The COVID-19 pandemic has devastated the hotel industry, and in doing so put the taxpayers who funded generous incentives for these hotels at risk of never being paid back.
This week, The New York Times reported on publicly funded hotels from around the country that are having to delay openings, or sitting empty thanks to coronavirus-related shutdowns and cancellations.
That includes the Hyatt Regency Hotel in Portland, Oregon, and the Loews Kansas City Hotel, which respectively received $74 million and $166 million in public incentives. The Hyatt opened in December. The Loews, which was already facing cost overruns, was supposed to open in early April, but that has since been delayed.
The Hyatt’s subsidies, like much of the public assistance detailed in the Times article, were funded by the sale of bonds by Portland’s Metro government (a separate entity from the city of Portland), which planned on paying back bondholders from taxes on hotel room stays in the city.
Metro told the Willamette Week that it has enough reserves to keep servicing the bonds on the Hyatt for the foreseeable future. But the longer COVID-19 shutdowns remain in place, the greater the risk that that governments who splurged on pricey hotel projects will have to pay back their creditors from general funds they’d otherwise be spending on public services.
It’s not just hotels either. Cities across the country are scrambling to figure out how to pay for stadiums, convention centers, and other venues that received taxpayer support. These projects were all pitched as economic development tools. With large gatherings banned in most of the country, they’re now a drain on city revenues that are already being squeezed by the current economic slowdown.
Wichita, Kansas, spent $75 million on a new baseball stadium that was opened in March, before being forced to close because of the pandemic. The city was expecting sales taxes from the stadium and surrounding businesses to pay for the costs of the venue. With games canceled for the foreseeable future, that’s looking increasingly unlikely, reports the Wichita Eagle.
Paducah, Kentucky, had just agreed to build a new aquatic center with the hope of attracting more tourism dollars. Now city leaders are scrambling to figure out how they’ll pay back the $20 million they borrowed to build the facility, according to local NBC affiliate WPSD.
Interestingly, Paducah’s aquatic center was already projected to lose money, even without the pandemic.
That’s because targeted subsidies for things like stadiums and hotels don’t make economic sense even in good times, says Michael Farren of George Mason University’s Mercatus Center.
“Targeted economic development subsidies don’t work. They don’t actually raise the standard of living in the communities that use them,” he tells Reason.
Farren says these kinds of incentives, at best, spend scarce public dollars on economic activity that would have happened regardless of the subsidies offered. That’s a loss for local businesses and residents who have to pay these taxes but don’t receive any of this largess, he says.
“You’re subsidizing one provider of goods and services at the expense [of] other providers of goods and services. You can certainly see winners and losers,” says Farren.
Often, targeted government subsidies can end up distorting markets by oversupplying a good or service, which then creates more demand for subsidies and incentives in order for said business to stay afloat.
Pointing to the research of University of Texas professor Heywood Sanders, Farren argues that local governments have oversupplied the market for convention space, and have since tried to shore up demand for these venues by building luxury hotels.
Now both types of investment are losing money at the worst possible time. Local governments are under tremendous financial strain as sales taxes they rely on evaporate, and the demands for all forms of public services grow.
This would be the case regardless of whether governments had splurged on dubious economic development projects. It nevertheless means that cities across America are having to divert money from providing essential services to cover the costs of luxury hotels.