Tourism has increasingly become an important activity: it promotes cultural diversity, increases employment, and boosts a country’s GDP. However, this is not a benign phenomenon: studies show that tourism also increases the demand for given services, which creates pressure on residents’ living conditions due to supply constraints. Lisbon has been experiencing this same trend which has led to a rise in congestion, environmental degradation, and an increase in housing prices. Movements such as Morar em Lisboa have been rising against the city’s rents’ increasing and demanded government intervention. So, how can we regulate tourism equitably and efficiently without endangering its economic benefits?
Currently, the Municipal Touristic Tax in Lisbon is a specific, flat-rate tax of 1€ in all lodging facilities, regardless of overnight expenditure. As mentioned in The Economics of Tourism, this is a regressive tax as it constitutes «a larger share of the poorer tourists’ total expenditure». But how can such a tax be designed from a more equitable stance? An alternative would be an ad valorem tax, which is enforced as a percentage of the overnight charge. This type of taxation is already used widely – e.g. Amsterdam or Berlin –, and addresses the regressiveness issue of a specific tax. But we must enquire: what is the impact of this tax on demand and on the economy? A study performed by the University of Vigo which attempted to simulate the effects of certain tourism taxes in Spain simulated a 10% tax on lodging expenditure and concluded that its impact on the economy – namely on GDP and employment –, prices, capital, and labour income was not significant, nonetheless showcasing a considerable rise in government revenue. This is said to happen because, since «many touristic destinations have no clear substitutes», consumers respond to price changes by shifting their consumption by much less than the price variation. Naturally, this study presents limitations: it departs from a case-specific scenario for Spain, and does not directly compare a specific vs. an ad valorem tax, however it does provide some important results to broaden the discussion.
Departing from a standpoint where we see equity as desirable, the previous solution may be satisfactory, however regressiveness is only negative if believed that everyone is entitled to tourism, which is not necessarily the case: a given government’s objective may be to increase the tax such that it removes low-income visitors who spend less in tourism-related services and consumption goods, while not threatening higher-income visitors, hence regulating tourism and safeguarding it as an economic-booster. This is Amsterdam’s case, which is «looking at a new formula to squeeze out low-spending tourists and in favour of the heavier spenders», as stated here by a city councillor.
Concluding, an ad valorem tax on lodging should be considered in Lisbon, with the predicted rising trend in tourism and the consequences it entails, as it promotes equity without significant spillover effects, and higher government revenue which can be allocated to the externalities originated by tourism. Ex-ante, however, we must question as a society what are our main objectives when designing such a policy.
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