Funding Futures: Dedicated Funding and Tax Increment Financing

In the research study “Funding Futures” released by Civitas, Miles Partnership, Tourism Economics, and an expert team of organizations and supporters, we have examined a wide range of various funding options for Destination Marketing Organizations (DMOs) to explore. Since the release of the report in August 2020, the “Funding Futures” team has been hosting a series of webinars designed to take a deeper dive into the funding options highlighted in the report, providing the tools and insight that industry leaders can harness into a strategy tailor-made for their particular needs. In September, we hosted a webinar designed to explore Building Reserves & Short-Term Rental Revenue. In our upcoming webinar to be held on November 3rd, we will break down two other types of alternative funding mechanisms highlighted in “Funding Futures”: the evolution of dedicated funding and utilizing tax increment financing.

Dedicated Funding- Tourism Improvement Districts

Perhaps the most common source of DMO funding is from the allocation of a percentage of local bed tax. However, reliance on bed tax renders DMOs vulnerable to the volatility of the economy and subject to their local government’s agenda. The bed tax is susceptible to the highs and lows of the tourism industry and is subject to seizure by local government should they divert bed tax revenue for other purposes. Dedicated funding mechanisms, such as Tourism Improvement Districts (TIDs), offer a range of advantages over bed taxes.

The very concept of TIDs was envisioned as an answer to the age-old issue of government dependence for funding. TIDs function on a basic principle: individuals who pay TID levies are the individuals that will receive the benefits provided by TID dollars. These levies are defined by the benefit to the payors and cannot be diverted for other purposes. Dedication of TID funds comes in two forms: legal dedication and political dedication. TIDs have legal protections to ensure elected leaders cannot divert funds for other purposes. Also, because TIDs are proposed, voted on, and managed by industry, government officials often view them as separate and distinct from tax revenue held in the government’s general fund.

Many TIDs choose to levy strictly on hotels, but some have included levies on restaurants, attractions, and retail. Presented with the challenges of COVID-19, a new iteration of the TID model called Tourism Recovery Districts (TRDs) has gained popularity, centered around creating a revenue stream specifically meant to fund recovery and resilience efforts. In a time characterized by instability, dedicated funding mechanisms such as a TID ensure a stable funding source that can only be utilized for purposes relating to tourism and cannot be seized by the governing body. This stability is invaluable as destinations work tirelessly to “build back budgets better”.

man riding white surfboard
Photo by Antonio Piña on Unsplash

Tax Increment Financing

Tax increment financing or funding (TIF) is a mechanism that helps address some of the weaknesses of traditional tourism-related tax revenue. As visitor spending increases and tourism-related tax revenues grow, funding to DMOs and other tourism-related programs is often capped, and decreasing proportions of the visitor-related revenue is reinvested back into tourism and tourism-related projects. TIF has been utilized as a long-term mechanism for funding urban redevelopment projects. A small number of DMOs now use the mechanism for part of their funding.

TIF offers several advantages, including clearly linking tourism growth to DMO funding. TIF can offer responsive funding for improved management of tourism growth, and funding for building reserves in periods of strong growth. More commonly, TIF is implemented on a property-tax basis. However, sales tax-based TIF mechanisms have been increasingly popular and present a wide range of possibilities for the tourism industry for two key reasons: first, TIFs do not include increased levies, only the diversion of future increases, and second, TIFs do not take away funding from any current allocations. TIF remains an exciting possibility for DMOs looking for alternative revenue streams and mechanisms to diversify their funding.

To download the Funding Futures report, please visit: https://civitasadvisors.com/funding-futures-crisis-response-recovery-research/

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