Case Study: The Economics of Tourist Taxes

Tourist taxes, also known as transient visitor levies, are taxes imposed on accommodation or other services used by tourists. Governments across the world implement these taxes for various purposes, including funding local infrastructure and mitigating the negative effects of tourism, such as environmental degradation and overcrowding. The implementation of tourist taxes has sparked debates regarding their economic impact, feasibility, and fairness.

Context:

In the UK, the Scottish and Welsh governments are introducing frameworks for local authorities to impose tourist taxes. For example, Edinburgh City Council plans a 5% nightly accommodation charge starting in 2026, while Welsh authorities may levy charges of up to £1.25 per person per night. Supporters argue these taxes will fund essential infrastructure, while opponents fear they could deter visitors and harm local economies.

Key Issues:

1. Microeconomic Impacts:
   • Price elasticity of demand for tourism services: Will tourists reduce their stays due to higher costs?
   • Incidence of taxation: How will the burden of the tax be shared between tourists and businesses?
2. Macroeconomic Impacts:
   • Revenue generation for public goods.
   • Potential effects on tourism sector employment and regional GDP.
3. Policy Design Considerations:
   • Hypothecation: Ensuring tax revenues are reinvested into tourism-related infrastructure.
   • Equity concerns: Balancing the interests of tourists, local businesses, and residents.

Questions for Students:

Microeconomics:

1. Price Sensitivity:
   • How would you assess the price elasticity of demand for tourism in Scotland? What factors would make it more elastic or inelastic?
   • If the demand for tourism in Edinburgh is relatively inelastic, who is likely to bear the greater burden of the 5% accommodation tax—tourists or hotel owners? Why?
2. Market Behaviour:
   • What might be the short-term and long-term effects of a tourist tax on competition among accommodation providers in a city like Edinburgh?
   • How might online platforms such as Airbnb adapt to these taxes compared to traditional hotels?
3. Substitutes and Complements:
   • Could alternative forms of leisure, such as domestic day trips or international travel, become substitutes for overnight stays in Scotland? Why or why not?

Macroeconomics:

1. Revenue and Redistribution:
   • If Edinburgh expects to raise £45–50 million annually from its tourist tax, discuss how this could impact local public services and the broader economy.
   • What risks might arise if tourist tax revenues are not hypothecated effectively?
2. Tourism and Regional Development:
   • Evaluate the potential effects of tourist taxes on regional income and employment disparities in the UK.
   • Could tourist taxes contribute to sustainable tourism? Provide examples to support your analysis.

Policy Evaluation:

1. Stakeholder Perspectives:
   • How might local businesses, residents, and tourists perceive the fairness of tourist taxes? What trade-offs might policymakers face?
   • Compare the implementation of Scotland’s and Wales’ tourist taxes. Which approach seems more equitable and effective, and why?
2. Global Comparisons:
   • Research another country that has successfully implemented tourist taxes. What lessons could Scotland and Wales learn from this example?
   • Consider the concept of arrival taxes, like the one introduced in Bali. Would this be a viable alternative for the UK? Why or why not?

Extension Activity:

Students could prepare a policy recommendation report on the implementation of tourist taxes in a specific UK region. They should address economic feasibility, potential social impacts, and methods to gain public and business support.

This exercise integrates theoretical knowledge with practical application, encouraging students to think critically about the intersection of micro and macroeconomics.