Taxes paid by people staying at hotels throughout Wisconsin were hit the hardest during the pandemic and revenues are only starting to recover now in Madison, according to a Tuesday report from the Wisconsin Policy Forum.
As COVID-19 shut down travel, revenue from local taxes on overnight lodging in Wisconsin fell by nearly half in 2020. Despite statewide room tax collections largely rebounding in 2021, revenues have taken until this year to recover in cities like Madison and Milwaukee that depend more on business travel.
However, revenue from online home rentals — like Airbnb — has increased following the passage of a 2019 state law that required internet marketplaces to collect room taxes from customers.
Wisconsin’s room tax, collected from overnight stays in hotels or other lodgings, was originally created in 1967. Today room tax is an important tool for creating a strong tourism industry in municipalities, according to the Wisconsin Hotel & Lodging Association. “Unfortunately, we often find municipalities who are unintentionally raiding room tax funds that are meant to bring tourists to their communities, which will in turn cause a decline in tourism and further erode the overall room tax revenue coming into the city,” WHLA writes on its website. “It’s a vicious cycle.”
The evidence of the importance of the tax can be seen in the drop off from the pandemic.
Local room tax collections dropped to $65.1 million in 2020 across the state, a 46.4% decline from the prior year, data from the state Department of Revenue show. The effect was immediate, Wisconsin Policy Forum writes in its report, not just for local governments in the state but also for private efforts to promote tourism.
As of April 18, 2022, Madison’s room tax rate is 10%, according to the Wisconsin Department of Revenue. The rate was last increased from 9% on Jan. 1, 2018.
While state law requires approximately 70% of the revenue from room tax to be spent on tourism promotion, local governments can use the remaining 30% for other purposes. Generally, room tax revenues are pivotal to funding tourism promotion districts, especially in Madison which relies on business travel.
The effect of the pandemic in the city was “almost overnight,” according to the Wisconsin Policy Forum report, and led local governments to slash funding for tourism promotion and replace it with federal pandemic recovery dollars or general tax revenues. Tax collections in Madison plummeted by 69% in 2020, one of the biggest percentage drops in the state, leaving behind a gaping $13 million budget deficit.
Hotel occupancy dropped significantly, as did hotel room rates that year, too, said David Schmiedicke, the city’s finance director. The pandemic also affected recipients of room taxes, including Monona Terrace, Overture Center and Destination Madison. With the drop in room tax due to the lack of travel, the city’s Room Tax Commission cut funding to these entities by 50%.
Room taxes recovered to about two-thirds of the pre-pandemic level in 2021, and federal economic recovery funds, particularly the American Rescue Plan Act dollars, were “instrumental in stabilizing the city’s budget,” Schmiedicke said.
The city’s Room Tax Commission restored funding allocations for programs supported by the room tax like the Monona Terrace and Overture Center, along with city arts and tourism activities, to pre-pandemic levels in its 2023 budget, which was adopted last month.
Schmiedicke said event revenue is recovering, but at a slower pace, as business-related travel is rebounding more gradually than leisure travel. Event revenue is expected to return to pre-pandemic levels by 2024 or 2025.
Despite a slower recovery than other cities, things are looking up for Madison.
Revenues in the state capital are expected to outpace earlier projections by $2.75 million in 2022 and are anticipated to reach $19 million in 2023, WPF reports — enough to match 2019 before accounting for inflation.
In contrast to traditional hotels, online rentals of private homes have expanded in recent years leading local officials to raise concerns that those rentals were not subject to the same tax, regulation and licensing requirements.
Online rentals of private homes have always been subject to the room tax, but collecting the taxes “was often administratively difficult for both local governments and homeowners, particularly in smaller municipalities with limited enforcement capacity,” according to the Wisconsin Policy Forum.
In response, in 2019 the state Legislature enacted a new law requiring online home rental services to collect room tax on rentals through their sites and remit these payments to local governments.
The legislation has bolstered the collection process, and an August report from the Madison Room Tax Commission indicated that 2022 collections from Expedia.com are up 97% compared to 2021.
As a result, room tax collections by online vendors will help mitigate some of the revenue lost to reduced business travel, and the importance of online rentals, and tax collections respectively, will likely grow.