Why tax travellers?
Tourism is already making a huge contribution to revenue
Since when is a border tax on an export industry a good idea? That is what the Government — with the support of the industry and most of those consulted — plans to impose next year, in the form of an International Visitor Conservation and Tourism Levy (IVL).
It is mean spirited and muddleheaded. It should be called the Inhospitable and Vacuous Levy.
That is not to deny the obvious, which is that rapidly growing tourist numbers have overwhelmed infrastructure in a number of places and are putting pressure on some precious parts of the conservation estate.
In the year ended October, overseas visitor arrivals at 3.8 million were up 3.6 per cent on the year before and more than 50 per cent higher than 10 years ago. Arrivals are forecast to hit 5.1 million by 2024.
The question is not whether more money needs to be spent on catering for this growth, but whether the planned IVL — set at $35 a head for the first five years and due to come into force by October 1 next year — is a sensible way to fund it.
The Cabinet paper released when this policy was signed off estimates that tourism generates, directly and indirectly, about 10 per cent of gross domestic product and represents 20 per cent of exports.
If you want to start taxing an export trade, and you shouldn’t, unprocessed logs might be a better candidate. They are less likely to resent it.
Officials reckon the $35 levy represents less than 1 per cent of the average spend. So they don’t expect any material negative price elasticity effects on visitor numbers.
But it is not as if the other 99 per cent of what tourists spend here escapes the tax net.
In addition to GST, the Inland
Revenue also gets to tax the profits of Auckland Airport and all the other businesses which cater to this trade, not to mention the wages and salaries of the 230,000 people who are employed by it.
The Cabinet paper’s estimates put the revenue the Crown derives from international visitors at $3.2 billion, and the expenditure they occasion at $600 million. The phrase “quids in” comes to mind. Those numbers come from analysis the Ministry of Business, Innovation and Employment commissioned from Deloitte Access Economics.
The $80 million a year the IVL is expected to deliver represents less than one-tenth of 1 per cent of forecast tax revenue of $90b for the 2019/20 year.
If more needs to be spent on infrastructure and environmental protection, surely it could be funded from the whole tax base, especially when international tourists are already contributing substantially to it. The second argument put forward for the IVL is that the volume of visitors gives rise to what economists call negative externalities — spill-over costs which are not sheeted home to those whose behaviour gives rise to the costs.
But as NZIER economist Peter Clough argues, in a trenchant critique of the policy, the IVL is not only set too low to affect behaviour, but also and more importantly, it does not target those responsible for the harm that needs to be addressed, only a subset of them.
If this is a case for user pays, we need to recognise that New Zealanders exploring their own country form a larger share of tourists than foreigners, Clough says.
“Statistics New Zealand’s tourism satellite accounts show that domestic tourism expenditure has been both larger and growing faster than international tourist expenditures over recent years.”
In some Great Walks, national parks and other hotspots, tourist numbers are high and foreigners may predominate, Clough says, but there are plenty of other places where they are not so common.
In any case the IVL will exempt, among others, Australians and Pacific Islanders.
Clough sees merit in raising more revenue from user charges. “But the price differentiation that would be most useful is not by distinguishing by visitors’ place of origin but by the timing and type of use.”
The Cabinet paper hints of a potential threat to the social licence on which tourism depends, arising from a belief that there is a free-rider problem here, “a perception that local taxpayers are bearing the financial burden of visitor-related infrastructure for the benefit of international visitors.”
Given how large a net contribution visitors make to the public purse through various tax channels, talk of a free-rider problem is absurd.
If there is a cross-subsidy here, it is from ratepayers in tourist hotspots in need of more infrastructure, to taxpayers and the various recipients of spending by the national government.
It is, in other words, one of the problems that the review of local government funding currently under way at the Productivity Commission needs to address.
To be fair, the Cabinet paper kind of acknowledges this: “The IVL alone will not address all the issues identified; instead it is a first step in a wider funding package. It will fill gaps that other funding tools in the package cannot address.”
The Deloitte report included a look at three local bodies, including Auckland Council, as well as central government.
It concluded that in Auckland, annual council expenditure attributable to international visitors exceeded the revenue attributable to them by between $20m and $40m.
But such numbers are spongy, as the report acknowledges.
Costs of infrastructure and of hosting major events and conferences are difficult to apportion to tourism, as both locals and visitors utilise them.
In many cases, attribution of revenue or expenditure is based on the proportion of international tourist expenditure to total expenditure in the economy, or the proportion of international tourist nights to total resident nights. “This approach may not be appropriate in cases where the costs of scaling up or scaling down a particular type of infrastructure or service are non-linear.”
The 17th Century French Finance Minister Jean-Baptiste Colbert defined the art of taxation as “so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
This goose is golden.
If you want to start taxing an export trade, and you shouldn’t, unprocessed logs might be a better candidate. They are less likely to resent it.