Millions in hotel taxes fuel DFW projects as Texas weighs changes

Dallas says one hotel-driven financing tool is generating nearly three times early projections as state lawmakers consider new accountability measures.

Texas lawmakers spent Tuesday discussing hotel occupancy taxes and whether the decades-old HOT programs are functioning as intended. That same day, the City of Dallas discussed in a Finance Committee meeting just how essential those revenues are in financing its new convention center.

Dallas told its Finance Committee that its project financing zone has generated $219 million to date, with annual collections now running nearly three times initial projections.

Hotel occupancy tax in Texas

The two meetings highlighted different parts of Texas' complicated hotel-tax system: local hotel occupancy taxes collected and spent by cities, and project financing zones that let certain cities receive growth in state tax revenue generated around major convention and entertainment projects.

When you stay at a Texas hotel, part of your bill can include several layers of hotel occupancy taxes collected by the state, cities and, in some places, counties. Unlike the state’s share, local HOT revenue is generally restricted to specific uses that promote tourism and the hotel industry.

That matters because local governments across Texas have accumulated $633 million in unspent HOT at the end of fiscal year 2025, drawing scrutiny from state lawmakers Tuesday, who questioned whether the rules governing them are working as intended.

North Texas communities account for millions in year-end balances

According to 2025 Comptroller data reviewed by NBC 5, Frisco reported about $14.9 million in unspent HOT revenue at the end of the fiscal year. McKinney reported about $9.1 million, Grand Prairie about $6.5 million and Denton County about $6.5 million.

Those balances don't necessarily mean the money is going unused indefinitely. Cities and counties can accumulate HOT revenue for future eligible expenses, and the circumstances vary by community.

Frisco told NBC 5 it maintains approximately 25% of its annual HOT revenue as a reserve for fiscal health. The rest of its balance remains available for eligible tourism-related uses.

“These funds are restricted, meaning the City cannot use them for general expenses such as streets, police, fire, or other day-to-day operations,” the city said.

Denton County offers another example. The county only began collecting its 2% HOT in October 2023 and told NBC 5 it has not spent any of the revenue yet. How those dollars will ultimately be used will be determined by Commissioners Court within the limits of state law.

The growing balances help illustrate a question that surfaced repeatedly during Tuesday's hearing: whether the restrictions that protect HOT as a tourism funding source work equally well for every Texas community.

The restrictions drew particular concern from Sen. Kevin Sparks, who represents a large swath of West Texas. He pointed to rural communities where hotel stays may be driven largely by oil and gas workers rather than tourists, leaving local governments collecting HOT revenue that can’t generally be used for basic services such as roads, law enforcement or EMS.

“Those communities don't have revenue streams to have services,” Sparks said. “I just wonder whether or not we're disadvantaging those rural communities.”

Without more flexibility, Sparks argued, the disparity could contribute to the challenges already facing smaller communities.

“Our little towns are drying up, and we're not giving them any tools to try and fix any of that,” he said.

Sparks wasn't alone in calling for more flexibility.

Rick Thompson with the County Judges and Commissioners Association of Texas suggested allowing some HOT revenue to offset tourism-related demands on services such as EMS and law enforcement.

However, the hotel industry urged caution, arguing the tax was created specifically to generate more tourism. One witness said if communities are accumulating money they can't spend, they should consider if the tax is needed at all.

Short-term rentals and HOT

Another issue lawmakers could revisit is how hotel occupancy taxes are collected from short-term rentals.

Major short-term rental platforms generally collect and remit the 6% state hotel occupancy tax, according to the Comptroller’s Office, but local taxes are different.

In many communities, hosts are supposed to register with their city or county and eventually collect and remit the local tax themselves.

This distinction with HOT has been the subject of previous legislation. Texas Sen. Carol Alvarado, D-Houston, said she previously carried a bill that would have allowed the Comptroller’s Office to collect local HOT and return it to cities. Another effort from Texas Sen. César Blanco last session also failed to advance in the House.

The Texas Hotel & Lodging Association opposed parts of previous proposals, but general counsel Justin Bragiel told senators Tuesday the industry supports automating local tax collection for bookings made through short-term rental platforms and has continued working with other stakeholders since the last legislative session.

“We really want to find a solution here and work together,” Bragiel said.

Another hotel-related tax tool is helping finance Dallas’ convention center

Lawmakers separately examined project financing zones, or PFZs, another financing mechanism tied in part to hotel activity. Unlike local HOT, PFZs involve state tax revenue.

Eligible cities can establish a zone around certain major projects, including convention centers and arenas. For 30 years, growth above an established base year in state hotel occupancy, sales and mixed-beverage tax revenue generated by hotels within the zone can be returned to the city.

Dallas established a PFZ around the Kay Bailey Hutchison Convention Center as part of the financing for its multibillion-dollar redevelopment.

On Tuesday, Dallas officials provided their own update on that financing. Convention and Event Services Director Rosa Fleming told the City Council’s Finance Committee that Dallas has collected $219 million through the PFZ so far.

When the zone was established, Fleming said the city initially estimated collections of about $15 million annually.

“The collections are actually almost triple annually,” Fleming said.

Those collections could continue growing. Dallas officials said 21 of 39 hotels currently under development in the area are within the PFZ, with most expected to come online between 2027 and 2030.

The PFZ is one of several revenue streams Dallas plans to use to support the convention center project. City financial advisers said regular local HOT, a separate venue-related hotel tax and PFZ revenue together are expected to provide more than $100 million a year available for debt service.

The performance of Dallas’ zone also illustrates one of the questions raised by lawmakers Tuesday: how much of the growth captured by a PFZ is actually created by the project?

The Comptroller’s revenue estimating division told senators Dallas’ base year was 2020, when the COVID-19 pandemic sharply depressed hotel activity.

“Lucky for them was 2020, and this was a COVID year,” Deanna Melnick, the Comptroller’s director of revenue estimating and budget position, said while explaining Dallas’ baseline. “As you can imagine, our hotel tax was significantly suppressed.”

The Comptroller calculates how much state revenue is expected to be redirected through a PFZ but does not currently perform a standardized analysis of the broader economic return generated by the project.

Melnick described the direct fiscal impact from the state’s perspective as “revenue foregone,” while noting that the analysis does not include additional business activity that a project could generate.

That distinction caught the attention of Committee Chair Sen. Angela Paxton, who questioned how lawmakers can compare claims about the economic benefits of projects when proponents may use different methods to calculate them.

“When I hear someone talk about the economic impact, I’m also always thinking, consider the source,” Paxton said.

Paxton suggested Texas could benefit from a uniform method of projecting economic impact, similar to the standardized fiscal notes prepared for legislation, giving lawmakers what she called an “apples-to-apples” comparison.

Even the hotel industry acknowledged a gap in the information currently available.

“I don't feel like we have enough information available to really judge the success of these programs long term,” Bragiel said, suggesting future reporting could examine tax collections alongside employment, development and other economic measures.

The Comptroller’s Office said $312 million in state hotel, sales and mixed-beverage tax revenue has been transferred to project financing zones through fiscal year 2026.

The Legislature could also consider requiring cities to return for approval before creating additional PFZs. Current law does not expressly prohibit an eligible city from establishing more than one.

That question already has a North Texas test case. Fort Worth recently designated a second project financing zone, which the Comptroller’s Office said would make it the first Texas city with multiple PFZ projects once the new zone is operational.

Tuesday’s hearing was part of the Senate Economic Development Committee’s work ahead of the 2027 legislative session. No changes were made Tuesday, but lawmakers are studying possible recommendations involving local HOT collection and reporting, allowable uses, measurements of economic return and greater state oversight of project financing zones.

No changes were made Tuesday. The hearing is part of the Senate Economic Development Committee’s work ahead of the 2027 legislative session, when lawmakers could consider changes to how local hotel taxes are collected, reported and spent, along with new oversight and reporting requirements for project financing zones.