Do Lodging Taxes Maximize Tax Revenue? Evidence from Ten U.S. Cities

Because taxes on lodging are generally not designed to correct market failure, their presumptive purpose is to maximize public revenue; we investigate whether they do so. Using recent estimates of the price elasticity of demand for hotel rooms in ten major U.S. cities, we find that existing tax rates on lodging are generally below the revenue-maximizing tax rates for all but the most expensive luxury hotels. On average, tax rates are 9 to 10 percentage points below the revenue-maximizing level.