THE LOST PENNY An Analysis of the Orleans Parish Hotel Tax Structure BGR presentation to the 2019 GRA Conference --- July 24, 2019 Thank you for the opportunity today to present our report, The Lost Penny. It provides a comprehensive picture of where $200 million dollars in hotel taxes are going in New Orleans. This is a major issue for our tourism-dependent city.

The Lost Penny was an offshoot of a 2015 report that examined all Orleans Parish taxes. It called on policymakers to make the best use of existing revenues before asking the public to pay more for service and infrastructure needs.

Hotel taxes matter in this conversation because they make up one-sixth of local tax revenues. Residents usually do not pay the taxes, but they indirectly bear the burden of funding government when taxes are not deployed optimally.

Challenge of the subject matter Orleans Parish has 16 hotel tax levies that are divided into 29 revenue shares that go to 12 different entities Hotel tax structures tend to be highly fragmented, which makes it difficult to see where the money goes. We had to navigate a web of laws and revenue sharing agreements to find the ultimate recipients of hotel tax revenues in New Orleans – and for 18 other parishes and peer cities.

What is the “Lost Penny”? NFL franchise awarded in 1966 New 4.5% hotel tax to fund the Superdome City of New Orleans agrees to suspend its 1% sales tax on hotel rooms This “lost penny” of hotel tax will deprive the City of $12.3 million in 2019 One missing piece was a 1% City sales tax on hotels that it agreed to suspend in 1966. this was done to help the tourism industry absorb the impact of a new hotel tax to fund the Superdome. This temporary measure effectively had become permanent.

While the City’s tax remained suspended, hotel taxes for other entities increased by nearly 10 percentage points ($119 million in 2019). Since the 1966 suspension, hotel taxes for other entities increased by nearly 10 percentage points, bringing the Citywide rate to 16.35%. Our report suggested it was time to reconsider ending the suspension.

This shows who receives the tax revenue, with our stadium district, convention center and visitor bureau receiving the three largest shares. In addition, the City must direct about $2 million of its share to support tourism.

But just analyzing hotel taxes by recipient does not tell the whole story. When we drilled down to ultimate uses, we found tourism receives 75% of the revenue, and general municipal purposes 10%. Of an average hotel tax bill of $29 a night, $21 goes to tourism and $3 goes to the City budget.

Best Practices Analysis New Orleans appears to have room to increase the overall tax rate Hotel taxes are an effective way to charge visitors for the public goods and services they use Lack of planning and prioritization Prevalence of permanent taxes weakens accountability Transparency issues Some entities may receive more hotel tax revenues than necessary We analyzed New Orleans structure against best practices for local taxation. While hotel taxes are effective at charging visitors for public goods and services they use, our structure suffered from a lack of planning, accountability and flexibility for change. Thus, some taxes may no longer align with current needs.

Convention Center’s Unrestricted Reserves 2001 to 2025 (projected) Case in point is our Convention Center, the second largest recipient. It has continued to receive a hotel tax for an expansion that it indefinitely deferred after Hurricane Katrina. This has allowed it to accumulate substantial reserves. These will continue to grow even after it spends a part of those reserves on a half-billion dollar capital plan.

We prepared a normative analysis to complement our best practices review. At the state level, we cound New Orleans had highest overall tax rate in Louisiana, but the smallest share for general municipal purposes. To reach median would require about $15 million in new revenue.

We also looked at 12 peer cities nationally, primarily our top competitors for tourism and convention activity. For context, New Orleans’ overall hotel tax rate is right in the middle.

Share of N.O. hotel taxes for general municipal purposes is relatively low New Orleans is more of outlier when you look at share for general municipal purposes. At the other end of spectrum, half of the cities direct at least twice as much to general municipal purposes. It would take about $16 million in new annual revenue for New Orleans to reach the median.

Unlike New Orleans, most jurisdictions apply the full sales tax to hotel rooms This chart further illustrates why the City’s “lost penny” is unusual. Most jurisdictions apply the full sales tax to hotel rooms. This sets a baseline for taxing hotels like other goods and services.

Research Highlights Shined a light on a largely unscrutinized source of public funding Detailed research to follow every tax dollar to the final recipient Extensive review of how hotel taxes align with taxation best practices A template for analyzing hotel taxes in other cities Impact: Lost Penny restored (currently $12.3 million a year) To wrap up, The Lost Penny shined a light on a $200 million revenue source that few people paid attention to. This study could be replicated in other cities to shine a light on where hotel tax dollars are going. And in June, the Louisiana Legislature restored the City’s suspended 1% sales tax. We are grateful for GRA’s recognition of our work.