In today’s Finshots, we explain why countries are imposing special taxes on tourists.

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The Story

You’re excited about that international vacation. You’ve budgeted carefully and saved up enough money. You’ve got your manager to approve the leaves for that much-needed break from work.

But suddenly the government throws a spanner in the works. They decided to impose a special fee on tourists. They tell you that for every day you spend in the country, you have to shell out an additional sum of money. It’s a tourist tax if you will.

Okay, such swooping decisions don’t happen overnight. But it could. Last year, out of the blue, Bhutan hiked the fees to a whopping $200 a day. It was still ₹1,200 a day for an Indian tourist, but you get the point. And it’s not just Bhutan that has a tourist tax. Just last week, Venice decided that even if someone’s visiting the city for a day trip, they’ll have to cough up a €5 entry fee. A few days ago, Iceland said it’s mulling over a daily tax. Thailand’s getting ready to impose a US$10 tourist tax. And Bali has announced that it’s soon going to charge a one-time fee of $10 per tourist too. Over 40 regions already levy this and the numbers only seem to be going up every year.

So, why is everyone in a sudden rush to tax tourists?

The reason is actually pretty simple — flights are cheaper and more accessible, social media has created a culture of YOLO and FOMO, and increasing disposable incomes means that everyone wants to travel these days. Everyone wants to cross off stuff on their bucket list. It’s the “experiences” over “material stuff” trend. But most of these tourists don’t really care about the places they’re visiting. They’re just in for a jolly good time, some Instagram photos and they’re out.

The unfortunate reality is that the ones who are hurt by all this are the locals. Because it’s their tax money that’s spent on cleaning up the mess. The streets have to be tidied up after the tourists. The transport system has to be upgraded to meet additional demand. The city’s sights and sounds need to be constantly spruced up so that the ‘outsiders’ don’t complain. And you also have to remember that most of these small towns aren’t built for a large influx of people. Their waste management and drainage systems may not be equipped to handle it. So there’s a need to constantly spend on upkeep and maintenance.

But maybe that’s not even the worst part. Just look at Thailand. During 2017–2019, the government actually needed to subsidise medical treatment for foreign tourists who needed to be hospitalised for various ailments. It cost the government over $10 million.

It’s insane!

Now sure, you could argue that tourism related activities can give a major boost to the economy. It helps hotels and restaurants. It creates jobs. There’s often a multiplier effect. Where say $1 spent by a tourist can create a ripple effect of $1.50 in economic contribution. But as new ways of travel have emerged, people feel that tourists are taking away more than they give. A large influx of tourists could mean that rich people might just buy apartments to rent out via Airbnb. It takes long-term rentals out of the market and increases cost of living for the locals. No wonder that locals are developing “tourism-phobia” these days and even launching protests against rampant tourism.

In economic theory, these things are often called the ‘production externality’.

Or in simple terms, it refers to the unintended side effects of tourism. It’s when the cost of these negative effects has not been accounted for in the market price of touristic activities.

And a tourism tax could help reverse it. Or at least help create a net positive social benefit.

Now taxes do sound good on paper. After all, you’re taking money from the ‘outsiders’ and the residents aren’t affected. They don’t have to be penalised for the problems they didn’t cause. But for it to work, governments do need to spend it on improving things for their residents as promised. And for the most part, it seems to be ticking the right boxes.

Maldives publishes a ‘Green Fund’ report every month. They show how much money each island or city has raised. And then break it down into the expenditure on projects such as - improving the sewerage system, setting up plants to convert waste to energy, and even reviving the Maldivian coconut industry. So that’s a positive.

Then there’s Bhutan which says that all their taxes get deposited into a pool account. That includes the tourism tax too. So it can be used for paying salaries to government staff too. It’s the leftover stuff that’s used for things such as maintaining forests and historical monuments. Now while that might seem like a negative, remember that Bhutan became the first carbon-negative country on earth in 2017 — the country is actually absorbing more carbon dioxide than it produced.

So maybe there’s some good coming out of these tourist taxes.

But wait…there’s one more thing we must address. Does this tax actually hurt tourism revenue?

Well, the results are a mixed bag.

Multiple surveys indicate that people don’t seem to actually hate paying a tourism tax. As long as the country proudly displays how this money is being used to improve tourism facilities, people are happy to open their wallets. In some cases, such as in Maldives, the elasticity of tourism is low — a 10% increase in tax only led to a 5% drop in tourists. On the other hand, there are other studies which indicate that higher taxes reduce international arrivals and hurt businesses catering to these tourists.

So yeah, the results are mixed. And without a clear answer, you can see why most countries are leaning towards imposing taxes. It’s an easy way to appease the local population. And that means, you’ll probably find more countries imposing this sort of tax sooner or later.

Maybe save up a little more for that international vacation from now, folks.

Until then…

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