Historically, destinations have long grappled with the challenge of securing sustainable funding to support the tourism industry. The struggle continues today for destinations that are trying to obtain adequate funding. To address this challenge, various funding mechanisms have been developed over the years to help fund marketing efforts. By diversifying its funding sources, maximizing available resources, accessing additional funding, and tailoring funding to specific needs, destinations can better meet their funding needs and achieve their goals. In this article, we will explore a breakdown of popular funding mechanisms that have been used in the past and present, as well as the future of destination funding.
Business Improvement Districts
Business Improvement Districts (BIDs) emerged as a response to the significant economic decline and disinvestment that many urban areas were experiencing. The concept behind BIDs is simple: business owners within a defined geographic area can work together to pool their resources and collaborate with local government to improve the economic strength and physical appearance of a designated area. A BID assessment is paid as an additional charge on the business’ municipal bill and is then remitted to the municipality. A non-profit organization, typically governed by a Board of business owners, manages the activities provided by the BID on behalf of the business owners.
BIDs provide stable funding for business owners to ensure their area is a clean, safe, and attractive place to live, work, and visit. BID activities can include enhanced property services such as additional garbage pickup, safety and security, signage and wayfinding, advertising, special event sponsorship, capital improvements, beautification efforts, and many other programs that benefit the businesses that are paying the BID assessment within the BID. Newer iterations of BIDs have evolved and expanded to include specific districts focused on wineries, breweries, and restaurants.
Transient Occupancy Tax
Transient Occupancy Tax (TOT) is a tax levied on visitors who stay in hotels, motels, and other short-term lodging facilities. Also known as a hotel occupancy tax, bed tax, or tourist tax, TOT is typically calculated as a percentage of the cost of the room and is collected by the lodging facility on behalf of the local government. Importantly, TOT is not the same as a sales tax. While sales tax is levied on all purchases, including goods and services, TOT is specifically levied on lodging accommodations.
The purpose of TOT is to generate revenue for the local government to fund public services and infrastructure projects that benefit the tourism industry and the local community. The funds generated by TOT can be used for a variety of purposes, including:
- Tourism Promotion
- Infrastructure Improvements
- Cultural and Recreational Programs
- Economic Development
- Public Safety and Services
It is also important to note that while TOT revenue is a valuable asset to funding a destination, it is subject to diversion by the government and can be unreliable as a source of dedicated funding.
Tax Increment Financing
Tax Increment Financing (TIF) is a widely-used public financing method for redevelopment, infrastructure, and other community-improvement projects throughout the United States. Municipalities typically direct future property tax or sales tax revenue increases from a defined area or district, usually in an urban area, toward an economic development project or public improvement project in the community. TIFs have been widely used to spur economic growth, create jobs, and revitalize blighted neighborhoods.
Generally, TIFs work through the following steps:
- A geographic area is designated as the TIF district;
- A plan for specific improvements or activities in the TIF district are developed;
- The improvements encourage private development and increase tourism and thus raise tourism specific sales tax revenues above where they would have been without the improvements or activities;
- With increased tourism business sales, sales tax revenues rise; and
- Increased sales tax revenue over and above the level before the TIF project began (the tax increment) is used to pay for marketing, sales, events, improvements, or other activities that drive more visitors to the destination.
TIFs can be a powerful tool for funding tourism-related infrastructure projects in a destination. By directing a portion of the increase in revenue collected from tourism-related sales taxes, without imposing a new levy or increasing sales tax rates, TIFs allow a destination to capture a portion of the new sales tax revenue generated by tourism-related development and use that revenue to fund public infrastructure improvements, such as transportation improvements, public facilities, and other tourism-related projects. Tourism TIF funding is directly linked to the tourism industry and allows for growth in revenue as tourism promotional programs and tourism-related improvements bring more visitors to the destination.
The Future of Funding: Tourism Improvement Districts
Lastly, Tourism Improvement Districts (TIDs) represent a unique, industry-led option to provide sustainable, dedicated funding for DMOs to continue supporting the tourism industry. As budgets become tighter, staffing becomes a challenge, and resources become scarce, TIDs offer a stable source of funding to keep tourism promotion efforts going.
A TID provides a stable source of funding for marketing efforts designed to increase demand for overnight visitation to a destination, with the intended result of increased occupancy and room rates for lodging businesses paying a TID assessment. Funds raised through this small assessment on lodging stays are used to provide services desired by and directly benefitting the businesses in the TID. The amount of the assessment is determined by business owners at the formation of the district. One of the key benefits of forming a TID is that funds raised through a TID cannot be diverted to government programs.
TIDs can provide a range of activities, including print and internet advertising, visitor center operations, sales lead generation and many other marketing efforts. Destinations around the country are also using TID funds creatively to invest in their community with sustainability, DEI initiatives, and workforce and community development.
Leveraging different funding mechanisms can help a destination better meet its funding needs and achieve its goals by diversifying its funding sources, maximizing available resources, accessing additional funding, and tailoring funding to specific needs. TIDs are a recent and secure mechanism to fund initiatives related to tourism across the US.