Taxes for Tourism: Further Reflections

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Taxes for Tourism: Further Reflections

by Ari Armstrong, June 22, 2006

In a column for the June 22 Boulder Weekly (linked in the catalogs), I evaluated a study by Longwoods International that claims that state spending on tourism nets a many-fold return in tax revenues. I concluded that the study's claims on that score are dubious. Here I further evaluate the study.

Longwoods International and Colorado

Longwoods International is a company based on Toronto and with an office in New York. The company's web page features a Client Case Study titled, "Budget Justification: Colorado Tourism Office." Following is select text from that document:

1986

The Colorado Tourism Board (CTB) hired Longwoods to conduct an image study as input into a new advertising campaign...

1993-97

CTB funding ($13 million annually) was provided by a small but broad tax of 20 cents on every hundred dollars of tourism-related expenditures.

In 1993, voters eliminated the tax in a referendum, thereby cutting the Board’s funding and leaving Colorado as the only state without a tourism funding source.

1997-98

In 1997, the CTB was reconstituted and given a one-time, $2.1 million appropriation. Longwoods was commissioned to carry out visitor and economic impact research to demonstrate the importance of tourism and provide ammunition in the industry's efforts to convince the State Legislature of the need for permanent funding for tourism marketing.

1999

Longwoods was hired by the Colorado Tourism Board and the Colorado Travel & Tourism Authority to develop a Strategic Marketing Plan that would serve as the foundation for a funding request to legislators...

The Longwoods International Strategic Marketing Plan was endorsed by the industry in January, 1999, and distributed to key legislators. By March, lawmakers authorized $5 million of dedicated funding for tourism promotion and established a new tourism agency, the Colorado Tourism Board (CTO). Longwoods continued to carry out annual Visitor research from 1999 to 2001.

2002-03

For the first time since 1992, Colorado launched a tourism advertising campaign with a significant budget. Longwoods was hired to measure the Return on Investment of the campaign, which information would be used to help secure future funding. For the 2003-04 fiscal year, total funding was increased to $12 million, in part due to the research results which showed a 13 to 1 return in taxes on the investment in advertising. (Accessed June 16, 2006.)

It is obvious by Longwoods's own account that it was hired specifically to support increased state spending on tourism. Not surprisingly, Longwoods reached its pre-determined conclusions.

It is also obvious that Longwoods had and continues to have a direct financial interest in state spending on tourism. Not only was the company hired to "provide ammunition in the industry's efforts to convince the State Legislature of the need for permanent funding for tourism marketing," but "Longwoods was hired to measure the Return on Investment of the campaign, which information would be used to help secure future funding."

The state's web page Colorado.com (accessed June 16, 2006) links to "Industry partners," which in turn links to the "Longwoods Colorado Visitors Study" from 1999 through 2004. (The study for 2005 is not yet available.)

Longwoods and The Denver Post

The Denver Post has mentioned Longwoods yet has neglected to point out to readers the details of the relationship between Longwoods International and the state of Colorado.

A June 11 editorial in The Denver Post states, "A study by Longwoods International concluded that for every $1 the state spent promoting tourism in 2003, state and local governments received $15.58 in taxes. But while that study argued for restoring a strong tourism program, the rigid TABOR revenue ceilings hindered such efforts."

A June 6 article for the Post by Will Shanley and Julie Dunn states, "Michael Erdman, senior vice president of Toronto-based Longwoods International, estimates the new tourism marketing money could generate as much as $216 million in state and local taxes. His market research firm conducts the annual Colorado Visitor Study, which tracks how many visitors come to Colorado and what they spend while they're here. Colorado spent $4.9 million on tourism marketing in 2004 and, according to the study, each dollar yielded $18.10 in incremental state and local taxes, a total of $89.5 million."

That article points out that "the state's tourism industry shouldn't expect to see a proportional increase in revenue, said Eugene Dilbeck, head of the Center for Travel & Tourism at the University of Denver's Daniels College of Business." The article also states: "Some critics called the bill a form of corporate welfare," quoting David Kopel of the Independence Institute. However, the article does not point out the nature of the relationship between Longwoods and Colorado, nor does it critically evaluate the study.

I don't question various other media references to Longwoods with respect to attitudes about Colorado among tourists. Longwoods conducts surveys, and survey information is useful for discovering certain attitudes (despite the inherent problems of such self-reported claims). However, survey data is rather less useful in determining the merits of corporate welfare for the tourism industry, as I discuss below.

The Longwoods 2004 Study

Here I evaluate the Longwoods International "Colorado Travel Year 2004 Final Report," dated May, 2005. I focus on the claims pertaining to state spending on tourism, not tourist attitudes about Colorado.

Page 6 discusses a "Visitor Study" and an "Advertising Study."

The study states: "Panelists are not paid per se, but provided with the opportunity to participate in draws for prizes such as US Savings bonds, cash, etc. For Longwoods surveys, the draws are for $500 US Savings Bonds." This is potentially problematic in that people who have a chance of winning something may be more likely to answer questions in a way that seems to be desired by the surveyors.

Page 8 discusses the method of "Advertising ROI [Return On Investment] and Image Research."

The study states: "A benchmark study was conducted following the advertising period to measure detailed awareness of specific ads, estimate the impact of awareness on intentions to visit and image, and estimate short-term conversion that occurred during and shortly after the campaign period."

However, there is good reason to doubt the ability of this "benchmark" to "estimate the impact of awareness on intentions to visit," as I'll address below.

The study states: "An 8-page survey was mailed in January, 2005 to 2,800 households in two regions where advertising was placed," the regional market and the national market. The study continues, "The sample was designed to allow for separate analysis by the two regions. To achieve this we sampled disproportionately to population distribution, i.e. we split the sample relatively evenly between national and regional, despite the fact that the true population split is roughly 80/20. At the analytic stage, we corrected this imbalance by weighting the data back to the correct 80/20 ratio." Page 40 notes that regional recognition of advertising was lower. While "[t]he 2004 combined [advertising] campaign was recalled by 4 in 10 travelers across the country... [i]n regional target cities, about 2 in 10 remembered seeing a TV and/or newspaper ad, and half that number recalled the radio or outdoor/transit advertising." It is unclear how much money was spent on the national market versus the regional market.

Page 8 also states, "1438 surveys were completed, for a return rate of 51%." Page 9 adds, "Since the response rates achieved on these surveys are very high, i.e. between 50% and 65%, we have not made any adjustment for potential non-response bias." This is not a problem unless those responding are not representative. Yet because responders are entered in a drawing for prizes, those interested in winning prizes may be more interested in responding, and those interested in winning prizes may also be more likely to respond in ways that seem desired by the surveyor.

Page 8 continues, "The survey package included black & white copies of print ads and the web banners, and storyboards of television ads that had been run in prior months." This is a potential problem. If you show people an add and ask them if they recognize it, they may say "yes" even if it only looks like another ad that they vaguely remember (or think they remember). Were any false ads added to the mix, to see if people "recognized" ads that were in fact never placed? (Ralph Shnelvar suggested this point to me.)

Page 9 encourages the reader, "Please see the appendix for a copy of the questionnaires." Unfortunately, the final page of the document as released on the state's web page is number 237, labeled "Appendix: Questionnaires," yet the questionnaires themselves are not included. Nor have the questionnaires been sent to me following my request for them.

Before I turn squarely to the main issue of the success of state spending on tourism, I want to address another curious side-issue. Page 40 states, "Awareness of the online component was also substantial -- 1 in 4 remembered some internet advertising, led by the Chevy Colorado promotion." First, the claim that a fourth of people recognized a particular internet advertisement is amazingly high. Given that internet users are highly individualistic in the sites that they visit, I doubt that anywhere near a fourth of the population ever went to a web page that featured the ad.

Second, what is this "Chevy Colorado promotion?" On June 15, I asked Michael Erdman of Longwoods whether this "Chevy Colorado promotion" was funded entirely by the state or with a financial contribution from Chevy. Erdman told me to ask the state, which I did, though I haven't received a reply. Assuming that at least part of this promotion was funded by the state, how is it that Chevy qualified for such special treatment?

Now I return to the main question: are Longwoods's claims about the results of state spending on tourism realistic?

Page 3 describes the marketing campaign:

From October 2003, Colorado conducted winter and spring/summer advertising campaigns to build upon its earlier campaigns and strengthen the Colorado brand.

The campaigns were directed nationally and to several regional target cities.

The campaign elements included:
* Four television commercials, aired on network and cable television
* Radio ads preceding local traffic reports
* Magazine ads that ran in a variety of magazines, including Architectural Digest, Better Homes & Gardens, Conde Nast Traveler, Cooking Light, Family Fun, Gourmet, Midwest Living, Outside Magazine, Sunset, Skiing, SKI, Texas Monthly
* Print ads promoting Colorado Adventure Festival events
* A travel planner insert in several major newspapers and magazines
* Multi-page inserts placed in the Denver Post and newspapers in the target cities
* Outdoor billboards and transit advertisements
* Web banners on various websites, directing people to the State's tourism website
* "Courage, Colorado", an hour-long TV show on OLN

Page 14 states: "The 2004 winter and summer campaigns made a significant contribution to Colorado tourism, yielding substantial visitation (5.3 million trips) and visitor expenditures ($1.4 Billion) that otherwise would not have occurred, as well as increasing the taxes which that spending returned to state and local treasuries ($44 Million and $45.1 Million, respectively)."

Page 42 asserts that "[t]he 2004 campaign increased people's intent to visit Colorado... [T]wice as many people aware of the campaign as those unaware said they planned a trip to Colorado over the next 2 years... The campaign generated an incremental 7,160,000 potential trips to Colorado, planned for over the next two years or so."

Page 43 continues, "5,264,000 people visited Colorado during or immediately following the advertising period (October '03 to December '04) that otherwise would not have visited without the campaign."

Page 206 contains a graph showing (self-reported) "Awareness of Colorado's Summer Ad Campaign." Pages 213 to 216 show various differences among those "aware" of the ad campaign versus those "unaware." Pages 221 and 222 show how differences of (self-reported) awareness are related to intent to visit Colorado.

Page 224 claims that, in 2005 and 2006, the "Intended Person-Trips Due to Advertising" total 7,160,000. Page 231 claims that, in 2004, "Overnight Trips to Colorado Due to Advertising" totaled 5,264,000. However, page 232 uses less forceful language. It claims that, from October, 2003, to December, 2004, 5.3 million trips were "Influenced by Campaign." But there's a big difference between being "influenced by" something and taking action "due to" something.

Page 233 returns to the "due to" language. Page 234 claims that, "Due to Advertising," in 2004 there were 5,264,000 total visitors, generating total spending of $1,442 Million, and also generating state taxes of $44.4 Million and local taxes of $45.1 Million.

Page 236 lists the "Visitor Spending per Ad Dollar" for 2004 as $292, and "Total Taxes Returned per Ad Dollar Invested" as $18.10.

Now it's time for a dose of reality.

What would you do if somebody offered you 1,710 percent short-term return on an investment? (I'm subtracting the initial dollar from $18.10.) Would you, like The Denver Post, rush headlong to hand over your money because a "study" demonstrated that rate of return? Or might you think to yourself, "The stock market does well to give returns of 10 percent annually. The only returns I would expect to be significantly higher than that are those from high-interest credit card debts and pawn shops. If somebody offered me interest of 20 percent, I'd be extremely suspicious. If somebody offered me interest of 100 percent, I'd automatically suspect fraud or criminality. If somebody offered me interest of 1,710 percent, I'd be skeptical, and I'd suspect that something fishy is going on. Returns to marketing are highly variable, yet I cannot imagine any marketing campaign yielding short-term 1,710 percent returns."

Longwoods claims that one dollar spent through the state on advertising yields $292 in visitor spending (or at least did so in 2004), which is a return of 29,100 percent. The resulting tax revenues are $18.10, a return of 1,710 percent. Longwoods's claims are astounding, fantastic, and incredible. As in, not credible.

In the real world, what would happen if an investment opportunity actually offered short-term 29,100 percent returns? Lots of people would figure out lots of ways to capture the opportunity. The claim is that the free-rider problem results in mild inefficiencies related to tourism funding. But these alleged inefficiencies are nothing compared to 29,100 percent returns.

I asked economist Paul Prentice if it's reasonable to expect advertising to generate revenues 292 times the advertising costs. He said, "There's no realm of economics in which that's possible."

It's difficult to evaluate the Longwoods study in detail, given that both the survey questions and the detailed methodology have been withheld from me. However, I think I accurately describe the main methodological problem with the study in my Boulder Weekly column:

Obviously people who are already more inclined to visit the state are more likely pay attention to and "remember" (accurately or inaccurately) advertising about the state. Thus, the Longwoods study reverses cause and effect. The claim is that people came to Colorado because they saw the advertising. The reality is that people predisposed to visit Colorado are more likely to claim that they've seen the advertising.

I also point out that the study ignores alternative uses of the money and market alternatives to state-funded advertising.

Obviously, the state-funded advertising brings some benefit. However, even on standard statist cost-benefit grounds, if the benefits are lower than a certain amount they aren't worth the political time and bureaucratic inefficiency. But my argument is stronger: regardless of the benefit or alleged benefit, state spending for tourism is simply illegitimate. It constitutes a violation of individual rights rather than a protection of them. If businesses of tourism wish to advertise, they are perfectly free to do so with their own money, either individually or in combination.

A Chronology of My Inquiry

After my father and I wrote a June 12 column critical of corporate welfare, it occurred to me that further investigation of the study by Longwoods would be useful.

On June 14, I called Longwoods and spoke with Scott Hanson, CEO. I asked him for a copy of his company's studies for Colorado. I also asked him how much the state pays to Longwoods. He said to ask Kim McNulty of the Colorado Tourism Office. He also said that I should call Michael Erdman if I had additional questions about the study.

I left a voice message for McNulty asking for the study. After that, I found the study on the state's web page. McNulty wrote:

From: Kim.McNulty[**AT**]state.co.us
Subject: Longwoods International studies
Date: June 15, 2006 2:18:12 PM MDT
To: ari[**AT**]freecolorado.com

Hi Ari -- I received your voicemail. The Longwoods studies can be viewed online at http://www.colorado.com/static.php?file=industry_partners

Scroll down to Research and Presentations. The 2004 study is linked here. We have not released any 2005 numbers yet.

Regards,
Kim
Kimberly S. McNulty
Director, Colorado Tourism Office
Colorado Office of Economic Development & International Trade [etc.]

I replied the same day, "Thanks a lot! I did find the study after I called you. However, the Appendix is missing. It's supposed to be the survey questions. Can you send that to me? Thanks, -Ari"

As of noon on June 22, she has not responded.

On June 15, I also called Michael Erdman of Longwoods. I first explained that my preference would be to either record the conversation or send him questions via e-mail, so that the discussion would be documented. He asked me what sorts of questions I had, so I proceeded to ask them (unrecorded).

Erdman answered some of my questions, but after a while he said, "You should really be dealing with the state about this." He said that his clients have to authorize all releases of information. I answered that, in this case, his client is the state of Colorado, so the information is public, anyway. (Longwoods's web page states, "In the interest, however, of respecting client confidentiality, we have chosen case studies in the public sector domain [including the one for Colorado] that illustrate the benefits of our product offering.") He referred me to Sue Piatt as a contact with the state.

At one point, Erdman asked me how he could know my identity. What if I were a competitor? (Perish the thought.) I told him that he could call my editors at Boulder Weekly, which he did.

On June 15, I also sent the following e-mail:

From: ari[**AT**]freecolorado.com
Subject: Longwoods study
Date: June 15, 2006 3:43:52 PM MDT
To: Sue.piatt[**AT**]state.co.us, mderdman[**AT**]longwoods-intl.com

Dear Ms. Piatt and Mr. Erdman,

I spoke with Mr. Erdman on the phone today, and, while he answered several of my questions about Longwoods' 2004 report, he asked me to take up additional questions with Ms. Piatt.

First, I ask that you send me the survey questions. Page 9 of the report states, "Please see the appendix for a copy of the questionnaires." However, the questionnaires are not available in the version of the report on the state's web page.

At this time, I have but one question about the report, and I encourage both of you to reply: How do you know that people came to Colorado because of the advertising cited in the report? Please provide an answer sufficiently detailed to permit independent evaluation.

Because of deadlines (I'm working on a column for Boulder Weekly), I hope that you can e-mail me your answers by the end of the business day of Friday, June 16. If that's not possible, please let me know by then when I should expect your reply.

Thank you for your assistance; I appreciate it.

-Ari Armstrong

On June 16, I sent the following e-mail:

From: ari[**AT**]freecolorado.com
Subject: Longwoods follow-up
Date: June 16, 2006 7:16:08 AM MDT
To: Sue.piatt[**AT**]state.co.us, mderdman[**AT**]longwoods-intl.com

Dear Ms. Piatt and Mr. Erdman,

Yesterday I wrote, "At this time, I have but one question about the report, and I encourage both of you to reply: How do you know that people came to Colorado because of the advertising cited in the report? Please provide an answer sufficiently detailed to permit independent evaluation." I also requested the survey questions.

I now wish to ask two follow-up questions.

First, how much has the state paid Longwoods, by year, for all services, since 1986?

Second, the Longwoods 2004 study mentions a "Chevy Colorado promotion." What was the nature of this promotion, and what were its funding sources (and in what amounts)?

If you are unable to respond today, please let me know when I should expect your reply.

I again thank you for your assistance.

-Ari Armstrong

Piatt sent the following e-mail:

From: sue.piatt[**AT**]state.co.us
Subject: RE: Longwoods follow-up
Date: June 19, 2006 2:12:56 PM MDT
To: ari[**AT**]freecolorado.com

Hello Ari --
Just a quick note to let you know I can get the info you requested by about mid-day tomorrow -- I have to contact a number of other people to pull this all together. Thanks for your patience.
Sue Piatt

As of noon, June 22, I have received no response. I will publish any response below, in full, upon receipt.

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