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Report Says Door County Lodging Can Handle a Higher Room Tax

Destination Door County commits to support for local business associations, municipalities

A new report from the University of Wisconsin-Whitewater found that a higher room-tax rate will not result in fewer visitors. The report, commissioned by a Door County Tourism Zone Commission (DCTZC) ad hoc committee made up of eight local innkeepers, paved the way for the DCTZC to formally support an increase in the room-tax rate during its Feb. 18 meeting.

“We can conclude that a tax hike would not harm the tourism industry of Door County,” Russell Kashian wrote in the report. He directs the Fiscal and Economic Research Center at UW-Whitewater.

Meredith Coulson-Kanter, a DCTZC member and owner of the White Gull Inn in Fish Creek, was receptive to the UW-Whitewater report and voted in support of the commission’s position backing the rate increase. She noted that Door County tends to navigate economic downturns pretty well.

“Basically, now is the time to do it,” Coulson-Kanter said. “Places with regional car travel are doing better and tend to do better in a recession.”

The room tax was implemented in 2007 and expanded countywide by 2009, through the height of the Great Recession. 

As of Peninsula Pulse press time, four communities have adopted a resolution in support of raising the room-tax rate from 5.5% to 8%: Baileys Harbor, Liberty Grove, Sister Bay and the Village of Egg Harbor. The Town of Sevastopol has also signed a letter of intent to support the increase, and the Sturgeon Bay Finance Committee has recommended approval of the rate increase to the city’s Common Council. The council postponed a decision until its first meeting in March, pending the receipt of additional information. Only one community, Jacksonport, has voted against the proposal. 

It will take the support of 13 of Door County’s 19 municipalities to compel the change countywide.

In presenting the findings to the DCTZC on Feb. 18, Kashian said that demand for lodging in Door County is inelastic, meaning that when the price goes up, consumer buying habits stay about the same.

“The increase in the tax rate will not diminish tax revenues; it will slightly diminish rentals,” Kashian said. “This can be countered by the allocation of the additional revenues that you get.”

In other words, as long as the additional room-tax revenue is put toward getting more “heads in beds,” then new visitors will more than make up for the few people who don’t visit Door County because of the higher lodging price. 

Some commission members questioned whether the report – which did not conduct any analysis specific to Door County, but relied on the findings of studies conducted elsewhere – captured what actually happens on the ground in the peninsula. Kashian said he was confident that trends researched elsewhere would also hold up in Door County, adding that the only way to truly know how the change would affect Door County would be to conduct a lab experiment, which would not be feasible.

Data from the DCTZC on occupancy rates and room rates demonstrate the inelasticity concept, according to analysis by the Pulse. Between 2010 and 2020, the average room rate increased by 52%, from $124 to $189. During the same period, the countywide occupancy rate increased by 8.7%. The fact that demand for rooms increased even though prices were increasing suggests that visitors will still come to Door County even as prices rise. 

A narrower time frame, which better controls for changes in visitors’ income and other trends that could affect demand over a 10-year period, bears the same results. Between 2018 and 2019, room rates increased 4.3%, and occupancy rates were nearly unchanged, decreasing 0.5%.

Three members of the DCTZC voted against the rate increase, citing the unique challenges of 2020 as a reason to proceed with caution.

“During this pandemic, when so many people are losing their jobs and don’t have the income, doesn’t it seem like the wrong time to raise it?” said Commissioner Little Bit LeClair, owner of the Square Rigger Lodge in Jacksonport.

Though the historical data show lodging increases don’t change consumers’ spending habits, lodging operators have experienced pandemic-driven revenue losses during the past year. Room-tax collections during 2020 were down approximately 7%, meaning that lodging operators saw a $7 million decline in revenue from 2019.

Door County did fare better than some other parts of the state in 2020. The City of Madison, for example, estimated a 50% decline in room-tax revenue, and Lake Delton predicts a 30% decline. Additionally, 2020 room-tax collections were higher than in 2018, even if they were down from 2019.

Sales-tax collections – another lens through which to view the tourism industry – show a similar story: They increased 3.5% between 2019 and 2020.

Still, lodging operators in Door County felt a pinch. Judy Korte, owner of Edgewater Cottages in Fish Creek, echoed LeClair’s reservations about raising room-tax rates amid pandemic uncertainty.

“We clearly made less income in 2020,” Korte said in an email. “We lost the entire month of May and experienced cancellations from longtime guests who feared the COVID virus. You can’t increase costs, receive less income and operate a viable business.”

The DCTZC expects any changes to the room-tax rate, if approved, to be implemented no sooner than 2022.

The governing board of Destination Door County (DDC) also voted to increase support of local business associations and municipalities if the room-tax increase is approved.

Based on room-tax revenue from 2019, DDC stands to gain an additional $1.8 million in revenue under an 8% rate. Jack Moneypenny, president and CEO of DDC, said the organization has committed to putting approximately $1.3 million of that increase back into Door County municipalities: $1 million to help support local tourism organizations and business associations, and $300,000 for municipal governments to use on tourism promotion and tourism development, in accordance with state law.

Municipalities would then be on the hook to fund the DCTZC, with the $300,000 payments serving to offset those costs. This funding structure would eliminate the need for lodging operators to pay permit fees, which was part of the original proposal to increase the room-tax rate.