Policy issues surrounding tourism taxes

In Scotland, there has been a series of discussions about tourist taxes instigated by both the Scottish government and by some local authorities. The latter want additional funding and greater autonomy and feel that new taxes might assist. In the recent budget negotiations a tourist tax and workplace levies have come to the fore with the Scottish Greens making them a condition for their support.

Tourism employs over 200,000 people in Scotland; according to the Scottish government, over 2.7m overseas visitors arrived in Scotland in 2016. The number arriving from overseas has grown significantly and around £9.7bn was spent by tourists in 2016. Little wonder then, that a transient visitor levy (TVL) is one new tax which is high on the agenda.

But there are a number of issues that require careful consideration before creating new taxes.

Has Holyrood the competence to create new taxes?

The powers of the Scottish Parliament to introduce new devolved taxes, or amend the provisions of existing devolved taxes, derive from s 80B of the Scotland Act 1998 inserted by s 23 of the Scotland Act 2012. Provisions that relate to reserved matters (defined in Sch 5 of the 1998 Act) are outside the Scottish Parliament's powers. Any proposed new tax will be within the Scottish Parliament's powers if its underlying purpose is within devolved competence (defined in s 29(2) of the 1998 Act); and the process is subject to approval by Westminster (through an Order in Council). It is expected that a tourist tax could be introduced by Holyrood.

Should a new tax be raised by Holyrood or by local authorities?

• Tax base may be localised, e.g. only certain areas have a lot of tourists.
• The tax can be designed to suit the locality.
• It may help to manage behaviours at a local level (e.g. congestion and workplace levies).

Arguments for a Scottish TVL:

• One tax, applied nationally, should be simpler and more efficient.
• Tax can be collected, pooled and then redistributed to those areas most in need of funding.

Local tax raising may lead to a cycle of funding inequalities between local authorities that increases over time, i.e. those local authorities with, say, strong tourist demand would be able to raise most revenue from a levy, which in turn enables them to strengthen their tourist offering.

It is clear from the discussion document that the Scottish government would wish to retain a share of the revenue in recognition of its role (and the cost incurred) in promoting Scottish tourism nationally and that the potential for a tourism tax is realistically limited to a fairly narrow range of locations.

Does hypothecation provide answers?

Tax is never popular but at the same time additional revenue needs to be raised to meet spending needs. Hypothecation is often put forward as the answer, on the basis that there will be greater public acceptance of increased or new taxes if they are raised for specific (popular) purposes.

Some of the potential local taxes perhaps lend themselves to hypothecation. Should a tourist tax pay for services for tourists (e.g. funding events) or contribute to the services that are most used by tourists (e.g. rubbish collection)?

Full hypothecation might mean inadequate funding if the tax did not produce enough revenue. The tax receipts might also vary from year to year – fewer tourists due to a global recession (or if it is a local tax, fewer tourists in the local area for a local reason).

In terms of public taxation policy, care needs to be taken, and there should be a full public debate, before this path is followed. Hypothecation implies that the taxpayer is simply paying for a particular item or service. Following this logic, taxpayers might feel that they should only pay for what they use which undermines the notion of contributing to the common good. If taxation is levied for the common good, all funds should be collected together and then decisions made about their use. Hypothecation also limits flexibility for government policymakers.

From an operational aspect, restricting funds to the provision of certain goods or services is limiting, adds to the administrative burdens, and reduces flexibility around spending decisions.

Behavioural consequences

Tax can drive behavioural change. For instance, would a tourist tax result in lower tourist numbers visiting an area? This might depend on the rate and whether surrounding areas had no (or a lower) tourist tax. Tourists might also decide to reduce the length of their stay. Likely behavioural responses need to be taken into account in deciding on the structure and rates of new taxes – and estimating the revenues which might be produced. This may sometimes restrict the options available.

However, in some cases a tax may be specifically designed to change behaviour – for instance if smaller numbers of tourists were wanted in certain areas or at certain times of the year, achieving that could be more important than raising revenue.

There needs to be a clear analysis of the objectives of any proposed tax and consideration of the likely behavioural changes that may result from its introduction. Without this there could be unintended adverse consequences.