An objective look at the tourism tax

Photo: Jaanus Ree, Enterprise Estonia

An objective look at the tourism tax

An opinion piece, which was written by Margus Sameli, Director of the Estonian Tourist Board, and published in the opinion section of the Estonian newspaper Postimees. The article was written with contributions from experienced data analysts from the Estonian Tourist Board and other units of Enterprise Estonia.

A lot of opinions have been published on the topic of tourism tax in Estonia and the discussion is still ongoing. During these discussions, it is wise to take a look at the arguments for and against imposing such a tax, experiences of other countries, as well as the pros and cons of the potential economic effects of such taxation. We know of various tax related decisions from recent history and are aware of their impact retrospectively. Therefore, we can now ask whether those taxes imposed met the purpose for which they were intended or had some other effect. When voting for or against imposing a tourism tax, it is also beneficial to analyse the tax’s potential impact on a greater scale and what’s more important – ask what kind of a challenge the tax is supposed to help overcome?

Various expenses incurred by tourists

How would a surcharge for an overnight stay at an accommodation establishment – which is one of the technical tax solutions suggested – work out from the point of view of a taxable visitor? Mobile positioning data shows that one third of foreign visitors to Estonia stay in accommodation establishments, the rest are single-day visitors, stay with their friends and acquaintances or opt for rented accommodation.

According to data from a study of foreign visitors conducted by the Estonian Tourist Board and Statistics Estonia, in 2017 foreign tourists who stayed in accommodation establishments in Estonia spent an average of 117 euros per day, those who opted for rented properties spent 82 euros per day, single-day visitors spent 68 euros, those who stayed at their own or employer’s housing spent 59 euros per day and those who stayed at free accommodation (e.g. at their friends or acquaintances) spent 56 euros per day. Therefore, tourists who stay in accommodation establishments already contribute significantly more to the local economy per day than tourists or single-day visitors who spend the night elsewhere than in accommodation establishments.

It has been proposed that a modest yet uniform sum is required from all accommodation establishments. When taking into account the price of accommodation, tourists staying at more affordable accommodation establishments would be paying proportionally more. For example, in the case of a 1-euro tax, hotels would charge 2% more for a night, whereas hostels would have to increase the price of a single night’s stay by 6–7%. In the case of a flat tax, the smallest accommodation establishments, which offer the most affordable prices and already have limited investment opportunities, would be the ones most affected by the tax burden.

Specific region, clear problem

Tallinn, which hosts nearly 70% of the country’s overnight stays of foreign tourists, was the first to suggest a tourism tax. Tallinn was also the one to propose the first ideas for how to invest the tax money. Among those ideas was that of organising international events. The need for such events is great; even though Enterprise Estonia and the Ministry of Culture already finance this field we are still falling behind our neighbouring countries as the establishment of a local conference centre is delayed.

Marketing Tallinn is another necessity, for example when we take into account the novel competition situation we’ve been placed into by being named as Lonely Planet’s best value destination in the world.

It was also proposed that the tax revenue could be used for urban development. This is an important cause, especially with regard to tourists in the peak season. Cruise tourists, among others, fill up the narrow streets of the old town, require a lot of toilets and parking spaces for large buses. Cruise ships are required to pay port dues when landing, but they result in no overnight stays at local accommodation establishments and, as mentioned previously, no significant sums spent in Estonia.

Cruise tourism should not be viewed as a problem. Every visitor who receives a positive experience is a promotional ambassador to Estonia in their home land. However, it is in everyone’s best interest that mass tourism be better thought through and that physical infrastructure would be supplemented by functional digital infrastructure, which would allow for improved organisation, thereby ensuring better experiences and the desire to spend for all parties. We have a good foundation as Tallinn is now among the top 10 smart cities in Europe. We need to come up with ways in which to create a balance between the footprint of cruise tourists and the money they leave to the economy of Tallinn. Should it really be accommodation establishments that pay for meeting the needs of tourists who do not stay here overnight, but whose footprint is the most noticeable?

There is a variety of other issues worth discussing. It would definitely be possible to enhance cooperation between accommodation establishments and events that shape the reputation of the destination, so that the event and destination could also benefit from the accommodation prices that grow two- or three-fold during major events.

This logic does not apply only to Tallinn, but other regions in Estonia as well. If discussions in the sector lead to the conclusion that a certain solution requires financing and regulation with a tourism tax, then why not implement one?

Experiences elsewhere in the world

Analysis shows that tourism taxes have been implemented in Europe and outside of it. Only a third of European countries have not applied a tourism tax and the map indicates that those are all northern countries: Sweden, Finland, Denmark, Norway, United Kingdom, Ireland, Latvia and Estonia. Plus Cyprus and Luxembourg. In most cases, the tax is calculated on the basis of nights spent in the country. Tax rates var from 0.10 euros (in Bulgaria) to 7.50 euros (in Belgium) per night spent by one person.

Sometimes air passengers are taxed as well. Departure tax (taxation of people leaving via the airport) does not affect the companies of the sector directly, but it can have an impact on the general attractiveness of the location as a travel destination. An air passenger tax has been implemented in seven EU states: Austria, Croatia, the Czech Republic, France, Germany, Italy and the United Kingdom. Destinations outside of Europe that have set a departure tax include Thailand, Butan and Australia. There are other specific taxation methods; for example, France has implemented taxes on ski lifts and trails. 

To give an overview of trends, it can be said that taxes are imposed on that which can be taxed. Be it a warm climate that attracts travellers, outstanding ski holidays, historic settings that are overflowing with masses of tourists. In other words – that, which could be at risk due to excessive popularity.

Impact on our economy

In 2017, the European Commission commissioned a study on the impact of taxation on the competitiveness of the European tourism industry. It was concluded in the study that tourism taxes hinder the competitiveness of destinations. Particularly price-sensitive are the so-called beach holiday tourists, business tourists are less affected by the taxes. Leisure trips are not essential and alternatives can be found easily enough: destinations with similar products, a rental apartment instead of a hotel, etc. In addition, there are a lot of micro-enterprises that earn low profits in the tourism sector and that experience the most significant negative impact from tax increases.

Regardless of the fact that tourism revenue as a whole decreases as a result of taxation (for destinations of holiday tourism) or increases (for destinations of business tourism), the impact of taxation on the revenue of companies of the sector is always negative. Based on a model presented in a European Commission report, in the case of Estonia, a 3% tourism tax would result in a 1.7% decline in the revenue of accommodation establishments.

Prices in Tallinn have continued to grow, in 2017 accommodation prices increased by 10%. In parallel, the number of overnight stays by Finnish tourists has decreased. Visitors from Finland still come to Tallinn, but the higher the prices get, the fewer recurring visits Finnish tourists make. For example, during the crisis of 2009/10, when accommodation prices fell and tourism demand decreased, the number of Finnish tourists’ overnight stays in Tallinn increased.

One strong argument against implementing a tourism tax is that a third of visitors to Tallinn are price-sensitive Finnish tourists. Should they decrease in number, many companies would experience a decrease in revenue. Additionally, we need to operate in an environment with an ever-increasing price level and despite growing tourism, we have not reached saturation of tourists; on the contrary, we need to introduce Estonia to the rest of the world time and time again. When it comes to air travel, the competitiveness of the Tallinn Airport might decrease: in addition to foreign tourists, the departure tax would also affect Estonian people, who might take to starting their trips from Helsinki or Riga even more than they do right now.

If a tax is implemented at all, it could be used to disperse tourists in the Tallinn old town during peak season; however, there are other, technological solutions that can do the same. It is also worthwhile to consider financing investments for infrastructure necessary for cruise tourists so that their footprint can be decreased; this, of course, applies if the money is directed to solve the problem intended.

The implementation or non-implementation of a tourism tax is, however, not the main issue in Estonian tourism. We have bigger problems to worry about. For example, how to adapt to the fact that future business models bring less money to destinations? Destinations invest, yet booking.com and other mediation environments take the lion’s share. Additionally, how shall tourism companies adjust to the competition caused by the emergence of the sharing economy? Plus there are the local concerns – as long as Estonia has no major conference centre, it has to work on how Tallinn as a whole can function as a major conference centre, offering joint solutions in a synchronized way. I hope that all interested parties continue to have the energy and wisdom for seeing challenges and opportunities for development as a whole and, focusing on the bigger picture, also provide solutions.

Last updated : 09.11.2018