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Looting in Las Vegas

Mises Daily: Thursday, June 06, 2002 by

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The common thief has the decency to leave you alone after he takes your money. But, society's biggest thief, government, steals money, calling it taxation, and then lurks in the shadows to tell its victims what to do, calling it regulation. And, in Las Vegas the government goes one step further, it taxes, it regulates and then competes head to head with private enterprise in the city's largest industry, tourism.

The Las Vegas Convention and Visitors Authority (LVCVA) was born in the 1950's when city and county politicians decided that a convention center was needed to put "heads in beds" during slack tourist months. In April of 1959 a 6,300 seat rotunda along with 90,000 square feet of adjoining exhibit hall space was completed. In the 1980's the convention center was expanded to 1.9 million square feet and just this spring, another 1.3 million square foot addition was completed. The new addition is $30 million over budget, and counting, with many subcontractors still owed money for their work on the project.

LVCVA proponents argue that the state agency is needed to boost tourism and fill local hotel rooms, and besides, according to LVCVA spokesman Rob Powers, "[i]n the 45-year history of the convention authority, the people of Las Vegas have never paid one dime, or one nickel or one penny to support the convention authority." "Our operations are supported by room taxes paid by visitors to Las Vegas."

Indeed, a large portion of the 9% room tax goes to fund the LVCVA. Over half of the taxes collected go to the authority, with the county, the school district and the state dividing up the rest of the booty. But the question is who paid the tax, the tourists or the hotels?

Although Mr. Powers is positive that tourists pay this tax, he's wrong. It is the hotels and thus the people of Las Vegas that pay, and it's not just, nickels, dimes and pennies. Last year, almost $136 million was collected.

The question with a room tax or any partial excise tax (sales tax on specific commodity) is whether the tax can be "shifted" from the seller to the buyer or from seller to supplier. In the first instance, this "shifting" will occur if the taxpayer or seller can raise his selling price to cover the amount of the tax. In the later instance, the seller can "shift" the tax if he can lower his supply costs to compensate for the tax, thus "shifting" the tax to another seller.

But as economist Murray Rothbard wrote in Power & Market, "No tax can be shifted forward. In other words, no tax can be shifted from seller to buyer and on to the ultimate consumer." Most people believe that tourists pay the room tax because they pay the tax at the time they pay for their room, and that the tax is merely another increase in the cost of production (like labor or supplies) and is just passed on to tourists as an increase in room rates. But, room rates are not determined by the costs to have room nights available. Daily room rates are determined by the demand schedule for those rooms and the amount of rooms available. The room tax does not affect the demand schedule. As Rothbard points out, "[t]he selling price is set by any firm at the maximum net revenue point, and any higher price, given the demand schedule, will simply decrease net revenue. A tax, therefore, cannot be passed on to the consumer."

Each room night is unique. Although a hotel room may be the same, the demand for that room will vary depending upon the date and the availability of other similar rooms. That's why room nights are much higher priced during the COMDEX convention, which brings 200,000 computer conventioneers to town, than on an average 100-degree August night with few conventioneers in town. Absent any new hotel rooms being built, the number of hotel rooms stays the same the year round. However, the demand fluctuates widely, and room rates reflect these demand fluctuations.

If the hotels could have passed along the room tax in the form of higher room rates they would have raised rates already without the room tax. Hotels don't rent their rooms for the lowest prices they can, if the demand for rooms allows for rate increases hoteliers raise their prices.

An excise tax, Rothbard summarizes, "cannot be considered a tax on consumption in the sense that the tax is shifted to consumers. The excise tax is also a tax on incomes, except that in this case the effect is not general because the impact falls most heavily on the factors specific to the taxed industry."

So instead of hotel corporations and entrepreneurs collecting $136 million for their shareholders, suppliers, lenders, employees and marketing they were forced to hand that money over to the LVCVA. The convention authority then uses the money to operate the 3.2 million square foot convention center at a continuing loss while private industry competitors such as the Sands Expo Center operate at a profit. Until the LVCVA's recent expansion, the convention center and Sands operated similar sized facilities. But the Sands, not having a perpetual stream of tax loot gushing in, operates their facility with 50 employees, while the convention center employs over four times that number.

Not pressed to operate profitably to continue, the convention authority leases its space for 25 cents per usable square foot per convention day and zero cents per day for set-up days up to the number of convention days leased. These rates lastly undercut private operator Sands Expo, who charges 35 cents per usable square foot per convention day and seventeen and one-half cents for set-up days.

The Sands Expo's sister property, the 3,036-room Venetian, generates some of the highest rooms rates in the city, well over $200 per room night. And thus, the LVCVA takes $30,000 every day from the Venetian and then turns around and competes with the Sands Expo, using the Venetian's tax dollars to subsidize LVCVA convention center rates.

And forgetting its original mission of attracting new business to Las Vegas, the LVCVA uses its tax-subsidized rates to lease more space to existing conventions (Comdex and National Association of Broadcasters, for example) at the expense of private competitors, instead of marketing new convention business.

The marketing of Las Vegas hotels and operating convention space are not activities that government should be involved in. If the hotels could keep the millions stolen from them yearly ($136 million in 2001), no doubt they could spend the money putting "heads in beds" much more effectively than a bloated government agency can. In turn, the convention center property should be sold to the highest bidder, with the money generated after paying creditors going to the hotels whose tax dollars funded its construction.