% to 6% with the revenues from the additional 1% earmarked for convention center financing.
It is conjecture that lawmakers knew even back then that the receipts from the additional 1% rate would not be enough to fully finance the debt service of the convention center, but they hoped that future sessions would find other ways to come up with the money. Little did they realize that the state would continue to slip into the economic abyss. Because the tax was collected and earmarked before the bonds were issued for the convention center, the surplus moneys carried over from the early years of earmarking have helped to tide over the financing demands.
However, with the convention center debt nearly completely issued, the amount of the debt service payments will soon overtake revenues from the 1% TAT. Although the debt issued for the convention center is not counted against the state debt limit as the bonds are deemed “reimbursable,” should there be insufficient earmarked funds to pay that debt service, the bonds could be deemed in default and payable out of the resources of the state general fund. At that point, the convention center bonds would be counted against the state’s debt limit which could seriously impair the state’s ability to authorize or issue non-reimbursable general obligation bonds.
Thus, it becomes even more important for lawmakers to find a way to finance the convention center debt out of an earmarked source like the TAT. However, given the political sensitivity of taking back the county revenue sharing funds, return of the TAT revenues to the state for the purpose of convention center financing seems out of reach, out of reach that is, unless the state can come up with a way to make up those funds to the counties or assure the counties that the receipts are being taken only to finance the convention center debt. Next week we will look at some revenue sharing alternatives.