Monday, May 04, 2009


Tourist tax increases can’t be shown to be bad OR good

by Larry Geller

An op-ed in today’s Advertiser, Tourist taxes cost too much for too little, argues against increasing taxes that apply to tourists (snippet):

Some legislators openly mock the industry's concern that these new taxes will keep visitors from coming as a "cry wolf" mantra of the visitor industry. They are wrong.

Well, should we decrease taxes then? Will more people come to Hawaii if we knock off a percent? How about two or three percent?

I could just say “I don’t think so” but I must point out that neither the author of the above-cited op-ed nor I can easily substantiate any position we wish to take on this. Because we have no economic model to plug numbers into.

Imagine how the availability of a model for the state would assist lawmakers in making the best decisions.

The other day I held forth in On the virtues of economic modeling. This is a perfect illustration of that approach.

Let’s say you have a model. It could be an Excel spreadsheet on your computer screen. You plug in a certain tourist tax increase and let ‘er rip. It tells you if tweaking that single variable, while holding all else constant, will make a difference and estimates how much. 

But look, it really is only a single variable. Now let’s drop room rates by 20% and kick it again. I’m willing to bet that the model shows that the small increase in tax makes little difference when compared to dropping the room rate, as an example. Intuitively, I can buy into this—I will look for a cheap room rate if I’m travelling to New York and I don’t even consider the taxes.

What I’m trying to suggest, though, is that we (someone) should build the model we need.

We know that there are many more than two variables, and some will be harder to estimate. As the model matures, though, we learn which variables are important and how they behave.

So I haven’t much sympathy for arguments that amount to belief systems with little substantiation.

I can’t substantiate my theory either, but after walking through Ala Moana Center today and noticing the lack of shoppers, and ending up in Shirokiya where the fabulous huge-screen TV sets and unaffordable Sony electronics are all gone as they downsize, I’m willing to bet that room rates will be cut, that bargain air fares will emerge, and that the room tax won’t make a bit of difference one way or the other.

In the absence of an economic model, though, I can’t prove it to you.


I’ve been thinking about this since your first post on statistical modeling and don’t see how the suppositions and presumptions and, more so, biases that would go into an on the fly analysis wouldn’t also be built into the model. In other words, the construction of the model is subject to the same statistical biases as any mental analysis.

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