Nova workboard

a blog from young economists at Nova SBE

Enriching Lisbon while it sleeps

With the local Portuguese elections of 2017, a heated debate on the Lisbon touristic municipal tax incidence arose. This tax is decomposed into an overnight tax (a 1€ extra charge per night introduced in 2016 with a maximum of 7€, yielding 13.5M€) and an air and maritime arrival tax (introduced in 2015 only in the airport and materialized on a 1€ extra charge per arrival, yielding 3.8M€ and borne by ANA, which refused its prolongation to 2016). Basically, the arrival tax applies to all citizens except Lisbon residents, children under two years old and passengers having their connection flight in Lisbon and the overnight tax to every citizen above thirteen years old.

The effectiveness of the lodging tax has been recognized even by the political parties who voted against it. However, improvements can still be achieved. One discussed proposal is to increase the tax to 2€/night to guarantee more affordable housing opportunities, though its opponents defend that Lisbon cannot rely on the touristic tax to solve its structural problems. This critic seems reasonable because when taxes increase by 1% (perceived by consumers as a price increase), guests´ behavior may change (lodging demand elasticity) – empirical data shows a fall on the occupation rate. Nevertheless, the more inelastic the lodging demand (insensitive to tax increases), the higher the success probability of such policy.

If the local government´s objective is to increase the revenue levied by this tax, then two less obvious alternatives can be explored. Firstly, following Ancona´s (Italy) example, Lisbon´s city council could set a fixed tax independent of the accommodation´s length. Given an average stay in the capital of 2,36 nights and assuming no substantial future changes, setting a tax superior to 2,36€/person would expectedly generate a higher recipe. A possible critic here is the higher the number of nights spent in Lisbon, the higher the benefit acquired so discriminating the overnight tax according to benefit levels delivered to the tourist seems reasonable (benefits principle).

Secondly, note Paris´ example where lodging taxes vary according to the accommodation´s number of “stars”. Since hotels with five, four and three stars lodge most tourists in Lisbon, by setting a tax above 1€/per night for these accommodations and a lower tax for the remaining (tourism progressive taxation), the town hall could expect to increase overnight total tax revenue. Additionally, bearing in mind equity considerations, this proposal is justified by the typically higher predisposition to pay a superior tax of a tourist that stays in a three to five-star hotel than the one who stays in a hostel (diminishing marginal utility of income). However, this alternative presupposes not a fall on overall consumption but rather induce high spending tourist to “reduce only their savings”.

Personally, such tax makes absolute sense as to improve the quality of the city (not decrease the number of visitors), since the increase in Lisbon tourism is exerting higher pressure on existing resources. Accordingly, the proposed alternatives would be more efficient to achieve the desired goal while generating a higher revenue.

Margarida Castro Rego | 23848

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Author: studentnovasbe

Master student in Nova Sbe

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