Visiting London? You should pay a tourist tax

Economic Times

2 days ago

iStock Taxes have always been as inevitable as death. In Rachel Reeves' Britain, it's looking like tax increases are now as unavoidable as the grim reaper. The chancellor must find billions of pounds to fill a black hole in the public finances before the autumn budget. So far, she has proven unable to cut public spending thanks to a series of rebellions by Labour MPs. And Keir Starmer's 'defining mission' of making the sums add up by turbocharging growth has also been stymied, partly by Reeves' move to hike national insurance for employers in her last budget. GDP figures out Thursday are expected to show an anemic 0.1% increase for the second quarter of 2025.That leaves taxes and, having ruled out increasing the burden on 'working people,' Reeves and her team are spending the summer eying other sources of cash. One idea being pushed by some in Westminster is a tourist tax. It's worth taking seriously, both for the potential to raise some much-needed revenue and as a driver of growth.
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A stroll around the center of London on a warm August day this week confirms there's plenty of scope. Crowds were 10 deep outside Buckingham Palace and, inside, visitors of various ages and nationalities were glued to audio guides as they gawped at the King's riches before stopping off for a cream tea in the cafe. London was the third most popular destination in the world in terms of international arrivals last year and third for tourist dollars spent in 2023. An estimated 43 million foreign visitors are expected this year and are anticipated to collectively spend £33.7 billion ($45.7 billion), according to VisitBritain. That's not including business travelers and domestic visitors, who may or may not be caught by a potential tax, depending on how it's levied.
ALSO READ: UK emerges as bright spot for Indian students Among the most world's most popular tourist destinations, London is rare in not already levying a tax on hotel stays. From Tokyo to Barcelona, New York to Amsterdam, the additional nightly charge is a familiar, if mildly irritating, sight on hotel bills. As Sadiq Khan, London's mayor who favors a tourist tax, put it, most travelers: 'don't really mind paying the few extra euros' when they visit cities such as Paris and Berlin.Reeves is said to disagree, reportedly squashing proposals by Deputy Prime Minister Angela Rayner to introduce measures in the Devolution Bill, currently going through Parliament, that would allow local authorities to impose a tourist tax. She should reconsider.
ALSO READ: Schengen visa to go fully digital: No more lengthy paperwork & traditional visa stickersThere are different ways of imposing levies on tourism, but the most common is a nightly charge, often with varying rates depending on the standard of the hotel or as a percentage of the final bill. Assuming a stay at a 4-star accommodation, analysis by the Telegraph suggests the most expensive popular European tourist destination is Amsterdam, at the equivalent of £16 a night, down to £3.40 for Lisbon, with Venice, Paris and Rome coming in at just over £8.Given the sums I saw being handed over for Buckingham Palace-branded merch, including a £10 jar of honey and £17 socks, a similar tax in London seems unlikely to break the bank of the average overseas visitor.The fear for a hospitality industry with fresh memories of Covid is that any tax would inhibit visitor numbers and make alternative, cheaper destinations more attractive.But given most major cities already have a tax, that argument doesn't stack up. In any case, a recent report by the House of Commons Library into the potential impact of a tourist tax pointed out that currency fluctuations and the strength of the pound appear to have little impact on arrival numbers, suggesting that so long as the rate is set at a comparable figure to other cities, it's unlike to put travelers off.What about the effect on destinations that may prove less of a lure for visitors? England's beleaguered seaside resorts would be particularly loathe to adopt any measure that would further put off holiday makers. The solution to that is to make a tax optional, with local authorities choosing whether one might suit their particular local circumstances.That's the model favored by mayors including Manchester's Andy Burnham, who I discussed tourist taxes with recently, as well as Khan and Steve Rotheram in Liverpool. Local councils across London are supportive, along with the Institute for Government and the County Councils Network, although the trade body UK Hospitality described such a move as 'deeply misguided,' pointing out that Britain charges a higher rate of VAT than most countries, which is included in hotel bills. Maybe so. But Manchester and Liverpool have already taken advantage of a loophole in the law to introduce hotel charges as part of scheme allowing hotels to band together in 'Business Improvement Districts' to raise levies, without any impact on visitor numbers, according to analysis by the journal Tourism Management. Manchester's £1 nightly fee is estimated to have raised around £2.8 million in its first year, but the scheme is voluntary for hotels and limited in geographical scope and the mayors want to go further. Scotland has adopted similar powers and Wales is expected to follow suit next year.Given how skewed international travel is toward the capital, which attracts more than half of all visitors to the UK, a tourist tax would have to be be introduced in London to have a significant impact on the nation's finances.That seems fair. Londoners love tourists — but visitors shouldn't get a free ride. As protests in cities around the world highlight, locals suffer from the impact of tourism, in terms of congestion and the added strain on services. Buckingham Palace's coffers may benefit, but Londoners go uncompensated for tourists drinking their water supply, walking their well-lit streets, leaving litter or slowing down their commute. A recent YouGov poll found 45% of Londoners would support a tourist tax compared with 37% who opposed — this feels more tolerant than the Barceloni, who have taken to shooting visitors with water pistols.Many taxes, including those in Manchester, are designed to be reinvested in the tourist industry, making them a potential driver of the precious growth Reeves is seeking. A broad definition of what constitutes the industry, such as allowing spending on transport that tourists also utilize, would free the chancellor up to divert money elsewhere.And here's another idea. Unusually for a global city, most of London's leading tourist attractions (although not Buckingham Palace) are free. That means tourists get to glory in the treasures of the British Museum, the National Gallery, the National History Museum and the rest without paying a penny. How about introducing fees for non-residents, as New York's Metropolitan Museum of Art does, with locals allowed to 'pay as you wish' (they must produce a credit card with a New York billing address to qualify)? The savings could be pocketed by the Treasury in terms of reduced grants to the nation's cultural institutions — the British Museum alone received £43.2 million in government funding last year.Reeves is right to be leery of imposing any more pain on a hospitality industry already struggling with the national insurance and minimum wage increases. But by being smart about how a levy is introduced — limiting it to areas such as London and the wealthy tourists who can afford it — estimates are that she could raise £500 million a year (on a nightly bed tax of £12). That won't fill her budgetary black hole — but it would be a start.
(The views of the author are personal)
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