Embrace taxes to maintain destinations, says Travel Foundation chief executive Jeremy Sampson

Can you name an industry other than tourism where the main ‘product’ comes free?

Tourism businesses provide services such as travel, accommodation, tours and attractions, yet the main product or experience isn’t provided by them but by the city, the beach, the natural world, the people, their culture and history. The destination itself comes without a price tag.

That does not mean it’s cost-free. In March, we published a report ‘Destinations at Risk: The Invisible Burden of Tourism’ with Cornell University’s Centre for Sustainable Global Enterprise and EplerWood International.

A central theme of the report is that while every tourist brings economic benefits that are well understood, they also bring a range of costs – an ‘invisible burden’ that is not currently accounted for.

These costs are mostly related to use of municipal services, public assets and the natural environment – such as costs to maintain public spaces or national parks, or to upgrade infrastructure to meet increased visitor demand – and are not factored into the tourism product. They are either picked up by residents or, if maintenance or infrastructure is overlooked, result in degraded public assets and environmental damage.
So how should destinations respond to ensure they cover the invisible burden of tourism?

One option is to introduce a charge to cover the costs of managing tourism. Some destinations have already introduced or are considering a tourism tax – a levy paid on entry or departure or, more commonly, added to accommodation costs.

Japan and New Zealand have introduced such taxes this year, and many cities are considering the option. Venice now charges an entry fee for day-trippers and Edinburgh is on the way to introducing a tax once the necessary legislation is in place.

Often there is a twofold motivation behind introducing a tax – to close funding gaps at the municipal level and to address concerns from residents about the impacts of tourism – often linked to ‘overtourism’.

Understand tourism’s costs

Tourism taxes could provide much-needed additional resources to cover the invisible burden of tourism, but this will only happen if destinations understand and account for the full range of costs and how these change as visitor numbers grow. Only then can tax revenue be allocated in a way that addresses the invisible burden.

At the Travel Foundation, we don’t know of any destination doing this.

It is the allocation of tax rather than how it’s raised that stands at the heart of this issue.

Even without a tourism tax, there are other taxes that contribute to the public purse – such as VAT on accommodation and other sales, corporation tax on profits, business rates and property taxes, and income tax paid by tourism employees.

The Travel Foundation research in Cyprus, carried out with Tui and business consultancy PwC, estimated the total annual tax contribution from tourism operations relating to 60,000 Tui customers at €13.7 million – equal to €25 per customer per night. The ‘tourism tax’ element of this – an airport departure tax – accounted for only €1.4 million.

There is a strong argument for local administrations to see more of the revenue that already comes from the tourist sector. Yet tourism taxes are often in place in countries that offer the tourism industry tax cuts and tax breaks.

For example, the EU applies a minimum standard VAT rate of 15%, but member states can apply a reduced rate on hotel accommodation. Twenty-five of the EU’s 28 members, including the UK, do this.

The VAT rate on hotels in Spain, Italy and France is 10%, in Germany 7%, and Belgium and the Netherlands 6% – compared with 20% in the UK and 25% in Denmark. At the same time, 19 of 28 EU countries have some form of tourist tax. The UK does not.

Stop misallocating resources

The policy implications of tourism tax allocation are vast, but the allocation of taxes has barely been researched.

No matter how much tourism contributes to national and local treasuries, if the costs associated with each visitor are not understood, resources will be misallocated.

Currently, there is a high allocation of taxes to support visitor-growth targets. While destination facilities deteriorate under the weight of overtourism, marketing and airport expansion continues apace using substantial tax revenues generated by tourism visitors.

It isn’t realistic for municipalities to hope for a reallocation of finances to help better manage tourism at a local level, particularly in the absence of data to show the full extent of the costs involved – and the investment required – to maintain destination assets and upgrade infrastructure.

It is more realistic to introduce a new tourism tax and ringfence it for that purpose.

Countries such as Iceland and New Zealand already charge an infrastructure tax. The Balearic Islands has implemented a tourism tax, which has raised €200 million in less than three years and is used to fund sustainability projects – including a €40 million investment in charging points to encourage car hire firms to offer electric vehicles; €6.8 million to expand Majorca’s Llevant Nature Reserve; and €500,000 on beach cleaning.

Safeguard the future

It seems only fair that tourism should pay its way and cover all its costs. It’s encouraging that some destinations are seeking to do this. Whether these funds come from new taxes or by other means – and all options should be considered – they are needed to safeguard the future of the world’s most-treasured places.

However, if they come without a necessary understanding of the invisible burden, and only once overtourism has taken hold, then it could be too little, too late.

Destinations need to build their capacity to introduce systems that account for the costs, not just the benefits, of tourism.

Jeremy Sampson took over from Salli Felton as Travel Foundation chief executive in September

UK moots tourism tax

UK industry leaders are working on proposals that could see the sector back demands for local tourism taxes in return for a cut in VAT on hotels when Britain leaves the EU.

However, they want VAT and local taxes on tourists to apply to all accommodation providers including Airbnb-type rentals. Travel Weekly reported in June that umbrella industry group the Tourism Alliance is drafting proposals for local authorities to tax visitors in return for a reduction in the 20% VAT rate on accommodation to a level in line with other leading destinations.

Tourism Alliance director Kurt Janson told Travel Weekly: “If the government reduced VAT on accommodation to 10% then added a 5% tourist tax, customers and destinations would both win.”

The alliance proposes the Treasury make up the lost revenue by reducing the VAT threshold, which excludes accommodation providers earning less than £86,000 a year and means most Airbnb-style landlords do not pay.
Janson said: “The government could lower the threshold to £5,000 and everyone would pay.”

MPs called in May for a cut in the tax ‘burden’ on UK tourism “to mitigate industry opposition to a tourist tax”. A report by the All-Party Parliamentary Group for Hospitality noted “increasing enthusiasm” among local councils for levying taxes on tourists as they face a funding gap of £8 billion by 2025.