Subject Taxes
Topic Market Failure, Regulation, And Public Choice and Equilibrium
Key Words Tax, Fees, Cost, Price
News Story

Phoenix, Arizona, is the latest city to levy a tax on rental cars rented at the airport in order to raise funds for a new sports stadium, as well as to promote tourism and youth sports. The 3.25 percent tax takes the total taxes and fees to 27.75 percent of the base rental price. The tax, with the help of a 1 percent hotel tax increase, should cover about one-half of the \$331 million cost of the new retractable-dome home for the Arizona Cardinals football team.

Other cities have similar stadium-related taxes - such as Atlanta, Austin, Cleveland, Dallas, Detroit, Houston, Indianapolis, San Antonio, and San Diego. They range from 2 to 5 percent.

The winner is the community. Citizens vote in favor of such taxes to shift the cost to visitors who cannot vote. The Travel and Sports Authority in Phoenix says that travelers benefit not only from the stadium, but also the convention center floor that lies beneath the field when it is retracted. Besides, it is argued, renters will not notice the tax increase, particularly as taxes are in the same range as in other cities. However, the Travel Industry Association questions how many travelers will really use the facilities. Car rental companies also oppose tax increases. In Tampa, they were powerful enough to block a similar tax proposal.

(Updated April 1, 2001)

Questions
 1 a) Draw a supply and demand diagram showing the equilibrium price and quantity of rental cars in the absence of a stadium tax. b) Now show what happens as a result of the 3.25 percent tax on rentals. Mark the new equilibrium and shade in the area representing the tax revenue that will help pay for the stadium. 2 a) Why are the rental car companies unhappy? Relate your answer to your diagram. b) Under what conditions would the car companies suffer most? 3 a) Some say that consumers will not react adversely to the price increase. What is the assumption concerning the elasticity of demand? b) Redraw your diagram, but this time show the demand curve with the elasticity identified in (a). c) What would the implications be for citizens, consumers, and rental car companies? d) Is this assumption likely to be correct? Refer to the actions of rental car companies in Tampa.
Source Chris Woodyard, "New tax funds stadium," USA Today, February 26, 2001.