On European city taxes and tourism

I’ve been travelling around Europe by train for the last two weeks. In that time, I’ve visited Brussels, Berlin, Prague, Budapest, Vienna and Paris. In each of the locations so far, I’ve been charged a “city” or “tourist” tax.

It’s not uncommon to see this additional levy placed on hotel rooms across Europe, but it’s something that doesn’t happen in UK cities at all.

Whilst visiting these foreign delights, I’ve also spent a good few hundred quid on cultural activities or “tourist attractions”. Museums, galleries and the like. Many of these are things that you might expect to visit for free in — for example — London.

City taxes are genius

Cities on the continent are, in effect, extracting cash from tourists twice, where cities like London and Manchester don’t do that even once. You might think I’m about to launch into outrage, but guess again; I think it’s genius.

City taxes are an easy way of generating tax revenues. Apparently the Greater London Authority floated the idea of a city tax early last year, and thought that a 5% tax on each room per night could generate around £240 million a year. That’s some serious cash; especially in the light of decreasing central government grants and a pressure not to increase Council Tax.

There’s no reason why it would have to be limited to London though - Manchester, Birmingham and other cities with concentrations of tourists or business visitors could be equally ripe for such a tax. Clearly dozens of cities in Europe are successfully doing this: why not UK cities too?

But a tax is a tax

In economic terms, taxes are intended to dissuade people from doing something. We tax petrol and diesel because we want drivers to use greener, more efficient transport; we tax cigarette’s because we don’t want people to die. You get the idea.

In practice a city tax could either drive up prices for consumers (like me) or it could put an additional tax burden to businesses who may feel unable to simply pass the cost on to consumers (good for me, but “bad for business”).

So if city taxes are meant to dissuade behaviour, and they might hike up prices, is a city tax going to dissuade me coming to your city? Well, no.

On this holiday, I’ve paid the equivalent to a couple of pounds a night in most cities. It’s not always that cheap: I went to Rome last year, and I paid €7 per person, per night in taxes (more than £100 by the end of that holiday). Importantly though, I still went. I bet others would still come to UK cities if they had city taxes for the same reason.

A city tax could add around £4 per night to the cost of a budget hotel in London, and at least £30 per night to the cost of a 5-star hotel, according to the GLA. That’s potentially a pretty significant deterrent effect on booking a hotel room, but the thing is, people pay it.

I paid it this week.

I could have choosen to go to cheaper hotels to avoid paying as much, but ultimately, I wanted to explore these cities, so I can’t escape the tax entirely. Like I said, it’s genius (and a bit dastardly).

Collecting the tax

The level of tax and how it is administered matters: it determines how pissed off I am at paying it. And when it comes to European city taxes, they could be less painful.

There are a lot of hot takes on the economic theory of taxation, and specifically on the Laffer curve and what the ‘right’ level of tax is in various circumstances. I’m not going to go there. What I will say is that, where a city tax has been a few Euros, I haven’t cared. Where it was €7 per person, per night, I didn’t care how beautiful your city was, I was unhappy at paying that (looking at you, Rome).

Basically, charge me, but don’t rip me off.

Then there is how you pay. Some city taxes are paid as part of the cost of your room, so you see and consider an ‘all-in-one’ price; the hotel I stayed at in Prague was like this. I didn’t think twice about the tax in this instance. In fact, I don’t even know how much it was!

In other places, I was charged at the end of my stay as a separate cost. This is a bit harder to swallow: it feels burdensome when it’s called out.

My hunch is that city taxes have a greater deterrent when they’re explicitly separate from the cost of a room. You can see why hotels wouldn’t want to include the tax in the cost of the room — it makes them look more expensive relative to their competition — but it became a dint in my experience when I paid it separately.

In other words, treat it more like part of the service, rather than a tax; if I know I’m paying a tax, I won’t like it.

Using the tax to subsidise what makes UK cities great

If a tax is intended to dissuade behaviour, then a subsidy is intended to promote a behaviour. European cities get to invest in their cities because of the tax they charge tourists: the UK could do the same, and it’s starting from a stronger place.

We’re very lucky in the UK that we invest loads in keeping our parks, museums and galleries free to access. On the continent they charge you an arm and a leg for a museum, when we give all the museums in London away for free.

We’re already putting a huge public subsidy into our attractions: taking that away would probably be an even larger deterrent than a city tax. So instead, why not shift the tax burden away from locals and on to tourists?

It’s a triple-win. Everyone still gets access to great places for free, tourists feel like their city tax is for something meaningful (“did you know, madam, that because you’ve paid this city tax, you can get into all our museums and galleries for free?”) and we would get to knock some money off our Council Tax or invest the extra revenue in something meaningful for us, like cheaper rail fares. Everybody wins!

A great opportunity for public policy in cities

As I travel back from Paris on the Eurostar, holiday complete and taxes extracted, I think there’s a potential opportunity for our cities to make a city tax work. The trick, if we would be so bold, is to make it feel like a value added exchange, not an extractive excuse for pulling more money from our pockets.