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Law360 (July 8, 2020, 8:10 PM EDT ) A proposal by Rhode Island's governor to increase the state hotel tax from 5% to 6% would further harm the hospitality industry amid the COVID-19 pandemic, Rhode Island tourism groups and localities told a state Senate panel.
Kristen L. Adamo, president and chief executive of the Providence Warwick Convention & Visitors Bureau, said Tuesday that the group already has "grave concerns" about the health of the hotel community in Providence and Warwick because of the financial losses caused by the pandemic. She told the Rhode Island Senate Finance Committee that competitive disadvantages could help put hotels out of business.
"While adding 1% to the state's current 13% hotel tax may be viewed as a nominal change, it represents a nearly 8% tax increase on a room night in Rhode Island, and further impairs our competitiveness to attract future business," Adamo said.
The state Senate Finance Committee heard testimony on H.B. 7171, part of Democratic Gov. Gina Raimondo's budget proposal that would increase the state portion of the hotel tax from 5% to 6%.
Currently, Rhode Island imposes the state's 7% sales and use tax on the rental of all lodging, then imposes a 5% state tax on some lodging rentals and a 1% local hotel tax on all lodging rentals. The 5% state hotel tax rate doesn't apply to rentals of entire dwellings, such as beach houses or condominiums on a golf courses, said Paul Dion, chief of the Office of Revenue Analysis within the state Department of Revenue.
Dion told committee members while the measure was estimated in January to raise $4.7 million annually starting in the 2021 fiscal year, it's now expected to raise only $2.2 million.
"The lower revenue estimate is a reflection of the COVID-19 pandemic and its impact on travel and hotel occupancy rate," Dion said, referring to the respiratory disease caused by the novel coronavirus.
For most rentals in Rhode Island, the tax increase proposal would bring the total tax imposed to 14%. The rental of an entire dwelling would have a total 8% tax rate, Dion said. He compared the proposed hotel tax rates to those in neighboring states, including Connecticut's 15% combined rate and Boston's 14.95% standard rate and its 17.95% short-term rental rate.
Sarah Bratko, vice president of advocacy and general counsel for the Rhode Island Hospitality Association, said in a letter that government orders to stay at home and other travel restrictions forced many Rhode Island hotels to shut down. She noted in April the hotel occupancy of hotels in the state was 21.7% as compared with 65% in 2019, a statistic that didn't include shuttered hotels.
"While we understand that the state is facing its own financial difficulties, the hospitality industry simply cannot afford this increase in the hotel tax," Bratko said.
As currently proposed, the hotel tax measure would take effect July 1, 2020, the first day of the 2021 fiscal year budget. Lawmakers have delayed meetings on the 2021 fiscal year budget to see whether Congress would provide more funding to states. Rhode Island has a law that appropriates state funding at the same levels from the previous year on a monthly basis until a budget can be passed to avoid a government shutdown, Sen. Louis P. DiPalma, D-Middletown, told Law360 on Wednesday.
DiPalma, a member of the Senate Finance Committee, said he had reservations about the tax when it was first proposed in January by the governor, and those concerns have only grown since the pandemic hit. He noted the governor had proposed a budget with a hotel tax increase from 5% to 5.5% in 2019, which lawmakers rejected.
"Given the environment within which we're living now, I don't support it," DiPalma said. "It's going to generate potentially half of what it was planned to have generated before."
If Congress decides to appropriate funds to states in response to budget shortfalls caused by the pandemic, DePalma said, lawmakers can then try to figure out how much states would need to contribute to fill in the remaining revenue gaps.
Amanda Clarke, chief of staff with the Rhode Island Department of Administration, told Law360 on Wednesday that the proposed state hotel tax increase remains unchanged from the governor's initial proposal. She noted the measure would also alter the distribution of state hotel tax revenues to ensure revenues from the tax increase go into the state's general fund.
The changes to the hotel tax are part of a $10.2 billion budget proposal for the 2021 fiscal year, which include adding a tax tier to the property transfer tax, adding software-as-a-service and lobbying to the sales and use tax base, increasing tobacco taxes and legalizing cannabis.
In April, Raimondo said the state was facing a difficult budget and noted the state's third-biggest source of revenue is Twin River Casino in the town of Lincoln, which had been shut down and only reopened on June 30.
--Additional reporting by Paul Williams and Maria Koklanaris. Editing by Tim Ruel.
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