Taxes can’t simply be ‘passed on’ to tourists
Faulty assumption gives birth to bad Nevada policies
- Tuesday, September 28, 2010
Nevadans are often told that they face a relatively low tax burden compared to residents of other states because they are able to offload much of their tax burden onto tourists who contribute revenues via the state's gaming, sales and hotel taxes.
This argument has served as a rationale, over the years, for state lawmakers to levy increasingly higher tax rates because, lawmakers claim, Nevadans will not be forced to bear the burden of these taxes.
Unfortunately for Nevadans, this argument is based on a fundamental misunderstanding of the price mechanism.
This argument erroneously presumes that the primary determinant of the price of a good is its cost of production and not the marginal utility that the good's use provides to consumers. Betamax players, for instance, might be costly to produce. However, given that the contemporary demand for Betamax players is minimal, producers would be unlikely to recoup their production costs at market prices — which is why you don't see Betamax players on store shelves today.
The key lesson here is that consumers, in deciding what they will pay for a good, determine its price. Prices are not determined by production costs. In fact, the reverse is true — production costs are determined by prices. The final market price of a good is imputed backwards to reward factor inputs such as labor and capital with wages and rents according to the marginal productivity of each.
How does this relate to taxes? Taxes add to the final market price of a good, reducing the willingness of consumers to purchase that good.
Hence, when the Nevada Legislature raises the price on hotel rooms in Clark and Washoe counties, for instance, by elevating the tax rate, consumers will respond by purchasing fewer hotel stays. The Silver State's hospitality industry is then forced to respond to this artificially lowered profitability by reducing the return to factor inputs such as labor — through salary reductions and layoffs. As a result, the true burden of an increased hotel room tax is borne by hotel workers who suffer pay cuts or are forced into unemployment.
As Murray Rothbard points out in Power and Market, none of the tax is shifted forward to consumers or "exported" onto tourists. To assume this would be to assume that consumers are unresponsive to the rise in prices that a tax increase entails. If this were true, hotels in Clark and Washoe counties, for instance, would increase prices without limit to maximize revenues — and workers and owners of capital would receive higher wages and rents, respectively.
However, as Nevadans — at least those outside the state legislature — have acutely experienced recently, consumers are sensitive to the artificial price increases created by tax hikes. Many Nevadans have paid for the legislature's 2009 tax hikes with their jobs and can now provide firsthand testimony that taxes are never exported but are absorbed by workers in the taxed industry.
If lawmakers insist on a further round of tax increases in 2011, Nevadans will find that the artificial price increases created by those tax hikes will translate into even more joblessness and lowered living standards.
In fact, if lawmakers were truly concerned with the plight of Nevada's families, they would be examining proposals for reducing the state tax burden in order to minimize the impact of taxation on final consumer prices, spurring additional demand for the goods and services offered in Nevada.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. For more information visit http://npri.org/.