The cost of being accommodating: tourist tax for and against

With the SNP well known for party unity, at least publically, it was unusual to see an open spat on Twitter over the summer.

The subject was a tourist tax, as SNP tourism secretary Fiona Hyslop publicly chastised SNP City of Edinburgh council leader Adam McVey for announcing plans to introduce a visitor levy that the council did not, and does not, have the power to collect and which is counter to national party policy.

It was a bold move by McVey. Why did he take that approach?

“This has been council policy for a long time and we’ve made almost no progress in the five years before this administration formed, mainly because we did hold to that principle [of waiting for permission],” McVey explains.

“We were lobbying for the power rather than actually doing the hard work that was required to evidence why we needed it.

“So when I became council leader, I said we were going to take a totally different approach, we were going to develop our plans so that people would see what it would mean for them.

“It wasn’t going to be an abstract concept of a power; it would be this is the pounds and pence of what it would look like in Edinburgh, this is the impact we think it would look like in Edinburgh and sort out all the things that people would have as legitimate questions.

“Because in my mind this is our policy, this is actively no one else’s policy, this is ours, so it’s our responsibility to develop up in a way that people can buy in to.”

The council has since passed two resolutions in favour of the policy, one at executive level and one at full council, and the policy to bring in a transient visitor levy (TVL) or tourist tax has cross-party support, with the exception of the Conservatives.

It has also conducted market research through Marketing Edinburgh and held informal roundtable discussions with industry, which have shaped the questions in the consultation that launched last month.

COSLA too is pushing for it nationally, with all councils in Scotland backing the policy, regardless of party make-up or whether they have any plans to introduce a tourist tax themselves – although at least four others are interested in doing so and eyeing Edinburgh’s lead.

The work the council and others have done so far has found residents to be in favour of it and tourists “about 50/50 support and opposition” but when asked if it would change their decision, only a “minute number” of tourists say it would affect their decision on where to go.

“And that’s the experience we’ve found elsewhere as well,” says McVey.

“I mean, the example I keep saying is the queues in the Colosseum are no shorter for Rome’s six euro a night charge.

“We’re talking about two quid a night, or thereabouts, which is, especially in a market like Edinburgh where the price is so elastic of our night-time accommodation, going from what you’ll pay on Hogmanay to what you’ll pay in mid-November to what you’ll pay during the Festival to what you’d pay mid-February, it’s so elastic.

“We know the market and price point changes vastly and I don’t think we’ll be interfering with that in any major way.”

The tourism sector is, for the most part, vocally opposed to the introduction of a tourist tax, particularly in the current economic climate.

Marc Crothall of the Scottish Tourism Alliance (STA) pointed out that 60 per cent of visitors are domestic, who may at present be reaching a tipping point due to a consumer spending squeeze, while Barry McCulloch of the Federation of Small Businesses (FSB) says that while tourism is a “success story”, the market is “fragile”.

But nineteen out of 28 EU countries already have a tourist tax and it doesn’t appear to have put people off going to Paris, Brussels or Amsterdam.

“That’s a fair argument to make,” says McCulloch.

“The point we would make is we’re starting from a point where we don’t have it and when we’re looking at a situation post-Brexit where the economy will go through a lot of disruption.

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“Is this the right time to impose a new levy on people that come to the country when actually, we will need more people to come to Scotland and the UK to spend their money given the fragility of economic conditions?”

One of the key arguments that has been raised is the level of VAT for visitor accommodation in the UK versus other European countries.

Most other EU countries have a lower level of VAT for tourist accommodation.

“A lot of what’s being referenced in the media and by others is that other destinations charge, so why would it be an issue, but there is no comparable destination,” Crothall tells Holyrood.

“And our overarching argument would be that if we could bring down some of the other costs, like VAT in particular, to a level that is competitive with other destinations, then that might open up a different type of conversation around a tourist tax, but in the current situation, we don’t believe it’s the right thing to do.”

The UK has been rated 135 out of 136 in price competiveness as a destination by the World Economic Forum based on an array of taxes such as fuel duty, VAT and passenger duty.

McVey says the council has “taken cognisance of” what the industry has been saying about the UK having the highest VAT rate in Europe, but he adds: “I suppose we don’t buy that because what that’s missing is a full tax analysis of what corporation tax is: very low in the UK, much higher in other countries.”

Both the FSB and the STA are emphatic that further modelling needs to be done to work out the likely impact before a tourist tax is adopted as a policy, but there is a difficulty in pinning down actual figures as very little modelling has been done so far by either side as to what the effects might be, and there is not a great deal of data about the effects elsewhere either.

McVey says they’ve “done a lot of work looking at the cities that have implemented it” but Crothall does not accept that anywhere else is “comparable directly to the UK because of the tax environment”.

Industry trade body UKHospitality has done the only modelling of the Edinburgh proposal thus far.

It estimates a loss of £100m a year nationally through reduced demand, plus £75m in reduced spend across the wider visitor economy, if the Edinburgh TVL was adopted across the whole of Scotland.

This projection is based on an assumed fixed £2 per night charge for every night of every stay in hotels, B&Bs, hostels, and self-catering accommodation at an average price of £71 excluding VAT, which would amount to a price increase of 2.8 per cent.

The total figure is calculated based on academic studies which estimate a 1.3 per cent decrease in demand or spend for every one per cent of price rise.

With Edinburgh making up around 25 per cent of the Scottish tourism market, if this calculation is correct, it could mean a drop of £40m in revenue based on a tax there.

However, there is no way of knowing if this is actually what would happen.

An October 2017 report for the European Commission by PwC on the impact of taxes on tourism in all 28 EU countries does suggest that to remain competitive, countries should keep their total taxes for tourism low – although not so low that investment is neglected.

But it suggests the effect of cost will depend to some extent on how interchangeable a particular destination is.

So, for example, a Mediterranean beach holiday would be very price sensitive whereas a more unique location may be less so.

Key concerns are about how the money will be spent, whether it will actually be invested back into tourism or simply used to plug shortages in local government budgets.

The EC report notes that tourist taxes work best when stakeholders have control over how they are used and Crothall states that the industry must have “total say” over how it is used, while McCulloch is keen to have local government funding looked at in the round and whether the need for further tourism infrastructure spend could be met by central government.

Anticipating these concerns, the consultation proposes setting up an advisory body from the sector and residents’ groups to set rates and propose how revenue is spent.

McVey says he’s also taken on board other concerns from the FSB and offered, for example, the option of certain businesses such as B&Bs being exempt – although he doesn’t think they should be.

McVey says he does “not recognise” complaints from the STA that they haven’t been consulted.

He says: “We’ve spoken to now dozens of individual businesses. We’ve now engaged in a public consultation.

“Before we put that consultation out, the questions were ran past key people in the industry and representative bodes, so we have engaged throughout our process and it’s been meaningful”.

But there seems to be a difference in understanding between the expectation on the one hand of an “open conversation” about whether to have a tax at all, in which industry opposition should automatically lead to the policy simply being shelved, or listening to industry concerns and taking them into account within the context of the policy being adopted.

But while the industry is making its concerns heard, the other side of the equation is the wishes of residents.

McVey makes it clear he thinks the levy is necessary to provide “additionality” and a revenue stream to sustain the current levels of success and prevent issues arising in the future.

He explains: “For me, it’s not about framing it as a negative; it’s about framing it as a positive.

“We won’t be able to sustain the hotels that are being built and the tourists that they’re bringing unless we have that additional strand of investment, so there’s that kind of initial point on how we’re going to secure success going forward in the future.

“But there’s a real community and resident point, which is people are paying their council tax, they are living in this city, this is their city and the people who will suffer are not the people who will come for three nights and have to queue a bit longer in the castle and the Scott Monument and other fantastic things that we have here; the people who are really going to suffer are the people who live here.

“And unless we find a way of sustaining that success in a positive way, we are going to see more and more residents say this has stopped becoming a positive, vibrant thing in our city and started becoming an albatross around our neck.

“Now, I don’t think we’re there yet, and I don’t think we’ll be there in my time as council leader, but unless we do something now, that will become more of an issue.

“And my message to the industry has been pretty clear, the threat to the success of hospitality in Edinburgh is not a transient visitor levy of a couple of pounds, it’s the city changing policy from one to support the industry and support that growth and vibrancy in that economy to a policy which actively tries to manage it down to try and better balance those resident concerns.”

And it begs the question, if, as seems likely, the consultation shows that residents are firmly in favour of TVL and business against, how is this decided democratically?

Does industry get to veto something the electorate wants?

McVey believes the consultation will provide the business case in terms that will provide evidence of need and support, while the sector wants more modelling of potential outcomes.

The Scottish Government has announced it will carry out its own consultation on a tourist tax, which a spokesperson described as “a national discussion to allow all different views” supported by “objective evidence-based research with analysis of the pros and cons of a tourism tax”.

McVey says he is “optimistic and hopeful” that they will get the powers to go ahead.

“I’ve noticed, and I think everyone’s noticed in the last few weeks in particular, a change in position,” he says.

The fact that the government is to launch a rival consultation might be seen as a criticism of him, but he backs the decision to carry out its own inquiries, particularly as, he says, they’ve had “two versions of the truth thrown at them” about the level of industry engagement.

He says: “Now what the government’s doing, and I think they’re quite right to do it, is test that, and test it between what the industry has been saying and what the issues actually are for them, because I think if the industry engages at that level in those discussions and just says, well, we’re just against it because it’s a tax, we have no substantive issues against it, then that’s not exactly helpful to the debate.

“What I hope they’ll do is bring forward the issues that they have, the issues that their members are articulating, which is much more about where it’s set in terms of price, the easiness or otherwise to administer, and the simplicity of it, making it easy for them to plan their business.

“Those are the messages we’ve heard back really clearly.

“I think if they go and say that to the government, while they start the sentence with ‘we’re against this because it’s an additional charge’, then I think we’ll end up getting to a place where, as the First Minister implied, we can get to a consensus, including with the industry.”

However, all this may be moot anyway with the budget coming up next month.

The Greens, who are the most likely partners to help the minority SNP government get its budget through, have said they will not support the budget unless it includes substantial reforms to local government finance, and the power to levy a tourist tax is likely to be part of that.

The question is what commitment will be enough to satisfy the Greens and yet not be a complete U-turn by the SNP?

Nicola Sturgeon has committed to an open consultation on a tourist tax and not going ahead unless the sector backs it, which is unlikely, but it is also unlikely that a consultation alone will satisfy the Greens if that is a negotiation point of the budget.

Given the industry’s desire for evidence and the likelihood of the Scottish Government having to give in on this, might a commitment to some pilots be the answer, since that’s the only way to really find out for sure what the effect is?