Last month, the Healey-Driscoll Administration announced the “Municipal Empowerment Act,” a legislative proposal that includes a set of tools designed to help towns generate additional revenue and support the recruitment and retention of staff. In addition to a number of policy provisions, the bill offers an increase to the maximum rate for local lodging and meals tax, and introduces a new 5% local option motor vehicle excise tax. This means that each of the 351 cities and towns in Massachusetts could opt to raise additional lodging, meals, and excise taxes, or not.
The administration states in an informational bulletin that the proposed local option increases could generate $58 million in new, annual revenue statewide, and “…would be particularly impactful for larger communities and destination areas, such as the Cape.” Media coverage of the Municipal Empowerment Act has reported a positive response from municipal leaders, with one mayor calling the legislation a “game changer” for smaller and less-populated communities. The Massachusetts Municipal Association (MMA), the statewide professional association for municipal leaders, issued a press release with glowing reviews from a handful of mayors and select board members.
To the outside world, this legislation might look like a slam dunk. Cities and towns could offset the rising cost of providing municipal services, without having to raise property taxes. In destination areas, revenue could be captured from existing lodging and meals activity.
However, on Cape Cod, the local option tax increases would generate minimal additional revenue for our towns, while providing no reinvestment in the lodging and restaurant businesses that produce those funds.
By our estimates, the local option tax increases would raise about $7 million per year across Cape Cod's fifteen communities. The tax revenue would, by default, be directed to the general fund in each town - a drop in the bucket considering the operating budgets of the Cape’s fifteen municipalities collectively amounted to more than $970 million for Fiscal Year 2024.
Let’s put that in perspective. Towns get most of their revenue from property tax. The property tax valuation on Cape Cod has increased by more than 66% since 2019, from $85 billion to $142 billion. In Fiscal Year 2024, towns levied $164 million more than they did in 2019 from residential, commercial, industrial and personal property, an increase of 23%. On top of that dramatic increase in municipal revenue, a new 6% local option tax on short-term rentals was implemented in 2019. All 15 towns have adopted this tax, and all but one at the maximum of 6%, raising additional millions for municipal budgets last year.
The local option tax increases in the Municipal Empowerment Act are touted as being complementary to economic development and a “reinvigorated” tourism strategy. Some special taxes – for example, a real estate transfer fee, or the Cape’s 2.75% surtax for water and wastewater infrastructure projects – do indeed have this effect. Regional taxes can make strategic sense, particularly in highly seasonal communities where funding is needed to help us address significant regional challenges, like affordable housing and water quality.
But a percent here and a percent there in local option taxes can add up quickly, all while returning little to no economic benefit for the paying businesses. Cape Cod lodging businesses, for example, already pay a cumulative tax of between 12.45% and 14.45%, depending on the town, with businesses seeing no direct reinvestment from these funds. A local option approach to taxing can increase the disparity in tax rate from town to town, putting lodging businesses in higher-taxed towns at a competitive disadvantage when attracting groups, bus tours, and conferences. Local option taxes also make it more difficult for businesses to take advantage of statewide tools like the Tourism Destination Marketing District (TDMD), which applies an additional fee on room night stays with 100% of funds earmarked for reinvestment in tourism marketing and destination infrastructure.
When it comes to tax policy, we have to be strategic about the revenue tools we employ and resist the urge to max out every available state and local tax option. For the Cape, raising taxes on our tourism, hospitality, and food businesses simply doesn’t make sense unless these funds are designated to address big-picture, regional challenges, like housing and wastewater, or to support year-round economic growth. We can raise taxes, or we can grow the economy. Which will we choose?