Travelers’ Checks: How to Tax Tourists in States and Localities

Key Findings

• Taxing tourists is a relatively efficient way to ensure that visitors are paying a share of essential government services. Places with a modest number of tourists should limit general sales tax rates to minimize the effect on the full-time population. Places with higher proportions of tourists may have higher sales tax rates to better capture the economic behavior of tourists.
• The most common tourism-specific taxes include hotel taxes, vehicle rental taxes, and restaurant taxes.
• Tourism taxes should be used to diversify revenue streams, not to replace existing revenue streams.
• Some municipalities can use subregional or seasonal consumption tax arrangements that target tourist spending without disparate impact on low-income full-time residents. Taxing luxury services and experiences can reduce the regressivity of consumption taxes.

Cities and towns around the world grapple with a sticky question: What is the fair share for tourists to pay for public services? Tourists may be visiting from as close as an hour’s drive, or as far away as a 20-hour plane ride. Whether the destination is a big city, a resort, or a remote cabin, tourists interact with local governments at virtually every step of their trip – when they drive on roads, visit publicly funded parks and museums, or rely on local emergency services for help.¹ Tourists benefit from public services, and it’s important to make sure that full-time residents are not footing the bill for visitors.

Through this lens, a tourist tax is any tax levied on economic activity done by tourists that directly or indirectly benefits them in some way. These can include obvious taxes on tourists like hotel taxes, as well as taxes that apply to both tourists and locals, like restaurant taxes.

Tax revenue from tourists supports further tourism, allowing localities to pay for infrastructure needs like roads and transit, environmental protection for parks and natural resources, and public safety and hospital systems. Taxing tourists keeps full-time residents from subsidizing tourists through property or income taxes. Otherwise, the long-term costs of a tourism economy – maintenance, congestion, and even rising housing costs – would be borne entirely by residents.

As global tourism rises,² municipalities of all sizes and in all markets are dealing with a rising number of tourists and demand for public services. In 2024, travel in the U.S. rebounded, with over 1 billion domestic and international travelers on planes, and over 20 million passengers boarding cruises in North America, marking a complete recovery from the pandemic.³ Tourists come to municipalities of all sizes, from destination cities like Las Vegas and New York, to smaller places like southwest Michigan and the Gulf Coast – all of which have seen higher visitor numbers or receipts than before the pandemic.⁴ While local tourism can boost economies through jobs and opportunities for new businesses, tourists can also strain local housing availability and the environment. Balancing the demands of locals and visitors requires creativity and flexibility to ensure tourism benefits governments, residents, and visitors.

Existing Restrictions

In the U.S., states or cities cannot directly tax tourists by charging visitors a fee for entering. While there is no specifically enumerated right to travel in the Constitution, the Supreme Court has long indicated that it is understood to be a basic right.⁵ The Supreme Court affirmed this right in the landmark 1999 case Saenz v. Roe.⁶ In addition, the Constitution explicitly bars states from adopting taxes on the tonnage of goods or passengers in the Tonnage Clause of Article I without congressional approval.⁷

States also restrict how taxes generated by tourists can be spent. Frequently, funds are earmarked for tourism-related priorities, especially marketing.⁸ Requiring revenues to be spent drumming up more business ignores the pressures tourists impose on localities and can worsen conditions by attracting too many tourists for some localities to handle.⁹ Municipalities in Michigan have had challenges spending the money generated, as strict limits mean funds can’t be spent on services tourists use, like emergency services – only on generating new tourism business.¹⁰ A lawsuit filed by local short-term rental operators in Currituck County, North Carolina, argued the county improperly used hotel tax revenues for police and other emergency services in violation of state law.¹¹

In addition, actions by local governments can also undercut the availability of these funds. Major sports teams have successfully convinced multiple cities to use tourism-generated revenues to pay for sports stadiums, including in Chicago, Las Vegas, and Nashville.¹² These diverted revenues go to repay bonds sold to benefit sports leagues and owners, instead of benefiting tourists or full-time residents. Even in cases where these investments would theoretically pay for themselves, the state or municipality’s ability to capture that additional wealth largely depends on its tax system. For example, localities that do not levy a local income tax cannot directly capture increased worker earnings, increases in property value may be constrained by property tax limits, and new sales tax revenue may flow to the state rather than the locality.

Tourist-Generated Revenues

Travelers may pay a variety of taxes when they arrive in a new place. These include taxes that primarily target visitors and taxes that fall more broadly on residents and commuters. In general, taxes on tourism are meant to reduce or otherwise compensate the municipality for the negative externalities caused by tourists. These externalities could include increased demand for public safety services, the need to manage crowds, increased stress on public utilities like sewer and trash collection, and increased costs of housing. While tourists can also have positive externalities like increasing revenues for local businesses and supplying some jobs for locals, these often do not have enough of an impact to make up for stressors on municipalities.

These taxes often have flat rates or fixed fee structures, though they may be adapted to have more progressive structures. Ensuring a broad base of taxation means that many taxes meant to target tourists will also affect some locals. This can add to the regressivity of state and local tax bases, taking a larger portion of income from lower-income families than higher-income families. This can also unfairly affect budget travelers, as flat rates fail to adequately capture luxury travel or other high-end travel experiences. Typical “tourism taxes” include:

• Hotel taxes, also called transient occupancy, visitor, or bed taxes, are levied on consumers who rent rooms or other accommodations on a short-term basis. These may be structured as flat fees or as a percentage of the total cost of the stay. These taxes are primarily paid by non-residents. For equity reasons, hotel taxes should also be applied to the short-term rental market, including Airbnb and VRBO. New York City has a progressive tax structure that charges a higher tax rate to pricier rooms than cheaper rooms.
• Vehicle rental taxes are levied on car and truck rentals. Usually structured as a percentage of the cost of the rental, these taxes are paid primarily by visitors, but a portion is paid by residents.
• Taxes on ridesharing services are a tax on the passenger who hails a rideshare. Taxis purchase medallions and usually pay a tax or fee when they do but rideshare companies like Uber and Lyft have a different structure that has enabled them to avoid purchasing medallions and paying those taxes.¹³ Rideshare taxes can be a flat fee or a percentage of the cost of the ride. Rideshare taxes are paid by residents, commuters, and visitors.¹⁴
• Parking fees, including metered spots and parking garages, can also generate revenues for cities. However, many municipalities are not charging enough for the temporary use of public land and may be best served by raising meter fees.¹⁵ This also has the benefit of encouraging use of public transit when it’s available. However, parking fees in many cities will be paid by residents and commuters, limiting how much these fees can be exported to visitors.¹⁶ In tourist destinations, these costs are paid primarily by visitors.¹⁷
• Restaurant taxes, often referred to as prepared food and beverage taxes, are taxes on eating out at restaurants, bars, and cafes paid directly by consumers.

Adoption of these taxes varies across the country. States generally allow counties and cities to use these taxes. Hotel taxes are near universal among states. While most states collect state and local hotel taxes, a few states only allow localities to tax hotels, and others only allow the state to do so.¹⁸ Rental car taxes are used by states and localities and are frequently dedicated to airport operations.¹⁹ Rideshare taxes are common in major cities but are often subject to other restrictions.²⁰ Parking is almost exclusively the responsibility of localities. Restaurant sales can either be taxed as part of a general sales tax as they are in California, or a specific rate on prepared foods like Nebraska. Many states have additional rules about how localities may tax restaurants.²¹

Some tourism proponents advocate to increase taxes or fees on concerts, sports contests and other special events, implying that visitors would pay those taxes. But most attendees of these events are regional residents, not distance travelers, except in unusual cases like international sporting events or music festivals.

One way cities can target some purchasers without hurting all residents is to use a zone scheme. These zones may have higher general sales tax, restaurant tax, or rideshare tax rates. Selecting a particular zone frequented by tourists, such as historic districts or downtowns, can generate revenues from visitors. This has the benefit of allowing locals to frequent businesses throughout the city without being affected by the higher sales tax. Chicago and Minneapolis both use restaurant taxes from their downtowns to support local spending priorities.²² Chicago and New York City also apply congestion fees to rideshares and cab rides in and around the Loop in Chicago, and south of 96th Street in Manhattan.²³

Destinations with highly seasonal tourism, such as summer towns or ski communities, could experiment with seasonal sales tax rates. Municipalities in Alaska are testing these to capture the economic value from tourists who overwhelmingly visit in the summer months. South Dakota’s lodging and amusement taxes only apply from June through August.²⁴

Both these approaches also encourage tourists to visit off-peak season and visit off-the-beaten-track areas, reducing congestion and smoothing out economic impact. They also offer some protection for locals, who may be able to move more freely throughout their community.

The Challenges Presented by Cruises

Cruises are an unusual challenge for states and municipalities. Article I, Section 10 of the U.S. Constitution specifically precludes taxing the tonnage or cargo of a ship, including passengers, for general purposes.²⁵ The jurisprudence around the Tonnage Clause is complex but generally allows water ports to collect taxes and fees related to operating the port. The federal government also exempts foreign-flagged vessels from paying federal income tax, so long as American vessels are exempt from tax in those countries.²⁶ As a result, all but one cruise ship sailing in the U.S. flies a flag from a tax shelter nation.²⁷

This makes states and municipalities reluctant to try to tax cruise ships or their passengers outside of a general sales tax.²⁸ However, there are some creative solutions to capture the economic activity and costs to municipalities for services cruise ships rely on. Municipalities can also coordinate to avoid tax cut incentives, fueling a race to the bottom.²⁹ One notable non-U.S. example is Vancouver, which spent over $79 million in the late 1990s building a new cruise dock to service cruises between the U.S. mainland and Alaska, only to be abandoned as vessels became more fuel efficient and companies moved to cities closer to the Pacific Ocean like Victoria.³⁰

Alaska’s Commercial Passenger Vehicle tax collects a per-passenger excise fee from cruise companies serving overnight passengers. The fee is shared with municipalities who receive cruise passengers.³¹ However, CPV revenues are restricted to being spent on port improvements.³² Between 2013 and 2022, the tax collected over $176 million for cities, municipalities, and boroughs in the state.

Municipalities and boroughs in Alaska are also testing other ways to apply sales taxes. For instance, Haines recently adopted a seasonal sales tax scheme that applies a higher rate in the summer when cruise tourists are in town.³³ Haines also applies a different tax rate to the core town where tourists visit, slightly higher than the rate applied to the rest of the borough.

Recommendations for States and Localities

States and cities should think creatively about how taxes on tourists can better suit the needs of the local governments and the diverse needs of residents and tourists. Adopting a variety of policies based on the local tourism economy will ensure that service needs are met and that communities properly balance the impacts of tourism on the local economy and environment.

Taxes on tourists should diversify, not replace, revenue streams. These taxes should not be used to replace existing revenue streams like local property tax or state income taxes. Revenue diversity helps states and local governments stabilize revenues, which protects public services in times of economic stress. These revenues can be dedicated to specific projects but may be more efficiently allocated to a general fund to allow fiscal flexibility. Travel is often the first optional expense cut by families, individuals, or businesses during times of economic stress, meaning revenues coming from travel will be more volatile than most other consumption taxes.

Do not rely on a general sales tax alone to capture economic activity from tourists. High reliance on sales taxes is regressive and more unpredictable than other revenue sources. It is best practice to apply sales taxes to services to capture economic activity done by wealthier residents, commuters, and tourists. States and municipalities should avoid sales tax holidays, avoid exempting specific items, and avoid exempting specific groups of people as all of these practices reduce revenue without addressing regressivity.³⁴

If possible, tax luxury tourist experiences at a higher rate than standard or budget experiences. While many states have constitutional uniformity clauses that prevent using different tax rates for similar purchases, higher tax rates on luxury purchases can reduce the overall regressivity of consumption taxes.

Vacation rental taxes should appropriately balance revenues and community needs. First, vacation rentals should be taxed as hotels, as hotels and vacation rentals are economic substitutes for one another. Second, in states and localities with property classification systems, vacation rentals should arguably be taxed as commercial properties for the purposes of property taxation. These are homes kept off the residential market and used as commercial investments rather than used as permanent housing. For instance, Honolulu applies a higher property tax rate to vacation rentals than to permanent housing, and Rhode Island recently adopted a surtax on second homes worth more than $1 million.³⁵ Third, communities that have many vacation rental properties should continue to support larger housing affordability strategies for locals, including developing workforce housing or other types of permanent housing. Breckenridge, Colorado, has been experimenting with different housing finance options to bring workforce housing to the ski town.³⁶

Cruise ports should consider how best to capture the economic activity brought by cruise ships. Municipalities in Alaska are experimenting with a variety of different measures, including seasonal sales taxes, subregional sales taxes, and other types of fees to help defray the costs of managing cruise passengers.