A Note On the Effect of Changes in Ad Valorem Tax Rates On Net Revenue of Firms: an Application To the Hotel Room Tax

Abstract

This article employs comparative static analysis to derive a general expresscon for Abstract the effect of an increase in the ad valorem tax rate on a good on the net revenue of firms. The magnitude of this effect is expressed as a function of the initial levels of the tax rate and net revenue of taxed firms as well as the elasticities of supply and demand for the good. The authors' results applied to the hotel industry suggest caution in relying heavily on revenues derived from hotel room taxes. Increases in hotel room tax rates may have large negative effects on the financial viability of the industry.