Some cities should introduce a tourism tax to raise revenue, but they need fiscal devolution first
After over a decade of austerity, local governments have seen their budgets shrink considerably but have very few fiscal tools to improve them. The main tool they have is council tax, and even the scope to increase this is limited by central government. Given this, is introducing a tourist tax a way to close some of the shortfall?
Cities across the UK, including Edinburgh, Birmingham, and London, have expressed interest in implementing tourism taxes in recent years. In early 2020, Birmingham proposed taxing visitors to the 2022 Commonwealth Games with the option to make the tax permanent if successful, although discussions appear to have halted since the pandemic. More recently, in the local elections, Edinburgh SNP’s manifesto included plans for a tourist tax in the Scottish capital. In Centre for Cities’ recent event in Manchester, Metro Mayor Andy Burnham raised the possibility of introducing a “tourist tax” in the city region.
The problem with this though, is that cities across the UK cannot introduce such a scheme without primary legislation, as local governments currently do not have the power of fiscal devolution to enact their own such taxes.
Many cities, especially in Europe, use a tourist levy to help manage and fund public infrastructure shared by both residents and tourists. This tax can be implemented in different ways. For example, Porto charges €2 per person each night, while Venice has an entry fee of between €3 and €10, depending on seasonal factors (see Figure 1 for further details).
|Tourism Tax Type||Example Cities|
|Flat rate per person per night||Dubrovnik (€2.68), Bruges (€2.83), Porto (€2)|
|Flat rate per person per night by accommodation type and star rating||Paris, many cities in Italy including Bologna, Genoa, Pisa|
|Percentage of room rate, per night||Vienna (3.2%), Berlin (5%),|
|Congestion type day charges, per person per day if not staying overnight||Venice (€3-€10)|
Source: Respective local governments.
So how much could British cities raise from a tourist tax if they were allowed to introduce one? And which cities would benefit the most?
The potential revenues levied from a tourism tax in UK cities are substantial. Centre for Cities’ conservative estimates, based on domestic travel data show that a £2-per-night occupancy tax could raise at least £216 million annually across the 62 cities analysed. The areas that would raise the most revenue are typically coastal or historic university cities (Figure 2). York, Blackpool, and Edinburgh rank in the top three with an estimated revenue of around £21-31 per resident. This could see Blackpool earn around £6.2 million a year. To put this in context, it is nearly half of the annual funding from the Town Deal budget, which only lasts until 2026.
These estimates are based solely on domestic tourism numbers (international numbers are not available), so popular destinations for international tourists could actually make even more money. For example, existing estimates show that a tourist tax in London – one of the most visited cities in the world – could raise around £240 million per year, when including foreign visitors – more than five times our estimate for domestic tourists.
It is important to note though that a tourist tax would only benefit a few places – it won’t be an answer for all cities. For instance, 48 of the 62 cities analysed are estimated to bring in less than £10 per capita annually, which is less than one third of York’s potential figure.
Opponents of tourism tax proposals often argue that it would negatively impact the local economy by reducing the number of visitors. In truth, the impact an occupancy tax would have on demand is unclear and likely to vary depending on the destination type and the tax rate. Edinburgh council has done some work on this, reflecting how seriously it is taking the proposals. One survey suggested that impacts on demand would be low, with only 2 per cent of respondents saying they would not have visited the city if they had to pay a £1-2 per night occupancy tax. Another poll shows that a Transient Visitor Levy was supported by 51 per cent of accommodation providers.
In addition to being an instrument to support local services, a survey conducted by the LGA in February 2020 suggests a tourist levy would be popular with the public – around 53 per cent of respondents supported it. As the tourism industry recovers from the pandemic, the popularity of a tax will likely increase.
The tension at the heart of discussions about fiscal devolution is the trade-off between allowing places to benefit from growth in their areas and redistribution to struggling areas. Given that money raised would all be new money, rather than the redistribution of existing tax (creating winners and losers), this trade-off isn’t an issue for a tourist tax. While it isn’t likely to generate a great deal of money outside a handful of places, it would at least allow central and local government to dip its toe in fiscal devolution. Given this, legislation should be brought forward to allow it to happen.
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