Key Issues in Travel & Tourism Development

On a superficial level, Travel & Tourism taxation issues seem relatively unimportant.  However, upon deeper investigation, it is apparent that Travel & Tourism is directly linked to, if not a driving force for, world commerce. The following discussion focuses on the key issues that shape Travel & Tourism development, and the role the industry plays in world trade.
 

Taxpayers and Voters

For policymakers, taxing Travel & Tourism is attractive because the bulk of the tax burden is perceived to fall on the shoulders of non-constituents.  The short-term injection of revenues paid by outsiders is politically seductive. The long-range implications can be sobering.

When taxes on Travel & Tourism reach a certain threshold, they can emerge as a net economic drain upon the economy.  Total tax rates that surpass this threshold shift demand away from the taxing jurisdiction, resulting in effects that resonate throughout the whole economy.  As total business revenues decline in the face of such ill advised taxes, adverse effects such as direct and indirect job losses are likely to occur.  In this way, taxes on Travel & Tourism ultimately do fall on the shoulders of constituents.


Exports

Many policymakers do not understand that the sale of Travel & Tourism to international visitors is an export activity.  Thus, taxes on Travel & Tourism may constitute taxing of exports.  Although this practice has become common, it has negative economic and social impacts.  Specifically, taxing Travel & Tourism is problematic because:

  • Sound economic policy for competing in the global marketplace states that taxing exports is self-defeating and should be avoided. No other exporting sector is systematically taxed like Travel & Tourism. Policymakers form all types of market economies realize that taxing goods and services upon export functions to reduce sales and ultimately the economic viability of a region as export dependent employment declines.
  • Taxes on exports reduce competitiveness in the global marketplace. Many counties rely on subsidies to keep goods and services priced competitively in export markets.  Although subsidies create artificial market conditions, the practice demonstrates the length to which governments will go to gain and maintain market share.  Taxing exports causes the opposite effect.  Taxes that raise prices significantly above free market values act to reduce competitiveness.
  • The stifling of competitiveness has an enormous impact on income generation and employment. Many countries are grappling with high unemployment rates brought on by a variety of changes.  As Travel & Tourism becomes less competitive, there are significant impacts on employment, because the industry is labor intensive.  Those who become unemployed as export market share declines convert form tax payers to tax recipients, relying on a wide range of government supported services.  The cost of unemployment also extends beyond the net revenue drain on government to a host of personal and social ills, ranging from the breakup of families to rising crime rates.
  • In an age of reducing trade barriers, taxing exports is a practice that runs contrary to worldwide efforts to streamline free trade. The near total absence of any government systematically taxing exporters is ample evidence that such a practice represents a poorly conceived tax policy.  Government revenue gains from such taxes are more than offset as their negative impact on sales is realized.  Not only does government revenue decline, but also the economy is left with rising levels of unemployment.

Travel & Tourism is not immune to the perils most generally identified with the taxation of manufactured imports. Indirect taxes, as well as VAT and sales taxes, border taxes, departure and embarkation taxes, all qualify as taxes on the Travel & Tourism export.
 

Changing Behavior and the Ease of Product Substitution

In all cases, taxes modify the behavior of consumers and industry.  Taxes are commonly used to change behavior that is deemed undesirable by society. For example, a "gas guzzler" tax may be imposed on some automobiles to encourage purchase of fuel-efficient vehicles.  Likewise, the unwitting taxation of beneficial goods and services can also change behavior that is otherwise desirable.   In the case of Travel & Tourism, taxes that are perceived as discriminatory or unfair will encourage consumers to seek substitutes by selecting alternative products and destinations,

Several factors combine to make a destination’s Travel & Tourism industry especially vulnerable to tax-induced product substitution. Unlike most markets, where products are delivered to consumers, the travel market involves mobile consumers who must be delivered to the product.  Furthermore, the consumer is usually an active participant in building the individual travel components into the final product.

Additionally, a significant proportion of Travel & Tourism is non-obligatory with respect to destination; in other words, the consumer is totally free to choose any destination that is accessible and affordable.  In this respect, the speed of destination substitution is dramatic when any element, including cost, is perceived as being unattractive,

This type of immediate response is evidenced by the travel market’s reaction to terrorism activity.  Although the mass media’s penchant to cover such episodes is a significant factor in explaining why travelers abandon targeted destinations en masse, it serves to demonstrate the traveler’s ability to freely substitute destinations whenever the need arises.

When faced with such potential extreme fluctuations in market conditions, destinations must exercise extreme care to avoid creating negative perceptions in the minds of the traveling public.  This task is made even more difficult because one negative experience, such as an abnormally high tax on a hotel bill, can taint an otherwise enjoyable visit and discourage the visitor to return or recommend the destination to others.

Finally, the total effect of Travel & Tourism taxes is often underestimated as tax levies evolve incrementally over the years.  However, the cumulative effect is readily apparent as travelers are increasingly barraged by a complicated array of mystifying taxes.  Frequently, every step in the production of the service is taxed.  This process is akin to taxing an export commodity upon planting, harvesting, transportation, refinement, packaging, and sale.
 

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Issues in Tax Policy 

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