There is an old economics adage that says if you want people to buy more of your good or service, you should raise the price. Right?
You would think something so obviously false would never be tried in the real world. Yet Chicago has decided to put this “law” into practice. Yes — the city has chosen to make visiting more expensive in order to attract more visitors. While contradictory even on the surface, it reflects a deeper assumption common in modern economic policy: policymakers believe they can engineer demand through spending, even when the funding for such spending suppresses demand in the first place.
Chicago recently approved an increase in its hotel tax, raising the rate from 17.5 percent to 19 percent in downtown and nearby areas. The explicit goal is to boost tourism by using the revenue to fund city tourism marketing. The city also created a Tourism Improvement District to fund its tourism organization. At 19 percent, the hotel tax is now among the highest in the United States.
The logic seems straightforward: spend more on promotion, attract more visitors, generate more economic activity. And since tourists do not vote in local elections, perhaps this is even politically painless.
But the policy rests on a major assumption — that demand for visiting Chicago does not respond much to price. Without that assumption, the policy works against itself.
All choices are made at the margin, and tourists are no different. Families planning vacations compare destinations. Convention planners weigh bids from multiple cities. Business travelers may extend or shorten stays based on cost. In all cases, price matters.
A hotel tax directly raises the cost of visiting. A few extra dollars per night may seem trivial in isolation, but travelers rarely book for just one person or one night. Consider conventions involving thousands of room nights. Whether for multi-night stays, getaways, or events, small differences can become decisive. Cities already compete aggressively for tourists and conventions through incentives, adjusted pricing, and other cost advantages — and Chicago has now changed that calculus.
The problem runs deeper than simple price sensitivity. It also reflects circular logic.
Tourism relies on visitors choosing a city based on cost and value. A tax raises the cost of visiting — the very thing the city hopes to stimulate with tax-funded promotion. In effect, the city is trying to offset a price increase with more spending.
This might work if demand were inelastic and marketing fully compensated for the higher cost. But neither is likely. Marketing can inform potential visitors, but it cannot eliminate trade-offs. If Chicago is more expensive relative to other cities, marketing cannot erase that disadvantage — it can only try to work around it. This is a common error among policymakers: assuming spending can substitute for underlying value — even when the spending itself comes from higher costs.
But spending is not value. Tourism does not arise from marketing budgets; it comes from perceived value. Visitors choose destinations based on attractions, safety, convenience, and price — among other factors. Marketing can highlight value, but it cannot create it. Demand cannot be produced directly through spending. If costs rise, marketing can at best mask the problem temporarily.
Hotel taxes often fall on outsiders — tourists who cannot vote — so policymakers see them as convenient revenue sources. But these taxes are not free. Higher prices reduce demand, leading to fewer bookings, shorter stays, and lost conventions. Local businesses like restaurants and service providers bear part of the burden, too. The effects ripple through the entire tourism ecosystem.
Chicago might see higher tourism revenue after the tax. The city might fund visible campaigns or secure high-profile events. On paper, the tax might look like a success. But aggregate numbers can be misleading.
Total tourism revenue could rise even as Chicago loses marginal visitors to cheaper alternatives. Large events might still come, often due to subsidies, while smaller, price-sensitive travelers go elsewhere. The composition of visitors changes, even if totals hold. That is not sustainable and runs contrary to the city’s stated goals.
At its core, Chicago’s hotel tax raises a simple question: can you tax something into existence? The answer is no — a lesson governments seem unwilling to learn.
Tourism, like all market activity, relies on voluntary decisions. Visitors compare costs and benefits. Raising the cost of visiting creates a built-in tension that marketing cannot fully resolve. The method matters: you visit a city because it offers better value than alternatives — not because it spent more on promotion. At its root, this is not a marketing problem, but an economic one.
