Since the passage of legislative efforts like Proposition 13 in California and the “tax-shift” legislation in Nevada in the 1970’s, local governments have become increasingly reliant on tourism and, more specifically, sales tax revenue to fund a growing demand for public services.  A shrinking tax base means that local governments, like the City of Reno, have increasingly made economic development policy decisions based upon the amount of increased hotel room and transient occupancy tax revenue and sales tax revenue a particular project can potentially create.

Although local policy makers are quick to point out that new convention centers, new hotels, new malls, and even new automobile dealerships create many needed new jobs, they likely won’t admit that these types of projects create relatively low paying and low skill jobs that really don’t offer individuals any real meaningful opportunity for general upward mobility and rarely contribute positively to a community’s overall quality of life.  Local governments and local economic development policy makers often leverage public revenues to support the development of new commercial-retail real estate development projects or projects designed to encourage increased levels of tourism in the hope of generating new tax revenues that can be “transferred” to out-of-state residents.  Sadly, time and time again, local governments are simply leveraging the long-term, stable, economic growth of their community in order to generate a few increased dollars of new sales tax or hotel room tax revenue.

To make matters worse, local governments and local economic development policy makers tend to have a poor understanding of what drives tourism.  Although there are many things that a local community can do to encourage tourism to their jurisdiction, if the individual “tourist” doesn’t have the money to travel to your jurisdiction (due to a loss in employment or reduced savings or a general uncertainty about their economic future because of the recent economic recession), they simply won’t come.  If tourism doesn’t increase, then the local government is left “holding the bag” for the amount of debt it incurred to finance the construction of the new convention center, the new mall, or the new hotel.  This problem is compounded in the long-run as the money that could have been spent on small business and entrepreneurial development efforts, technology-based economic development efforts, workforce training and development efforts, or even neighborhood and community development efforts, is instead spent on financing crushing levels of accumulated debt – debt that policy makers thought would have been paid by tourists but end up being paid by locals.

In the end, using public debt to finance commercial-retail and tourism oriented projects is about the worst economic development strategy a local government can undertake largely because tourism-based development and commercial-retail based development is not economic development.  These types of development are revenue development projects designed to enhance local government revenues.  No doubt about it – local governments need to enhance local revenue sources in order to finance the year-after-year increase in the demand the public has for more and more publicly provided services.  But the larger goal behind wider economic development efforts is to help create mid to high skill level jobs that pay mid to high level wages, offer individuals meaningful opportunities for general upward mobility, and ultimately contribute to a community’s overall quality of life by contributing to the long-term, stable, economic growth of an entire community and/or region.

Although tourism-based development and commercial-retail based development are important strategies that local governments should undertake and support when they can afford to do so, these types of development projects should never be subsidized with public tax revenues.  Think about it this way.  The goal behind any tourism-based or commercial-retail based project is to enhance publicly collected tax revenues.  But in order to finance the construction of the new convention center, or the new mall, or the new hotel, publicly collected tax revenues are needed.  But why would you give away sales tax dollars or hotel room tax dollars today in order to generate the same sales tax dollars or hotel room tax dollars tomorrow?  Also keep in mind that every other jurisdiction in the country is doing the same thing – in the hopes of getting residents from your community to spend their dollars in their jurisdiction!  So even in the very best case, publicly financing the construction of new convention centers, new malls, and new hotels simply swaps one local dollar in new sales tax revenue for one out-of-state dollar.

A recent article in the Reno Gazette Journal, “Bond Costs Drag Reno Budget” published on May 29, 2010, illustrates how risky it is to bet all your economic development hopes on the construction of a new convention center.  The article reports that the City of Reno will have to pay approximately $2.5 million to finance the debt issued to build the downtown Reno Events Center, completed in 2005.  The City had hoped that a new events center/convention center would be a critical element in the City’s wider efforts to revitalize the City’s downtown area and the overall decline in area-wide tourism.  But an unexpected and very severe nationwide economic recession further collapsed area-wide tourism counts as well as the discretionary spending of local residents on commercial-retail projects.  The May 29, 2010 Reno Gazette Journal article further reported that, “The city finance department estimates room taxes will bring in only $4.7 million in the coming fiscal year, short of the $7.2 million needed for the bond payment.”

The continued decline in area-wide tourism accompanying the decline in hotel room tax revenue collected from downtown Reno hotel and casino properties means that the City of Reno might have to look to other sources in order to continue financing the debt used to build the Reno Events Center if there isn’t an immediate and significant improvement in area-wide visitor counts.  But here is the problem.  What if the recovery never comes?  What if people decide, as a result of this recession, that they will save more and travel less?  The bond issuer and the bond holders of the debt to build the Reno Events Center don’t care about those potential scenarios.  They want the City of Reno to keep making payments on debt that was issued for a project that might never provide the return on investment the City thought that it might return when it first considered this project years ago.

If the City of Reno is forced to look at other revenue sources to finance the debt for the Reno Events Center, along with debt issued to finance other ongoing and wider redevelopment efforts throughout the City, the City might not have the resources needed in the future to pursue broader economic development strategies such as small business and entrepreneurial development efforts, technology-based economic development efforts, workforce training and development efforts, and even neighborhood and community oriented development strategies.  Although the resources might not be available to finance these strategies, these strategies are going to be needed over the next several decades as we struggle to develop a broader economic base and new, more dependable economic engines in order to ensure the long-term, stable, economic growth of our city, our county, our region, and even our state.

This entry was posted on Monday, June 21st, 2010 at 1:44 pm and is filed under Economic Development. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a comment, or trackback from your own site.