It has been reported that Rachel Reeves has floated the idea of introducing a ‘hotel tax’ which, as the name suggests, would be paid by hotel guests. Many on the centre-right have been quick to condemn such a move and they have rightly pointed out that another new tax is the last thing we need. While I have a lot of sympathy with this position, a well designed levy could actually bring a number of benefits.
A ‘hotel tax’ would essentially be a tourist tax similar to those levied by many cities around the world, such as Paris. In fact, I paid a tourist tax just last week when I checked into a hotel in Manchester. It was levied at a rate of £1 per night per person and, while I would have obviously preferred to have kept the two quid and it did add slightly more time to my check in, I still think that tourist taxes are a good idea.
Tourism is obviously a good thing. It brings money into cities and so boosts profits and supports jobs as people spend their money in shops, bars, restaurants and other venues. However, there are also downsides associated with tourism. For example, tourists can clog up public transport and increase the pressure on transport infrastructure without making the same contribution to the running and upkeep of these services as residents do.
As such, introducing a modest tax on stays in hotels could help to offset some of the externalities which arise due to tourism. This would help to give residents a break as they would not have to see their taxes or commuting costs increase by as much in order to fund improvements to their city or its infrastructure.
What’s more, such a move is likely to be popular with residents and there is little evidence to support the claim that it would have a real negative impact on tourism to the city. Given that many European cities now have some form of tourist tax, the cities in the UK which do not have one are becoming outliers.
All that being said, the tax proposed by Rachel Reeves is the wrong approach.
The reason why tourist taxes tend to be popular is because the revenue raised is used to benefit the people who live there. If that revenue goes to fill the coffers of HM Treasury with perhaps a percentage of it being redistributed back to your city or town, it destroys the whole rationale for a tourist tax.
Furthermore, levying the tax on people who already live in the city but who may just happen to be staying in a hotel for whatever reason again undermines the case for a tourist tax. Residents of that town or city are already paying a plethora of taxes to their local authority (as well as to the UK Government) to fund the upkeep of services such as public transport. It would be unfair to place even more pressure on them.
Finally, it represents an arrogance on the part of the Government and Treasury officials. It is the people who live and work in an area who know what their community needs, not mandarins in Whitehall. Some towns and cities would undoubtedly benefit from introducing a tourist tax, whereas other areas most certainly would not. It should be left to towns and cities themselves to decide.
Imposing a hotel tax in every town and city could actually exacerbate many of the issues being faced by these areas. For example, after my stay in Manchester last week, I decided to visit Blackpool. It was a spur of the moment decision as I had not been since I was teenager and so managed to convince a friend to join me. While I was always going to visit Manchester, I probably would have been less likely to then visit Blackpool if I had to pay more money. Given that Blackpool is one of the most deprived places in the country and really could do with as many tourists visiting as possible – especially during the off-season – a tourist tax would likely be damaging to its economy and deeply unpopular with residents.
Taxes do tend to impact behaviour (and sometimes that’s the point of them). While tourist taxes don’t have a negative impact on hugely popular locations and can bring benefits, they likely will cause more harm than good for many other towns and cities, especially in places with high levels of unemployment and poverty.
Labour’s Budget in October was an austerity Budget. It increased taxes in order to fund pay rises for public sector workers and the burden will fall on workers in the form of fewer jobs and lower wages. The markets know that it will not deliver growth and the tax increases will bring in less revenue than expected. As such, the Government is in desperate need of more money.
However, the way out of this mess for Rachel Reeves is to introduce pro-growth measures such as building more homes while eliminating wasteful public spending. It is not to be found in increasing the burden on people in towns and cities who are already struggling. Therefore, while the Government should certainly encourage certain towns and cities to introduce a tourist tax, it should not impose one on every area.
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