Monday, February 05, 2018

What's The Loss From The Tourist Tax?

The Balearics attracted 13,790,968 foreign tourists last year, the highest number ever. The increase was in the order of six per cent over 2016. The exactness of the figure makes one marvel at the statistics-gathering approach. One trusts that it is accurate. On top of this 13.8 million there were the Spanish tourists. They are treated separately. In 2016 there were just shy of 2.4 million mainlander tourists. That figure will have gone up. The overall tourist total last year will have topped the 16 million mark; in 2016 it was 15.4 million.

The increase last year was against the background of the first full year of the tourist tax. Its implementation had no effect. Or if it did, the effect was mitigated by a continuing "borrowing" of holidaymakers from other destinations. This borrowing, so we understand, is over; the Balearics are returning tourists that had been out on loan. The 2018 tourism dynamic has an additional element to this returning: the tourist tax is to double between May and October.

Last November in London, we did of course learn from Mallorca's hoteliers that the tax rise will mean the loss of one million tourists. What did they base their figure on? They said that it was an extrapolation from what happened when the ecotax of 2002 was introduced. Ok, but then was it not logical to have expected a loss of tourists last year? The borrowing clouded the issue and the logic.

Basing an assessment on the effect of the 2002 tax was in any event misleading. There was a loss of half a million tourists in 2002: a 7.6% decline. The loss was predominantly due to the German market. It fell by 16%. The British market went down by just over one per cent. There were other factors that are conveniently ignored to explain the big drop in German tourism that year. In 2003, prior to the tax being scrapped, the losses were all but recouped.

Jaume Rosselló and Andreu Sansó are researchers at the University of the Balearic Islands department of applied economics. They have published an article entitled Taxing Tourism: The effects of an accommodation tax on tourism demand in the Balearic Islands. It has appeared in the journal Cuadernos Económicos. The latest edition is a special look at 'sustainable tourism', and some of it - including Rosselló and Sansó's research - is in English.

Highly academic, it is for most of us pretty impenetrable. It does, nevertheless, seek to provide an evaluation of the loss of tourism because of the tourist tax. Rosselló and Sansó refer to the 2002 ecotax but don't use it or its impact in their study. They stick to more recent evidence. The upshot of this research is that there is increased price elasticity, i.e. the effect of a price change on demand, and that a decrease of between 0.4% and 0.9% of total tourism demand can be anticipated. If the higher percentage were to be applied to last year's foreign tourism, this would represent the loss of more than 120,000 tourists.

The point about the study, however, is that it used data for 2016 and none at all for 2017, when there was that six per cent increase in tourism. Does last year's experience invalidate their findings? Up to a point perhaps it does, but they supply caveats in their conclusions. For example: "Tourism, as a social activity, is influenced by many factors, such as advertising, news and other issues that undoubtedly affect demand behaviour in many ways. Possible media coverage of the tax’s introduction in the countries of origin and how revenue from it is reinvested are examples of factors that are not considered in this study." A specific factor in 2017 was that tourist borrowing. It might be argued, therefore, that 2017's 'record season' was a blip.

The real test will be this year. Yet we have had the hoteliers also talking about another record season, seemingly therefore contradicting what was said in London (which was probably a form of headline-grabber for effect). To suggest that there will be another record season sounds counter-intuitive and also contrary to indications from Rosselló and Sansó's study. There again, perhaps the hoteliers are expecting a new form of borrowing in 2018 - from that section of the holiday rentals market that has been closed off.

We don't of course know what the loss will be (if any). Research can place an estimate, but theoretical models do not always reflect practice. If there were a loss of 120,000 tourists, this would hardly represent much of a crisis. But this was a figure that took into account the rates of the tourist tax as they were, not as they now are. All that's certain is that we will be paying a great deal more attention to those monthly tourist statistics than ever before. Assuming, that is, that we believe them.

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