Funding for a regenerative future – could tourism taxes be part of the answer?

Funding for a regenerative future – could tourism taxes be part of the answer?

Transforming Vision Into Action - Guidelines and Tools

16 December 2020

As the world continues to reel from the shocks of the pandemic, the destinations that were once overcrowded with tourists are now faced with a dearth of visitors. During 2019 and early 2020, many destinations were exploring tourism taxation to regulate visitor flow and mitigate the negative impacts of  too many visitors.

When COVID-19 turned the world of tourism upside-down, tax relief or cancellation was introduced with the intention of assisting the industry. As the discussions began on how to ‘build back better’, a key question remains on how a regenerative future can be funded.  Could well designed tourism taxes be part of the answer?

This is the starting point of a newly published White Paper: “Tourism Taxes by Design”, which explores how tourism taxation can be designed to support recovery and the long-term development of a more resilient and regenerative tourism economy. The research was developed by Group NAO and the Global Destination Sustainability Movement and has been launched in partnership with European Tourism Association (ETOA) with support from nine urban tourism destinations.

The white paper explores the different kinds of tourism-related taxes, the existing models and revenue flows already in place and their impact, including further research into the current funding situation of destination organisations (DMOs) in Europe. Twenty-one out of 30 European countries have implemented tax, levies and duties on travel and tourism services that offer multiple examples and models where tourism tax revenue is used to invest in sustainable tourism development.  

Exploring the different taxation designs and models, it is clear that there is no one size fits all solution, although most of the tourism-related taxes have an element of regulatory design. While tourism taxation has generally been perceived as the ‘elephant in the room’, the white paper research shows that the perceived negative impacts on demand and competitiveness are rather marginal. Furthermore, consumers are inclined to be more willing to pay taxes if there is transparent reinvestment of the tax revenue for ear-marked “good purposes” (sustainability, local community, cultural and natural preservation).

Seven ways tourism-related tax can work:

Tourism taxes can be designed with manifold intentions and parameters. Across  all the research and data, the white paper identifies generic tax models and the roles tourism taxes can play:

  • Revenue generation – revenue from tourism taxes goes into the general government budget.

  • Regulate flows and behaviour with basic design parameters such as differentiated rates according to seasonality, city zones, type of establishment etc.

  • Relief in times of crisis: Many states have suspended taxes or lowered VAT during the COVID-19 crisis.

  • Reload: It is common for many destinations to allocate tourism tax revenues to promote the destination, marketing, and branding.

  • Rethink: Some destinations allocate tourism tax revenue to tourism innovation and research.

  • Regeneration: Some destinations use revenues to regenerate the destination’s natural and cultural resources.

  • Resilience: Taxing for resilience is mostly a theoretical objective, but it has high potential as a means of facing the next big crisis with buildup of funds for insurance purposes and cancellation guarantees for event owners.

Seven design criteria for tourism tax:

  • Earmark and ring-fence: There is a consensus among leading associations, intergovernmental organisations and amongst local stakeholders that tourism tax is a specialised tax and its revenues should be allocated and invested as such, in particular for tourism promotion or for regenerative purposes.

  • Local governance adds collaborative capability: Local governance is often key to balancing stakeholder interests and to earn political support for the tax regime and support of the local DMO. The local distribution of funds adds to the legitimacy of the tax and collaborative capability of the destination.

  • High visibility and transparency works with consumers:  Case studies prove that tourism taxes are often well received with consumers if communicated as a modest contribution to be used for purposeful, regenerative projects and activities.

  • Public engagement and consultation is key: Governments or destinations looking to introduce or change tourism taxation policies need to engage in open and public conversation.

  • Specify how to comply: Governments or destinations shall offer advice and extensive instructions on how to comply, including to less resourceful SMEs and by committing industry associations and platforms.

  • Monitor and evaluate impact: There is a lack of good data as well as monitoring, evaluation, and analysis of the impact of tourism-related taxes and incentives to ensure they are meeting their stated objectives without adversely affecting tourism competitiveness.

  • Consider both benefits and burdens: It is vital to also understand and address both benefits and burdens of the visitor economy to the destination that present themselves in many forms.

Overall, the research and case studies prove that well-designed tourism taxes can be both practical and meaningful tools in the sustainable management of the destination’s resources. Regenerative tax can offer a vital lifeline to recovery.

Read the white paper Tourism Taxes by Design.

This article for Transforming One Planet Vision into Action has been brought to you by Group NAO and Global Destination Sustainability Movement (GDSM). The White Paper was developed with the support of 9 European city destinations. The project has been implemented in parallel with a similar project in the US / Americas by Miles Partnership, Civitas and Tourism Economics and we have continuously shared methodologies, results, and reflections. In addition, European Cities Marketing (ECM) decided to carry out a 2020-member survey on the DMO financial situation in collaboration with Group NAO – the results of which will also feed into this study. Finally, European Tourism Association (ETOA) has generously shared their valuable insights and research materials as part of our data sources and peer review process.