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Business
Review
Federal Reserve Bank of Philadelphia
September • O ctober 1996
Taxes, Homeownership, and
The Allocation of Residential
Real Estate Risks
Satyajit Chatterjee




ISSN 0007-7011

Business
Review
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SEPTEMBER/OCTOBER 1996
TAXES, HOMEOWNERSHIP,
AND THE ALLOCATION OF
RESIDENTIAL REAL ESTATE RISKS
Satyajit Chatterjee
Home equity is the predominant form of
savings for most Americans because it
helps them save on taxes. However,
homeownership also determines how the
risks of fluctuations in the value of resi­
dential real estate are borne. In this article,
Satyajit Chatterjee looks at how the tax
benefit of homeownership has moved
households toward undiversified invest­
ments in risky residential real estate by
making it costly for them to rent their
homes. He also points out the often over­
looked risk-allocation consequences of
proposed changes in the U.S. tax code.
THE TRAVEL MARKET
IN THE UNITED STATES
AND THE THIRD DISTRICT
Timothy Schiller
How much economic activity does travel
generate? How many jobs does the travel
industry create? And how do the Third
District states—Pennsylvania, New Jersey,
and D elaw are— stack up in term s of
travel-related spending? Tim Schiller takes
a look at these questions and discusses the
importance of travel and tourism to the
local and national economy.

FEDERAL RESERVE BANK OF PHILADELPHIA

Taxes, Homeownership, and
The Allocation of Residential
Real Estate Risks
Satyajit Chatterjee*

T

X he saving habits of A m ericans have
aroused a great deal of interest in recent years.
While attention has focused mostly on how
much people save (it is commonly thought that
the typical American saves too little), the form
in which households save is perhaps just as im­
portant. In fact, Americans use a large fraction
of their savings to buy houses.

*Satyajit Chatterjee is a senior economist and research
advisor in the Research Department of the Philadelphia
Fed.




In a recent study, Arthur Kennickell and
Martha Starr-McCluer reported that, in 1992,
the median holdings of financial assets such as
checking deposits, savings accounts, bonds,
CDs, mutual funds, life insurance, and stocks
were $24,000 among homeowners. In contrast,
the median value of a primary residence among
homeowners was nearly $82,000, and the me­
dian value of their total debt (including mort­
gages and home equity loans) was only $38,000.
C learly, a large chunk of the typical
homeowner's lifetime savings is tied up in the
family house. Since 64 percent of American
3

BUSINESS REVIEW

households are homeowners, the importance of
home equity to household assets is beyond
doubt.
Of course, it is well understood that the U.S.
tax code encourages homeownership. For in­
stance, experts agree that the reduction in tax
liability made possible by homeownership is
the main reason for the predominance of home
equity in household assets.1 What is perhaps
less well understood is that, by encouraging
homeownership, the tax code plays an impor­
tant role in determining who bears the risk of
fluctuations in the value of residential real es­
tate.
Although the risk-allocation consequences of
homeownership (and by implication of the U.S.
tax code) rarely get mentioned in popular dis­
cussions and policy debates, they deserve to be
better understood and appreciated for several
reasons. First, the risks of owning residential
real estate are significant, and the issue of who
bears these risks, and why, is an intrinsically
important one. Second, the U.S. housing stock
is very large, and because the tax code affects
the way residential real estate risks are borne,
it exerts a significant influence on economic
welfare.2 Finally, proposals to change the tax
code with respect to housing appear frequently,
and a full understanding of such proposals re­
quires an understanding of their consequences.
THE TAX ADVANTAGES
OF HOMEOWNERSHIP
To understand the effect of the tax code on
the allocation of residential real estate risks, it's
essential to understand the manner in which

^See, for instance, the articles by David Laidler and
Harvey Rosen.
2In 1989, the total value of private residential capital
stock was about 80 percent of all private nonresidential
capital stock in the United States. See tables A6, on page
213, and A9, on page 276, in the publication by the U.S.
Department of Commerce.


4


SEPTEMBER/OCTOBER 1996

the U.S. tax code encourages homeownership.
Most people regard the deductibility of mort­
gage-interest payments as homeownership's
main tax advantage. In a sense, this is correct,
but the fundamental reason underlying the tax
advantage goes deeper than that. Indeed,
houses can serve as a tax shelter even without
the deductibility of m ortgage-interest pay­
ments. Let's see why.
Housing services—shelter and heat, for ex­
ample—could be had by renting. Therefore, to
understand why homeownership has a tax ad­
vantage, we need to compare the tax liability
of a household that moves from renting to own­
ing. Suppose a household is currently paying
an annual rent of $10,000. Suppose further that
it can purchase the house for $100,000 using its
own funds and that these funds are currently
invested in financial assets earning a market
interest rate of 10 percent a year. In addition,
the household's income tax rate is 30 percent.
If this household liquidated its financial invest­
ment and bought the house, it would save
$10,000 in rent each year, but it would lose a
before-tax interest income of $10,000 (10 per­
cent of $100,000). However, since $3000 of this
$10,000 would be lost to taxes anyway (30 per­
cent of $10,000), the actual loss in after-tax in­
terest income would be only $7000. Thus, the
household would save $3000 by owning the
house, even though there is no mortgage inter­
est to deduct.3
What explains this tax advantage of owner­
ship? When the household buys the house, it
effectively becomes its own landlord. Thus,
imagine that the household continues to pay
rent, but now, in its capacity as landlord, it is

3The example supposes that regardless of whether the
household rents or owns, its income exceeds the standard
deduction allowed for federal taxes. It also supposes that
the household opts for the standard deduction in either
case. Since there is no mortgage interest to deduct, and since
state and local taxes alone usually do not make itemiza­
tion worthwhile, this assumption is reasonable.

FEDERAL RESERVE BANK OF PHILADELPHIA

Taxes, Homeownership, and the Allocation o f Residential Real Estate Risks

the recipient of that rent as well. While the
household's expenses remain unchanged (it is
still paying the $10,000 in rent), it is now the
recipient of $10,000 of rental income. Against
this additional income, the household forgoes
a before-tax interest income of $10,000 or an
after-tax interest income of $7000. The source
of the gain should now be apparent: when the
household purchases the house, it replaces
$10,000 of interest income on which it paid tax
with an equivalent amount in rental income on
which it is not required to pay tax. Thus, its tax
payments are reduced $3000.
The crux of the matter, then, is what counts
as income for personal income tax purposes.
Generally speaking, the IRS counts as personal
income only those funds households receive
from external sources, including payment for
labor or interest and dividends. What matters
for household decisions, however, is not just
income from external sources but full income,
which includes what the household implicitly
earns (and spends) when its labor and assets
are used within the household. Since implicit
rental income is tax-exempt, it gives households
an incentive to convert explicit income (from
financial assets) into implicit income by own­
ing rather than renting a house. The higher the
household's tax rate on explicit income, the
greater is its incentive to own rather than rent.
The Role of Deductibility of Mortgage In­
terest. The above example did not involve a
mortgage. Yet, the most often cited benefit of
homeownership is the deductibility of mort­
gage-interest payments. Where does this advan­
tage fit in?
If mortgage interest is not deductible, house­
holds that need to borrow money to buy a house
would be unable to exploit the tax advantage
as effectively as those who don't borrow. To take
an extreme case, consider a household that bor­
rows the entire purchase price of $100,000 at a
market interest rate of 10 percent. In the first
year following the purchase, the household will
have an interest liability of $10,000 to match the



Satyajit Chatterjee

implicit rental income of $10,000 and will not
gain financially from ownership. However, as
the household pays down its debt (i.e., accu­
mulates equity), the implicit rental income will
exceed the interest liability on the remaining
debt, and homeownership will allow the house­
hold to save on taxes. The tax savings increase
as the m ortgage debt declines: borrowing
households would have to wait until they own
their property free and clear before they could
enjoy the same tax advantages as households
that buy their property outright.
The deduction for mortgage interest puts
these households on a more even footing. Now,
the borrowing household can deduct $10,000
from its taxable income in the first year of the
purchase, leaving it with the same taxable in­
come as the household that bought its property
outright. In later years, the tax deductibility
from mortgage interest would of course fall, but
there will be a corresponding rise in the tax ben­
efits from owning an increasing portion of an
asset that generates tax-exempt implicit income.
Thus, allowing a deduction for mortgage inter­
est gives borrowing households roughly the
same access to the tax advantages of implicit
rental income as households that own their
houses outright.4*
Do Tax Benefits Get Capitalized in House
Prices? One objection to the argument that
owner-occupancy carries a tax advantage is that
competition among potential owner-occupants
ought to raise house prices until households
become indifferent between renting or owning.
In other words, the tax benefit from owner-oc­
cupancy should get capitalized in the house
price.

4The tax liabilities of these households won't be identi­
cal because the borrowing household must glue up its stan­
dard deduction to claim the mortgage-interest deduction
whereas the household that purchases its property outright
can "deduct" $10,000 from its taxable income without giv­
ing up the standard deduction.

5

BUSINESS REVIEW

Tax advantages get "capitalized" in the value
of houses in the sense that the value of owneroccupied housing is higher because of them.
Still, most households will prefer owner-occu­
pancy over renting because the rent on these
houses also increases with the rise in their mar­
ket value. This happens because landlords, who
have the option of investing their funds in fi­
nancial assets, would be willing to hold these
houses as rental property only if the rent is high
enough to match the interest income forgone.
Put differently, the annual rent on a house can­
not stray too far from the product of the house
price and the interest rate on financial assets.
As long as this is the case, households that rent
such houses would lower their taxes by becom­
ing owner-occupants.
However, some exceptions arise because the
U.S. tax code allows landlords (but not owneroccupants) to reduce their taxable income by
an amount that reflects the depreciation on their
rental properties.5 For wealthy landlords fac­
ing a high income-tax rate, this depreciation
allowance can be quite valuable. Thus, they may
be willing to bid more for rental property than
the amount of rent charged would justify. Fur­
thermore, if the potential owner-occupants of
a house are families with low income-tax rates,
the tax benefits accruing to potential owneroccupants of the house may be less than the tax
benefits accruing to wealthy landlords who rent
it out. In this case, the price of a house will, in
effect, be determined by landlords competing
to capture tax benefits and will exceed any price
that potential owner-occupants may be willing
to pay. Thus, households that rent such houses

SEPTEMBER/OCTOBER 1996

may actually be better off renting than owning.67
Are tax benefits capitalized in house prices?
To some extent, but not fully for all types of
housing.
HOMEOWNERSHIP AND THE
ALLOCATION OF RESIDENTIAL
REAL ESTATE RISKS
Like the value of any other useful asset, the
value of houses fluctuates over time. Indeed,
the record shows that house prices are quite
volatile (see the Table). For instance, real house
prices in Newark, New Jersey, rose 4.1 percent,
on average, between 1977 and 19807 Then, af­
ter barely rising between 1980 and 1983, they
shot up 15.5 percent between 1983 and 1987.
Finally, between 1987 and 1991, they declined
4 percent.
Such volatility makes it clear that although
houses provide com fort and shelter,
homeownership brings with it substantial fi­
nancial risks. It also means that by encourag­
ing homeownership the tax code partly deter­
mines who bears these financial risks. To see
this more clearly, note that a home purchase
really involves two d istin ct tran saction s
bundled into one: the purchase of a house and
the purchase of the service benefits (comfort and
shelter) that flow from the house.8 In the ab­
sence of a tax advantage to owner-occupants,
the market would tend to "unbundle" these

6However, on average, an American household's esti­
mated tax savings from owner-occupancy is about 15 per­
cent of the value of its house. See Mills and Hamilton, p.
232.
7That is, house prices in Newark rose 4.1 percent faster
than the prices of other items households consumed.

5In their book, Edwin Mills and Bruce Hamilton explain:
"Annual depreciation for tax purposes is straight line over
27.5 years. That means that 100 (1/27.5) = 3.6 percent of
the basis can be subtracted from rents each year for 27.5
years in computing the owner's yearly taxable income. The
basis on which depreciation is calculated is purchase price
plus transactions costs at time of purchase."


6


8The easiest way to grasp the distinction is to see that
it's possible to do one transaction without doing the other:
someone wanting to purchase only the house (and not the
service benefits) could buy the house and rent it out to
someone else and someone wanting to purchase only the
service benefits could rent the house.

FEDERAL RESERVE BANK OF PHILADELPHIA

Taxes, Homeowner ship, and the Allocation o f Residential Real Estate Risks

Satyajit Chatterjee

TABLE

Percentage Real House Price Appreciation
Over Different Periods

Boston, MA
Naussau-Suffolk, NY
Newark, NJ
Atlanta, GA
Baltimore, MD
Charlotte, NC
Richmond, VA
Washington, D.C.
Chicago, IL
Cincinnati, OH
Cleveland, OH
Columbus, OH
Detroit, MI
Kansas City, MO & KS
Louisville, KY
Minneapolis, MN
St. Louis, MO
Dallas, TX
Houston, TX
Oakland, CA
Sacramento, CA
San Francisco, CA
San Jose, CA
Santa Rosa, CA
Seattle, WA
Stockton, CA
Anaheim, CA
Los Angeles, CA
RiversideSanta Barbara, CA
San Diego, CA

Average

1977-80

1980-83

1983-87

4.7
0.6
4.1
1.7
1.1
4.6
0.4
3.3
3
5.6
2
3.2
10.5
7.3
4
10.4
8.2
11.4
6.2
7.7
9.6
7.4
7.1
8.7
13.2
6.8
5.8
9.1

4.8
10.3
0.8
-2.5
-2.2
-2.4
-2.7
-2.1
-4.9
-5.3
-6.4
-4
-7.1
-4
-3.8
-3.1
-4.3
-0.8
-1.1
-2.6
-3.5
-2.3
-1.9
-2.8
-5.5
-2.2
-0.7
-2.3

7.2
7.4

-3
-3.9
-2.4

6.1

1987-91

1977-91

16.1
15
15.5
2.7
4.2
3.2
1.8
3.5
3.9
1.6
1.5
2
3.8
0.8
0.8
1.6
2.7
-0.2
-10
4
1.4
5
4.2
2.1
1.9
1.7
1.3
3.1

-5.5
-4
-4
-2.2
3.5
0.3
0.7
3.6
3.1
1.8
2.4
1.1
2.8
-2.8
0.2

4.8
5.2
4.1

-1

0.2
-0.5
0.2
1.2
-0.7
-0.3
0.7

-1.8
-7
-2.1
6.4
8.5
7.7
7.1
9.6
6.8
7.1
6.4
7.9

-0.8
-3
4
4
4.7
4.3
4.5
3.9
3.4
3.3
4.5

0.7
2.4
3.3

6
5.7
2.3

2.7
3
2

-

0.1
1.9
1.4
0.2
2.3

1

0.1

Figures for each city are taken from Table 2 in the paper by Jesse Abraham and Patric
Hendershott. The rate in each column is the growth in average house prices from
the middle of the beginning year for that column to the middle of the ending year
for that column. Nominal appreciation rates in house prices were converted into
real terms by subtracting the growth in local CPI, net of shelter costs. The last row
reports the mean for each column.




distinct transactions. The
household that most val­
ues the services of a house
will rent it from those best
able to bear the financial
risks of ownership. How­
ever, the tax code throws a
monkey wrench into the
works by allowing many
households to reduce their
tax liability if they own
rather than rent. (Recall
how, in the basic example,
the household paid $3000
in additional taxes if it
rented rather than owned
its house.) Thus, the tax
code leads some house­
holds that might otherwise
rent into owner-occupancy
and the financial risks that
attend it.
The record of houseprice m ovem ents also
shows considerable dis­
parity in the performance
of residential real estate
across cities. For instance,
appreciation in real house
prices between 1977 and
1991 ranged from an aver­
age of 5.2 p ercent for
N assau-Suffolk on Long
Island to -3 percent for
Houston. Generally speak­
ing, the different degrees of
ap p reciatio n in house
prices in these cities reflect
the pace of their economic
growth. For instance, Jesse
A braham and Patric
Hendershott found that
real income and employ­
ment growth helped ex­
plain the different degrees
7

BUSINESS REVIEW

of real house-price appreciation across cities.
Since economic growth is unlikely to be even
across cities, sharing real estate risks has po­
tential gains. If homeowners who experience
unexpected decreases in the value of their
houses could be compensated by those experi­
encing unexpected increases, the financial po­
sition of all homeowners would be more stable.
But the practical problems in providing such
insurance preclude such arrangements.9 How­
ever, insuring owners against possible declines
in the value of their homes is not the only way
for households to share the risks of residential
real estate. An alternative arrangement is one
in which households purchase portions of
houses located in different places. By having
their "home equity" spread over many houses
in different locations, households could share
the risks of unpredictable movements in price.
An unexpected decrease in real estate values in
one location may be offset by an unexpected
increase in another. Of course, this sort of risk­
sharing is precisely what the equity market of­
fers to its participants. By using their savings
to buy small amounts of stock in many differ­
ent companies, households can make the return
on their financial investment more stable.
Could the equity market be used to diver­
sify, i.e., share, the risks of residential real es­
tate? The opportunity for diversified invest­
ment in real estate exists in the form of real es­
tate investment trusts (REITs). These businesses
raise funds in the stock market (and borrow
from banks) to invest in real estate nationwide.
To date, REITs have focused on industrial and
commercial properties, but a few invest prima­
rily in apartment complexes. REITs (and simi­
lar businesses) could potentially offer an op­
portunity for diversified investment in single­
family homes provided households find it eco­

9For a discussion of the issues involved in directly in­
suring house values, see the article by Robert Shiller and
Allan Weiss.


8


SEPTEMBER/OCTOBER1996

nomical to rent these homes on a long-term
basis. Unfortunately, the tax code chokes off this
channel for diversifying residential real estate
risks by making it more costly for many fami­
lies to rent single-family homes than to buy
them.
TAX POLICIES AND THE ALLOCATION
OF RESIDENTIAL REAL ESTATE RISKS
Proposals for changing the U.S. tax code
come up frequently, and sometimes include
suggestions for altering the tax treatment of
owner-occupied housing. As stated earlier, the
debates surrounding such proposals rarely (if
ever) m ention their risk-allocation conse­
quences. Furthermore, changes that don't di­
rectly alter the tax treatment of owner-occupied
housing but that do alter the tax treatment of
income from financial assets could also affect
the allocation of residential real estate risks. This
section points out the possible risk-allocation
consequences of two proposals for changing the
tax code.
A change often proposed is the elimination
of the mortgage-interest deduction. Such a
change would certainly reduce the subsidy to
owner-occupied housing (which is usually the
reason given in support of a change), but it
would have an ambiguous effect on the alloca­
tion of residential real estate risk. On the one
hand, it would encourage the rental housing
market—a step that would improve the alloca­
tion and diversification of residential real es­
tate risks. On the other hand, households that
continue to own their own homes would have
a tax incentive to put even more of their sav­
ings into their houses. Owner-occupants would
take on less leverage, but as a result, their asset
portfolios would become even less diversified.
To see why, let's go back to our example in
which a household is contemplating the pur­
chase of a $100,000 house.
This time, suppose that the household has
$20,000 in personal funds currently invested in
financial assets that earn a market interest rate
FEDERAL RESERVE BANK OF PHILADELPHIA

Taxes, Homeowner ship, and the Allocation o f Residential Real Estate Risks

of 10 percent. As before, the household's income
tax rate is 30 percent. The question is, how much
of its personal funds should the household com­
mit? If mortgage interest is tax-deductible, com­
mitting $20,000 versus any lower figure has no
tax advantage. For instance, if the household
were to commit only $10,000, it would retain
$10,000 of financial assets on which it would
earn an interest income of $1000 a year. Because
its mortgage will be $10,000 higher, it would
also have an added mortgage-interest liability
of $1000. But if mortgage interest is deductible,
the deduction will balance the additional in­
come, and the household's taxable income will
not change. Thus, committing $20,000 versus
$10,000 w ill m ake no d ifferen ce to the
household's taxes.
In contrast, if mortgage interest is not taxdeductible, there is a clear tax advantage to com­
mitting all $20,000. If the household commit­
ted only $10,000, it would earn interest income
of $1000 but have no offsetting deduction, and
its taxable income would be higher by $1000.
Thus, for fam ilies who continu e to be
homeowners, eliminating the mortgage-inter­
est deduction will increase the desirability of
tying up assets in home equity and thereby
make the composition of their assets less di­
versified.
Another proposed change is to exempt all
capital income— that is, interest, dividends, and
capital gains—from personal income tax. Al­
though aimed at spurring more saving, the pro­
posal would nonetheless affect the housing
market. Let's go back to the initial example of
a household contemplating using its own funds
to purchase a $100,000 house. If capital income
is tax-exempt, the household's taxable income
will not fall when its interest income declines
by $10,000, so its tax liability will not decline
either. Therefore, an outright purchase of a
house will not generate any tax benefits. Alter­
natively, if this household borrows $100,000 to
buy the house, its taxable income will decline
by $10,000 in the first year of the purchase, since



Satyajit Chatterjee

it can still deduct the interest on its mortgage.
In later years, as the tax deductibility from
mortgage interest falls, the tax benefits from
ownership will fall as well, and there will be
no tax benefits at all when the mortgage is com­
pletely paid off.
Thus, making capital income exempt from
personal income tax but allowing households
to deduct mortgage interest will take away
some of the tax benefits of homeowner ship.
H ow ever, it probably w o n 't affect
hom eow nership rates very much because
households that have paid off a good portion
of their original mortgage can always take out
a home-equity loan to recapture the tax ben­
efits of mortgage-interest deductions. Therefore,
this change in the tax code is not likely to en­
courage the rental market in housing. However,
to the extent that it encourages households to
have less home equity and larger investments
in financial assets like mutual funds, it might
lead to a more diversified composition of house­
hold assets.10
It is worth noting that combining the pro­
posals—making capital income exempt from
personal income tax and simultaneously elimi­
nating the tax-deductibility of mortgage inter­
est—would eliminate the tax advantage of own­
ing rather than renting one's house. In this case,
the tax code would no longer stand in the way
of a larger rental market for single-fam ily
houses; that would be a boon for the allocation
of residential real estate risks. The combined tax
change would, however, do more than elimi­
nate the tax code's bias in favor of owner-occu­
pancy; it would also make investing in hous­
ing relatively less attractive, in comparison to
investing in financial assets, than is the case
today. Over time, adopting both proposals
would tend to reduce the share of their savings
that Americans put into housing.

10Depending on which financial assets the household
buys, its risk could rise or fall.

9

BUSINESS REVIEW

SEPTEMBER/OCTOBER1996

CONCLUSION
Home equity is an important vehicle through
which households save. This particular form of
saving predominates in the United States be­
cause it permits households to reduce their fed­
eral income-tax liabilities. This article has high­
lighted one consequence of homeownership,
and, by implication, of the tax code, that's of­
ten overlooked, namely, its effect on the alloca­
tion of residential real estate risks.
If the tax code didn't make homeownership
so attractive, households would be less willing
to invest such a large fraction of their lifetime
savings in their own houses. Instead, houses
would more likely be owned by individuals and
businesses best suited to bearing the consider­
able risks of residential real estate. Furthermore,
businesses that offered households the oppor­
tunity to invest in more diversified, and there­
fore less risky, portfolios of residential real es­
tate would crop up.
Nevertheless, some proposed changes in tax

policy that aim to curtail the tax benefits of
homeownership may have ambiguous effects
on the allocation of residential real estate risks.
For instance, the proposal to eliminate the de­
ductibility of m ortgage-interest paym ents
might stimulate the rental market in housing,
which would be good for risk allocation, but it
would also encourage people who choose to be
homeowners to have smaller mortgages and
own more equity in their homes, leading them
to hold less diversified portfolios. Furthermore,
proposed changes in tax policy that are directed
at other issues may have consequences for the
allocation of residential real estate risks. For
example, the proposal to exempt capital income
from personal income tax might encourage cur­
rent owner-occupants to take out more homeequity loans and thereby reduce the level of
equity in their own homes; that may lead to
greater diversification by allowing them to hold
other types of assets.

REFERENCES
Abraham, Jesse M., and Patric H. Hendershott, "Patterns and Determinants of Metropolitan House Prices,
1977-91," National Bureau of Economic Research Working Paper 4196, October 1992.
Kennickell, Arthur B., and Martha Starr-McCluer. "Changes in Family Finances from 1989 to 1992: Evidence
from the Survey of Consumer Finances," Federal Reserve Bulletin, October 1994, tables 5-B, 7-B, and 10-B.
Laidler, David. "Income Tax Incentives for Owner-Occupied Housing," in A.C. Harberger and M.J. Bailey,
eds., The Taxation o f Income from Capital. Washington: Brookings Institution, 1969.
Mills, Edwin S., and Bruce W. Hamilton. Urban Economics. New York: HarperCollins, 1994.
Rosen, Harvey. "Housing Decisions and U.S. Income: An Econometric Analysis," Journal o f Public Econom­
ics, February 1979,41, pp. 465-73.
Shiller, Robert, and Allan Weiss. "Home Equity Insurance," National Bureau of Economic Research Work­
ing Paper 4830, August 1994.
U.S. Department of Commerce. Fixed Reproducible Tangible Wealth in the United States, 1925-1989. Washing­
ton, D.C., Government Printing Office, 1993.
Digitized for
10 FRASER


FEDERAL RESERVE BANK OF PHILADELPHIA

The Travel Market in the
United States and the Third District
Timothy Schiller*

R

esidents of the U.S. took more than 1 bil­
lion trips in 1994, and, that same year, almost
46 million people traveled to the United States
from other countries. What motivates these
trips? Where do travelers come from, and what
are their destinations? How much economic
activity does travel generate? How does travelrelated spending compare to overall spending,
and how many jobs are created because people
take trips? Finally, how do the Third District
states (Pennsylvania, New Jersey, and Dela­
ware) stack up in terms of travel-related spend­
ing?
*Tim Schiller is an economic analyst in the Research De­
partment of the Philadelphia Fed.




THE WHERE AND WHY OF TRAVEL
Travel is important not just for travelers but
also for the residents of the areas they visit. State
and local governments recognize the economic
impact of both leisure and business travel, and
they devote substantial resources to attracting
out-of-area travelers—and their money. Suc­
cessful public- and private-sector marketing
plans are developed on the basis of informa­
tion that identifies where travelers come from,
the kind of travel experiences they are seeking,
and the amount of money they are likely to
spend on their trips.
The success of any marketing plan is mea­
sured by how much additional income is gen­
erated for each dollar spent on marketing. State
li

BUSINESS REVIEW

and local governments and private-sector tour­
ist enterprises use surveys to measure aware­
ness of their advertising and to gauge visitors'
use of promotional arrangements, such as spe­
cial pricing for group and package tours. Pri­
vate-sector tourist firms, hotels, and theme
parks compare the added profit they make to
the costs of their advertising and promotional
programs. They adjust their marketing to con­
centrate on the people most likely to visit their
facilities, and they develop new features to at­
tract additional visitors. State and local gov­
ernments compare their travel marketing ex­
penses to revenues obtained from travelers di­
rectly through taxes on lodging and transpor­
tation services and indirectly through sales
taxes collected from retailers and through wage
taxes collected from additional employees in
tourist areas. Like private-sector firms, state
and local governments evaluate their market­
ing programs with the objective of obtaining
the most revenue for every promotion dollar
spent.
Who's Going Where? Americans travel
widely around the country, and nonresidents,
who take about 4 percent of all trips within the
country, make up an increasing share of travel­
ers in the United States. Travel by U.S. residents
increased about 11 percent from 1984 to 1994,
but over the same period, the number of for­
eign visitors to the United States increased six­
fold. Over half of the visitors from foreign coun­
tries are our neighbors from Canada and
Mexico. Travelers from Japan account for about
9 percent of foreign visitors, those from the
United Kingdom 7 percent, and those from
Germany 4 percent.1 The U.S. Travel and Tour­

]The top foreign nations in numbers of visitors are not
necessarily the top nations in travel spending in the United
States. Visitors from more distant countries are more likely
to purchase transportation from American-based airlines
and to stay longer in this country, thus increasing their
spending. The top nations for travel spending in the United
States are Japan, the United Kingdom, and Canada.




SEPTEMBER/OCTOBER1996

ism Administration forecast that, in coming
years, these five countries will continue to sup­
ply large numbers of travelers to the United
States, but the number of visitors coming to our
shores from Asian countries other than Japan
and from South American countries will grow
faster as the economies of these nations grow
and their citizens' incomes increase.
Ju st as m ost foreign visitors to the United
States come from neighboring countries, most
visitors to the Third District come from nearby
states. A compact geographic area in the middle
of a densely populated part of the nation, the
three-state region can attract a large number of
visitors from neighboring states. In fact, sur­
veys indicate that half or more of the people
traveling to Delaware come from contiguous
states and around one-third of the visitors to
New Jersey come from states on its borders.2
Although more distant states provide far fewer
visitors, some states supply significant num­
bers: Virginia and California for Delaware, and
Ohio and Florida for New Jersey.
Several reasons may explain the pattern of
visitors. Travel from nearby locations is less
expensive, and advertising by state tourism
departments tends to be concentrated in nearby
states. Furthermore, travel to Third District
states from Florida (and some other southern
states) could be the result of visits by family and
friends who formerly lived in the area, since
Census Bureau studies indicate that southern
states are popular destinations for people mov­
ing out of the Northeast.
For all types of travel within the country (for
business and pleasure, by U.S. residents and
nonresidents), the average distance is 870 miles
and includes four overnight stays. Most trips
are taken by car. For many years, travel by auto
has accounted for around 75 percent of all trips,
airlines for 20 percent, and Amtrak, bus lines,
and cruise ships for the rest.
Pennsylvania has not conducted recent surveys of tour­
ism.

FEDERAL RESERVE BANK OF PHILADELPHIA

The Travel Market in the United States and the Third District

Why Do People Travel? Most trips
can be categorized as either recre­
ational/ vacation or business trips. Just
over one-third of the trips Americans
take each year are to visit friends and
relatives, one-third are for entertain­
ment and recreation, and one-fourth
are for business (including conventions
and other meetings). Personal and
other reasons account for the rest (Fig­
ure 1). This breakdown has remained
fairly constant over the years.
M ost recreational and vacation
trips are made by family groups, and
the most popular destinations are sites
affording recreational and cultural op­
portunities. Many families include
several types of locations in their va­
cation itineraries (Figure 2).
Ocean beach resorts have been the
most popular destinations for some
time. Each year, about one-half of all
family vacations are spent at ocean
beach resorts. Beaches top the list of
most frequently visited places in New
Jersey and Delaware. More than half
of the people who visit southern Dela­
ware do so primarily to stay at one of
the beach resorts from Cape Henlopen
to Fenwick Island, and half of the
people who make overnight visits to
New Jersey seek out the state's shore
resorts.
Atlantic City's casinos are an impor­
tant factor in the large percentage of
visitors who head for the South Jersey
shore. More than 30 million people
visit Atlantic City each year; however,
only 15 percent of these people stay for
one or more nights. In fact, going to
the Atlantic City casinos is the second
most frequently cited reason for trips
to New Jersey by out-of-state residents.
(Visiting friends and relatives is the
first.)



Timothy Schiller

FIGURE 1

Main Purpose of Trip
36.8%
Visit Friends
& Relatives

5.1%
Personal & Other

32.5%
Entertainment
& Recreation
Source: U.S. Travel Data Center/Travel Industry Associa­
tion of America

FIGURE 2

Leading Destinations
For Family Vacations
Percent of families stopping at these sites
50 |---------------------------------------------------

Beaches

Sites

Parks

Resorts

Source: Better Homes and Gardens 1993 Travel Survey
13

BUSINESS REVIEW

And although Atlantic City casino earnings
have been on the rise and additional gaming
facilities are planned, competition for gambling
dollars has been increasing. Until New Jersey
legalized casino gambling for Atlantic City in
1976, casinos were legal only in Nevada. Since
then, eight more states have legalized gambling.
Industry analysts believe that individual gam­
ing companies and the localities where they
operate will have to exert more marketing ef­
forts just to retain their existing business. It
appears, however, that the expansion of legal­
ized gambling is slowing; no states have legal­
ized casino gambling since 1993.3
The popularity of ocean beach resorts as va­
cation destinations shows no signs of fading.
This should bolster the economies of resorts in
Delaware and New Jersey. However, the tradi­
tion of seasonal or long-term family rentals at
resorts of this type appears to be waning, and
tourist officials and others in the industry doubt
if long-term rentals will ever again be as com­
mon as they once were. Also, there appears to
be a growing trend that favors weekend trips
and "mini-vacations" within one-day's driving
distance of vacationers' homes. The Delaware
and New Jersey beaches are located advanta­
geously near large population centers for such
trips. This type of vacation trip is likely to
change the types of services in demand at beach
resorts, however. Shorter stays, for example,
may mean a shift from purchasing groceries to
having meals in restaurants.
While ocean beach resorts are the most popu­
lar vacation spots for families, approximately
29 percent stay at lake resorts for at least a part
of their vacations. Among the three states in the
District, Pennsylvania has the most lake resorts,
located across the state from the Pocono Moun­
tains in the east, which also offer popular ski

3Casino gambling has been introduced on some lands
owned corporately by Native-Americans, and Delaware le­
galized slot machines at racetracks in 1994.
4Data

Digitized for14
FRASER


SEPTEMBER/OCTOBER1996

resorts, to the Allegheny Mountains and other
areas in the west. While not as plentiful in New
Jersey, lakes in the northern part of the state
provide recreational opportunities that attract
visitors from the heavily populated northern
New Jersey-New York City area. Also in the
northern part of the state, where the Delaware
River forms the boundary with Pennsylvania,
the Delaware Water Gap National Recreation
Area provides boating and hiking opportuni­
ties enjoyed by millions of people each year.
Historic sites are growing in popularity as
destinations for pleasure trips: 40 percent of
families traveling on vacation stop at historic
sites. Several factors account for this increased
interest. First, such trips tend to be less expen­
sive than other types of vacations or pleasure
travel. Second, family travel has increased, and,
often, historic sites offer something of interest
to all family members. Third, vacationers, es­
pecially family groups, are more concerned
about adding educational opportunities to their
vacation plans.
Pennsylvania, New Jersey, and Delaware are
rich in historic sites. Pennsylvania has many
significant sites from all periods of American
history. The most famous is Independence
National Historical Park in Philadelphia, often
called the most historic square mile in America.
Many visitors go to Lancaster County to ob­
serve elements of Amish culture. In addition,
America's military history is preserved at Val­
ley Forge and at Presque Isle State Park, Com­
modore Perry's naval base in the War of 1812
and Pennsylvania's most visited state park.
And the only major engagement of the Civil
War to take place north of the Mason-Dixon
Line occurred at Gettysburg, Pennsylvania.
New Jersey abounds in historic sites of the
Revolutionary War; battlefields at Princeton,
Monmouth, and Trenton, and the Continental
Army encampment site at M orristown are
among the most famous. Other historic sites
also attract substantial numbers of visitors, in­
cluding Thomas Edison's laboratory in Menlo
FEDERAL RESERVE BANK OF PHILADELPHIA

The Travel Market in the United States and the Third District

Timothy Schiller

Park and the town of Cape May, a Registered
National Historic Landmark, with its many Vic­
torian homes.
American industrial history is prominently
represented in Delaware, primarily at the sites
of the Du Pont enterprises, the earliest of which
is preserved at Eleutherian Mills in the north­
ern part of the state. In addition, colonial his­
tory attracts many people to New Castle.
The historic sites that distinguish Pennsyl­
vania, New Jersey, and Delaware should con­
tinue to attract visitors, according to local tour­
ism officials. They expect the more famous sites
to remain prominent among leisure-travel des­
tinations, especially for travelers from outside
the immediate region. Visiting historic sites as

part of a family vacation is becoming a com­
mon practice, and analysts believe that historic
sites, in combination with other cultural attrac­
tions such as art museums, are becoming in­
creasingly important as focal points of vacation
and short-term leisure travel (see map).
Theme parks, a relatively recent addition to
the list of favorite vacation places, are now
destinations for nearly one-third of family va­
cations. Although not in the same league with
preeminent parks such as Disney World, theme
parks in the three-state area figure prominently
in the region's travel market. Six Flags/Great
Adventure in central New Jersey was one of the
earliest theme parks to open during the most
recent wave of park development, and it re-

Three-State Area Map

Presque Isle

.town

P liN iy sA L Y A h
Hershey
H arrisburg^

Valley Forge*
Philadelphia*

• Pittsburgh




Gettysburg •

Wilminj
lew Castle
Atlantic Ci

Cape May
ape Henlopen
ehoboth Beach
Fenwick Island

15

BUSINESS REVIEW

mains popular. A recent survey indicates that,
except for the beaches, it is the second mostvisited site in the state. In Pennsylvania,
Hershey Park and related attractions in the
town of Hershey have drawn visitors since the
park opened in 1907.
The growth in attendance at theme and
amusement parks is another trend that is ex­
pected to continue. Analysts in the tourist in­
dustry say that attractions such as Hershey
Park, Great Adventure, and Sesam e Place
should be able to post further gains in atten­
dance, especially if they continue to add new
and expanded features. Like the region's his­
toric sites, the major theme parks draw a sig­
nificant portion of their visitors from outside
the region, either as a main destination or a sec­
ondary stop.
Although recreation and vacation trips
dominate travel in the United States, business
trips make up a significant share. Combining
business and pleasure on a single trip is a grow­
ing trend. It is estimated that travelers use some
vacation time on one-fourth of all business trips,
and the frequency of combining business and
vacation travel has doubled since the mid1980s. Furthermore, on 20 percent of all busi­
ness trips, the business traveler is accompanied
by another member of his or her household.
C ities are frequent travel destinations,
though perhaps more often for business than
for pleasure trips. In Pennsylvania, New Jer­
sey, and Delaware, cities are often the destina­
tions of out-of-state visitors for both single-day
and overnight trips. According to surveys of
travelers to Delaware, Wilmington and Dover,
the state capital, are among the top five mostvisited places in the state. Surveys in New Jer­
sey indicate that cities in the northern part of
the state are among the top 10 most frequent
destinations, excluding the beach resorts. In
Pennsylvania, cities at opposite ends of the
state— Pittsburgh and Philadelphia— figure
prominently among destinations for both busi­
ness and pleasure trips.
Digitized for16
FRASER


SEPTEMBER/OCTOBER1996

The recent opening of the Pennsylvania Con­
vention Center in Philadelphia has highlighted
the city as a destination for business travelers.
Indeed, nearly 800,000 people visited the Penn­
sylvania Convention Center in its first three
years of operation, over 60,000 more than ini­
tially forecast. The center's economic impact is
likely to be significant. A study by the Penn­
sylvania Economy League estimates that spend­
ing in Philadelphia by visitors to the center will
grow to $275 million annually by the tenth year
of the center's operation (fiscal year 2004). This
spending is projected to sustain 4600 jobs and
provide annual tax revenues of $30 million each
to the city of Philadelphia and the state of Penn­
sylvania.
TRAVEL ADDS UP
Both the number of people traveling and the
money they spend on their trips have drawn
the notice of businesses and state and local gov­
ernments. Private companies and travel devel­
opment officials in the public sector are focused
on gaining some of this business for their firms
and regions. They know that personal and busi­
ness outlays for travel expenses are a signifi­
cant portion of total spending. (See Estimating
Travel Expenditures.) For the nation as a whole,
spending for travel and tourism amounted to
approximately $400 billion in 1992, accounting
for 9.2 percent of total consumption spending
and 6.3 percent of gross domestic product.4
Travel and tourism as an industry thus ranks
above agriculture, mining, or construction as a
component of GDP. The industry has been
growing both absolutely and as a share of GDP.

4Data from 1992 are used because that is the latest year for
which total output at the state level— gross state product—
is available for state-to-state and state-to-nation compari­
sons. In 1994, travel spending was estimated to be 5.7 per­
cent of gross domestic product and 8.4 percent of personal
consumption expenditures.

FEDERAL RESERVE BANK OF PHILADELPHIA

Timothy Schiller

The Travel Market in the United States and the Third District

From 1987 to 1992, travel spending increased
44 percent in current dollars, while GDP in­
creased only 32 percent.
The share that travel spending contributes
to gross state product (GSP) in the Third Dis­
trict falls below the national average, but the
amount of such spending is still significant
(Table). For Delaware, the share is 3.4 percent
of GSP ($0.8 billion), for Pennsylvania, 3.6 per­
cent ($9.6 billion), and for New Jersey, 4.7 per­
cent ($10.5 billion). Travel and tourism as an

industry ranks above agriculture and mining
in all three states and also above construction
in New Jersey. The states at the top of the list
when ranked by travel spending as a percent­
age of GSP tend to be those where a large por­
tion of visitors stay for several days and where
the tourist season is year-round, such as Florida,
Flawaii, and the southwestern states. Nevada's
place in the rankings can be attributed to these
factors as well as to its casinos.
While these data make the travel industry

TABLE

Domestic Travel Spending as a Percentage
of Gross State Product
State
Nevada
Hawaii
Florida
Montana
Vermont
Wyoming
New Mexico
District of
Columbia
Colorado
Arizona
Utah
South Carolina
Idaho
North Dakota
Maine
Arkansas
Tennessee
Oregon
Virginia
Georgia
California
Missouri
South Dakota
New Hampshire
Louisiana

Travel Spending

Rank

(as % of GSP) (millions of $) (in $ spent)
31.54
11610.8
6
17.66
5863.1
16
2
10.07
27060.8
8.79
1338.5
42
969.2
47
8.18
7.88
1039.2
46
7.77
2475
35
7.34
6.82
6.81
6.78
6.65
6.43
6.34
5.90
5.89
5.86
5.61
5.56
5.49
5.25
5.21
5.12
5.02
4.90

2967.9
5623.5
5045.7
2411.5
4645.1
1341.9
828
1422.1
2590.2
6384.9
3518.6
8558.5
8434
41397.7
5813.7
774.8
1280.7
4713.8

31
18
19
36
22
41
48
40
33
15
27
9
10
1
17
50
44
21

State
New Jersey
North Carolina
Mississippi
Texas
Alabama
Nebraska
Iowa
Kentucky
Illinois
Oklahoma
Massachusetts
West Virginia
Kansas
Alaska
Maryland
Washington
Wisconsin
New York
Minnesota
Pennsylvania
Delaware
Michigan
Ohio
Connecticut
Indiana
Rhode Island

Travel Spending
(as % of GSP) (millions of $)
4.70
10479.9
4.65
7417.1
2052.8
4.63
4.50
18767.3
3501.7
4.48
4.44
1654
4.44
2637.1
4.39
3316.2
4.34
12793.6
4.24
2549.9
4.18
6767.2
4 .17
1281.3
4.15
2328.5
1071.7
4.13
3.95
4588
3.91
4990.3
3.86
4230.3
18980.2
3.81
3.80
4188.5
9648.7
3.61
3.44
813.3
3.41
6975.9
8162.2
3.38
3275.7
3.31
3.29
4005.5
3.23
698

Rank
(in $ spent)
7
12
38
4
28
39
32
29
5
34
14
43
37
45
23
20
24
3
25
8
49
13
11
30
26
51

Source: Dollar amounts in Travel Spending column are from U. S. Travel Data Center/Travel Industry
Association
 of America.


17

BUSINESS REVIEW

appear less important in the Third District states
than in the nation, Pennsylvania and New Jer­
sey rank high among all states in terms of ab­
solute amounts of travel spending. The top
three states in travel spending—California,
Florida, and Texas— account for more than 25
percent of the national market, doubtless be­
cause of their large size and year-round attrac­
tions. Nevertheless, New Jersey, ranking sev­
enth in the nation for travel revenue, and Penn­
sylvania, ranking eighth, play important roles
in the nation's travel industry. Delaware's small
size is reflected in its ranking—49th.
These state-to-state comparisons are based
on overnight trips and trips of 100 miles or
more. For the three Third District states, sur­
veys indicate that a significant portion of travel
into these states is for day-trips of less than 100
miles. While spending for such trips is less than
that for overnight and long-distance trips, the
number of short trips to the District's states is
so large that a substantial amount of travel
spending is generated in this way. For example,
a survey conducted for New Jersey suggests
that day-trip and pass-through travelers add an
amount equal to 67 percent of the spending by
overnight visitors each year. Surveys conducted
in Delaware indicate that day visitors may be
responsible for up to 10 percent of all travel
spending in the southern part of the state and
about 40 percent in the northern part. This dif­
ference between south and north in Delaware
may be attributed to the existence of large
population centers (in Maryland, New Jersey,
and Pennsylvania) close to the many cultural
attractions of the Brandywine Valley in the
north, while beach resorts in the southern part
of the state attract proportionally more over­
night visitors.
How Do Travelers Spend Their Money?
U.S. residents spent more than $300 billion on
trips in 1992.5 Nationwide, the largest category
of expense within this total was food service
(25 percent of travel-related spending). The next
largest was public transportation (23 percent),



SEPTEMBER/OCTOBER 1996

followed by lodging (17 percent), auto trans­
portation expense (17 percent), entertainment
and recreation while on a trip (10 percent), and
general retail purchases while traveling (8 per­
cent). (See Figure 3.)
The spending pattern among travelers to the
Third District states differs somewhat from the
national average, especially in New Jersey.
Public transportation is the top category of ex­
penditure for travelers to Delaware and Penn­
sylvania. Such spending accounts for 29 per­
cent and 27 percent, respectively, of total travel
spending in these states. In New Jersey, enter­
tainment and recreation spending is by far the
largest category of travel expense (34 percent
of the total). This category includes casino win­
nings, the amount of money earned by casinos
from gamblers.6
Travel Spending Generates Jobs. Employ­
ment in the travel and tourism industry reflects
the industry's share of output. Nationwide,
employment in the industry is estimated to be
5.7 percent of total nonagricultural employ­
ment. From 1982 to 1992, travel-related jobs
increased 56.3 percent, twice the rate at which
total employment grew. According to recent
estimates (1993), around 35 percent of these jobs
are in food service, 20 percent in lodging, 16
percent in public transportation, and 15 percent
in entertainment and recreation. The break­
down is similar for Pennsylvania and Delaware.
In New Jersey, however, employment in the
entertainment and recreation sector accounts
for 46 percent of total travel-related employ­
ment. The presence of casinos in Atlantic City
boosts the absolute and relative magnitude of
entertainment spending in New Jersey and
raises employment in this sector above the na-

5This amount is for U.S. residents only. Detailed break­
downs of spending by nonresidents are not available.
6In only one other state— Nevada— is this category a
higher percentage of total travel spending.

FEDERAL RESERVE BANK OF PHILADELPHIA

The Travel Market in the United States and the Third District

Timothy Schiller

FIGURE 3

Domestic Travel Spending

□ Food Services
H General Retail
■

Entertainment/
Recreation

□ Lodging
M Automobile
■

Public
Transportation

Source: U. S. Travel Data Center/Travel Industry Association of America

tional average.
Travel employment in New Jersey and Penn­
sylvania in 1993 placed these states eighth and
ninth in a listing of all states based on numbers
of total jobs attributable to domestic travel. But
travel-related employment made up only 4.7
percent of total New Jersey employment, which
matched the nationwide percentage of jobs at­
tributable to travel by U.S. residents, 3.2 per­
cent in Pennsylvania, and 3.4 percent in Dela­
ware. Nonetheless, for some local areas in these
states, travel-related employment accounts for
a significant share of all jobs. For example, in
the New Jersey shore counties of Atlantic, Cape
May, Monmouth, and Ocean, travel-related
employment constituted 25 percent of total
employment in July 1993. In the Pennsylvania
Pocono Mountain counties of Carbon, Monroe,
Pike, and Wayne, travel-related employment
was 16 percent of total employment in mid1993.



WHERE TRAVEL IS HEADED
Industry analysts have identified some
trends that they expect will shape the travel and
tourism industry for the rest of this decade.
These trends affect both business and pleasure
travel, and they will bring changes in the
amount of travel within the country as well as
in the types of destinations travelers will favor.
Some of these trends have positive implications
for the states of our region.
The trend toward combining business and
pleasure in a single trip should benefit the re­
gion as a whole. Its well-established business
base and wealth of historical sites and cultural
and recreational opportunities, all in a relatively
compact area, make the three-state area a logi­
cal place for such combined trips. In addition
to attracting greater numbers of visitors, the
region's variety of business and leisure attrac­
tions encourages longer stays per visit, thus
magnifying the economic impact.
19

BUSINESS REVIEW

SEPTEMBER/OCTOBER 1996

Another emerging feature of travel in the
United States is an increased desire for a vari­
ety of activities per vacation trip. However,
people in the travel industry are keenly aware
that coordinated regional planning and active
marketing will be crucial to any particular
region's ability to take advantage of this trend.
For example, out-of-state visitors to the 1996
Philadelphia Flower Show took advantage of
other tourist attractions in the region and ex­
tended their stays, many in response to a mar­
keting effort that highlighted special accommo­
dation and tourist packages for Flower Show
attendees.
A travel trend that will have negative impli­
cations for the region, and for domestic travel
destinations generally, is the growing popular­
ity of ocean cruises. Americans have been
spending more of their vacation time in this way
in recent years, and an increasing percentage
of cruise ship business is made up of family
groups. The overall impact of this trend on
other types of travel is likely to be minor, how­
ever, as cruise ship capacity remains small in
relation to all other types of travel.

SUMMARY
In 1994, domestic passenger-miles topped 2
trillion for the first time as U.S. residents took 1
billion trips and nearly 50 million visitors ar­
rived in this country from other lands. Spread
among many types of businesses and made up
predominantly of small firms, the travel and
tourism industry is sometimes difficult to see
as a whole, but it is clearly a big business. Visits
to friends and relatives, vacations and other
recreational travel, and business trips add up
to a $400 billion industry that employs more
than 5 percent of American workers, and those
numbers are growing.
The three states of the Third District—Penn­
sylvania, New Jersey, and Delaware—do not
spring to mind when glittering travel images
are conjured up. But the beaches, casinos, his­
toric sites, and sheer numbers of people pass­
ing through and around the region generate a
travel and tourism industry that is significant
within the regional economy and crucial in
many localities. The travel industry even pro­
pels New Jersey and Pennsylvania to national
prominence, placing them among the top 10
states in dollar value of travel spending.

SOURCES
The national statistics and some state statistics cited in this article were obtained from the U.S. Travel
Data Center, the Travel Industry Association of America, and the U.S. Commerce Department (Bureau of
the Census, Bureau of Economic Analysis, Tourism Industries/International Trade Administration, and the
now-defunct Travel and Tourism Administration). The following major publications of the U.S. Travel Data
Center were consulted: Impact o f Travel on State Economies (various years), The Economic Review o f Travel in
America (1995), and 1995 Outlook for Travel and Tourism (1995). Some data on employment were obtained
from A Portrait o f Travel Industry Employment in the U.S. Economy, published by the Travel Industry Associa­
tion of America. Commerce Department data were obtained from Gross State Product (Bureau of Economic
Analysis, 1992), U.S. Industrial Outlook (International Trade Administration, various years), and Geographi­
cal Mobility: March 1991 to March 1992 (Kristin A. Hansen, Bureau of the Census, 1993).
State data were obtained from the tourism divisions of Pennsylvania, New Jersey, and Delaware. Pub­
lished data may be found in Pennsylvania's The Economic Impact o f Travel in Pennsylvania Counties (Pennsyl­
vania Office of Travel Marketing, 1995), Delaware's Visitor Profile Studies 1994-95 (Delaware Tourism Office,
1995), and the New Jersey Travel Research Program 1993 (New Jersey Division of Travel and Tourism, 1994).
Estimates of the economic effects of the Pennsylvania Convention Center are published in Economic
Impact o f the Pennsylvania Convention Center, FY1995 to FY2004, Report 673 (Pennsylvania Economy League,
Inc., Eastern Division, March 1995.)



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The Travel Market in the United States and the Third District

Timothy Schiller

APPENDIX
Estimating Travel Expenditures
The United States Travel Data Center, the research department of the Travel Industry Association of
America, compiles the most comprehensive data on travel in the United States. The center conducts regular
surveys that seek to measure the amount and characteristics of business activity generated by travelers.
These data, along with data from other authoritative sources, are used to estimate spending both on direct
travel expenses and on other goods and services purchased during a trip. Data from the Center's surveys
are supplemented by data gathered by the Bureau of the Census and other federal agencies, by data gath­
ered in other private-sector surveys, and by information obtained directly from companies in the lodging
and transportation industries. In combination, this information is used to estimate domestic travel spend­
ing by major category.
There are some limitations to using these data to assess the full economic magnitude of travel and tour­
ism. First, the basic travel survey is intended to measure only travel within the United States. Second,
survey respondents are asked to give details only for major trips, usually ones that are not a regular part of
their daily activities. These trips are defined as those of 100 miles or more from the respondent's home or
trips that involved an overnight stay away from home. Third, the survey tabulates spending only in states
where travelers began or ended their trips or stayed overnight. Spending in the so-called "pass-through"
states of a trip is not counted.
While these limitations reduce the completeness of the data, the information is fairly comprehensive and
is collected on a consistent basis for all states. Nonetheless, for geographically small states and states that
border large population centers, day-trips of less than 100 miles, and pass-through travel can be a signifi­
cant sou rce of trav el-related business. T his is an im p o rtan t factor in the T hird District, especially for Dela­
ware, a small state, and New Jersey, which sits between the major cities of New York and Philadelphia.
Recognizing this, Delaware and New Jersey have undertaken their own studies to supplement the Travel
Data Center information.
In addition, there are also some limitations with respect to the categories of spending covered. The
categories covered are public transportation costs; private automobile expenses; lodging and vacation home
rental and ownership costs; food service; entertainment and recreation spending while on a trip; and gen­
eral retail spending while on a trip, not including purchases of goods in anticipation of travel. Travel indus­
try analysts believe that this last type of spending is significant, but because it cannot be linked to specific
trips, it is not included in estimates of travel spending. For the same reason, spending for off-road vehicles
and boats is not included.
The Travel Data Center uses its estimates of travel spending to compute travel-related employment for
states and counties. Each type of spending covered by the travel surveys and other data sources is associ­
ated with an industry for which business receipts and employment information are available (e.g., food
expenditure is attributed to eating and drinking establishments). Then the ratio of receipts to employment
for that industry in each state (based on Bureau of Labor Statistics surveys) is used to estimate the employ­
ment generated by travel spending (in each state and county indicated by the surveys and other data) for
the goods and services produced by that industry.




21

Philadelphia/RESEARCH
WORKING PAPERS
The Philadelphia Fed's Research Department occasionally publishes working papers based on the current
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please make checks or money orders payable (in U.S. funds) to the Federal Reserve Bank of Philadelphia. A
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96-1 Mitchell Berlin, Kose John, and Anthony Saunders, "Bank Equity Stakes in Borrowing Firms and
Financial Distress"
96-2 Joseph P. Hughes and Loretta J. Mester, "Bank Capitalization and Cost: Evidence of Scale Economies
in Risk Management and Signaling"
96-3 Tom Stark and Dean Croushore, "Evaluating McCallum's Rule When Monetary Policy Matters"
96-4 Sherrill Shaffer, "Capital Requirements and Rational Discount Window Borrowing"
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96-8 Satyajit Chatterjee and Dean Corbae, "Money and Finance with Costly Commitment"
96-9 Joseph P. Hughes, William Lang, Loretta J. Mester, and Choon-Geol Moon, "Efficient Banking Under
Interstate Branching"
96-10 Elvan Ozlu, Don Schlagenhauf, and Jeffrey M. Wrase, "Exchange Rates and International Relative
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96-11 Loretta J. Mester, "Measuring Efficiency at U.S. Banks: Accounting for Heterogeneity Is Important"
96-12 James J. McAndrews, "Retail Pricing of ATM Network Services"
96-13 Gerald Carlino and Keith Sill, "Common Trends and Common Cycles in Regional Per Capita In­
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96-14 Joseph P. Hughes, William Lang, Loretta J. Mester, and Choon-Geol Moon, "Safety in Numbers? Geo­
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96-15 Richard Voith, "The Suburban Housing Market: Effects of City and Suburban Employment Growth"


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