Edinburgh’s tourist tax: How can the city learn from other’s experiences?

01 May 2019

In February 2019, Councillors in Edinburgh voted in favour of the introduction of the first Transient Visitor Levy (TVL) or ‘tourist tax’ to be introduced to the city.

The tax, which would be the first of its kind in the UK, would follow in the footsteps of many other European cities including Paris, Berlin and Barcelona where a tourist tax has been in place for a number of years. Taxes on tourists are designed to offset the impact of tourists on local infrastructure and services, however they are often received with caution by the hotel community who worry the additional costs will ward off visitors. The Scottish Tourism Secretary has indicated that a TVL would not be implemented until 2021 at the earliest. We have taken a look at what has been proposed in more detail and how other countries have approached this contentious tax.

The purpose of the Edinburgh TVL is to directly raise money to pay for the costs of tourism and support its growth in the future. Infrastructure and public services improvements will be the main focus of the spending, however no specific proposals have been identified. It is estimated that between £11.6m and £14.6m would be raised annually through the introduction of the tax.

The details of the proposed tax are currently limited, however, it is understood that the preferred option would be the introduction of a flat rate of £2 per night, per room charged to guests. This is considered to be the most straight forward approach to implement the tax and would be easier to apply and communicate rather than as a percentage of an overnight stay as seen in other cities. The tax will apply to all accommodation types including short term lets (Airbnb), with a cap applying to seven consecutive nights.

The responses seen to the announcement of the new tax have been varied. Whilst proponents of the scheme argue that a tax would raise much needed revenue, others fear that it would put-off visitors coming to the city. A Council run consultation on the draft plans for the tax (over 2,500 people participated), found that 91% of residents, 77% of businesses and 51% of accommodation providers backed the Council’s scheme. Conversely, UK Hospitality has estimated that the annual negative economic impact from the TVL could cost Scotland around £175m per annum, driven by reduced turnover for the accommodation sector and reduced spend elsewhere in the tourism economy.

At present, almost two-thirds of EU member states impose a form of occupancy tax on visitors; what can Edinburgh learn from their experiences?

In 2016, the Balearic Islands introduced a Sustainable Tourism Tax charging visitors on an overnight stay basis. Similar to Edinburgh, revenues from the tax are hypothecated for tourism purposes with a Commission for Sustainable tourism being established. Within the first year alone €30 million was generated for sustainable tourism projects ranging from cultural restoration to environmental preservation. Prior to its introduction, the scheme received significant negative media attention focusing on the risk around visitor numbers. Despite this, the islands saw an additional 1.3 million visitors during the first year of its introduction, which was subsequently followed with an additional increase of over 750,000 visitors in 2017. It is clear that regardless of the imposition of a new tax the impact on demand was limited; a positive message for the Edinburgh TVL’s proponents. A further increase of the tax was introduced in 2018: a direct attempt by the government to reduce visitor numbers to the islands. As a result, 2018 saw visitor levels to the island plateau. This was met by concerns over the competitiveness of the island by local hotel federations who subsequently called for its removal. In the face of increased competition from rival counties such as Turkey and Egypt that experienced a resurgence in tourism, the additional tax in the Balearics was considered by some as an additional impediment to prospective tourists. The Balearic Islands highlight the evident benefits a tax can bring, both in supporting and managing tourism to an area, but also its inability to please all parties.

Venice’s hotel tax was introduced to help manage the impact of mass tourism to the city and generated €34 million in 2017. Approval was given to expand the tax to include day-trippers to the city in 2019. Of the 24m visitors each year, 15m are day-trippers, many arriving from the city’s vast cruise business. The new tax - which will replace the existing hotel tax - will aim to mitigate the effects of ‘over tourism’ to the city and directly support the local population and city services. This could be important in Edinburgh which hosts large events annually including the Fringe Festival, drawing large numbers of day visitors to the city. Understanding the level of day trippers to Edinburgh will be important in selecting the correct implementation approach.

Opponents of the Edinburgh tax have argued that it will affect the competitiveness of the city to attract visitors and potentially impact the numbers coming to the city. However, looking at Paris, where a form of tourist tax has been established since 1919, it could be argued that the impact is not significant if the attractiveness of the city as a tourism destination is strong. Paris experienced great challenges to attract tourism to the city following the 2015 terrorist attacks, however by 2017 it saw the highest volume of foreign visitors come to the city in ten years. This was despite a tourist tax remaining in place across the city. Hotel performance since 2017 has also seen year-on-year growth in Occupancy and ADR, with PwC forecasts showing positive increases for 2018 and 2019. The uniqueness of Paris’ offering as a destination has arguably played a greater role in driving tourist levels than the tourist tax. With Edinburgh second only behind London in the UK for visitor numbers, the attractiveness of the city as destination is strong and its appeal diverse. The impact of the implementation of the tourist tax here may not be as significant, as the situation seen with the Balearic Islands, which compete with other destinations for a share of a particular holiday market.

Despite this, The Scottish Tourism Secretary recently described the industry as ‘fragile’ and facing an ‘incredibly competitive’ international market. It is important to consider the current position of the industry in order to fully understand if it is an appropriate time to implement such a tax. A closer look at Edinburgh shows significant growth can be seen in tourist overnight stays to the city (Edinburgh and Lothian’s) which have increased by over 22% during the period 2014 to 2017. Hotel occupancy rates have also shown an increase of 3.1% between 2014 and 2018, with Edinburgh’s occupancy rate second only behind London in the UK. Although past performance for Edinburgh is no guarantee for the future, the attractiveness of the city as a destination remains high. With the city offering highly unique landmarks, cultural attractions and events, will this be strong enough to continue to attract tourists despite the implementation of the new tax?

There are also wider implications for the tourism sector if the policy is passed. Calls from other cities in the UK to introduce their own respective ‘tourism tax’ have been heard from cities including Bath, Oxford, Aberdeen and Liverpool. With the potential for additional costs to prospective visitors, will this impact the wider attractiveness of the UK as a destination for tourism and the strong levels of domestic tourism the UK enjoys? Further consideration at a national level would perhaps need to be given if the new tax comes to fruition to help maintain the attractiveness of the UK as a destination.

With further government consultation expected during 2019, the introduction of the TVL in Edinburgh is looking likely to go ahead around 2021, the city can look to the experiences of others to understand how to best move forward. With this tax being the first in the UK it does raise wider questions on competitiveness which need to be considered however many groups will watch Edinburgh with keen interest looking to learn from its experiences.