Rachel Reeves should allow local tourist taxes

Recent reports suggest that the Treasury, with support from No.10, stepped in to prevent the deputy prime minister from adding a power to levy local tourist taxes in her recent devolution white paper.  ²² https://www.independent.co.uk/travel/news-and-advice/england-tourist-tax-angela-rayner-rachel-reeves-b2793567.html

The Treasury has a long history of wanting to monopolise potential tax bases – even if it does not want to use them. In 2008, the Lyons review of local government suggested allowing limited experimentation with tourist taxes (even if Lyons himself seemed sceptical) – but nothing came of it.

But while some taxes are bad in principle, the idea of adding a levy to hotel stays (and ideally other platforms like holiday rentals and Airbnbs) is not one of them.

There is no objection in principle to the idea of taxing tourists

Areas with big transient populations of tourists can generate more revenue but also undoubtedly face additional costs – such as coping with added passenger traffic or dealing with litter – which are currently borne by local residents. Those residents must also deal with crowds and congestion – although the UK has so far seen nothing like the anti-tourist protests that are commonplace in Spanish tourist hotspots as locals complain about the impacts on both housing availability and the takeover of their cities by visitors. Asking tourists to make a fiscal contribution to those additional costs is a way of rectifying that balance, while also being a useful source of revenue at a time when budgets are squeezed.

The tourist industry is unsurprisingly hostile to the idea. But international experience suggests that the sort of low level charge usually levied has minimal deterrent effect (though the UK’s hospitality industry may argue that some European countries levy lower VAT rates on hospitality than this country).

Tourist taxes work better as a local tax

There may be a different reason for Treasury hostility: it may be eyeing up a hotel tax of its own.  ²³ https://bmmagazine.co.uk/news/rachel-reeves-weighs-a-hotel-tax-as-treasury-battles-to-fill-funding-gap/  There were stories in January that Rachel Reeves was considering that as an option – and chancellors have before invented new taxes when they need to repair the public finances. It was the post-exchange rate mechanism exit era that saw the introduction of Air Passenger Duty and Insurance Premium Taxes, which now yield well over £10bn per annum.  ²⁴ https://www.gov.uk/government/statistics/insurance-premium-tax-ipt-bulletin/insurance-premium-tax-ipt-commentary-january-2023 and https://obr.uk/efo/economic-and-fiscal-outlook-march-2025/#chapter-4  VisitBritain estimates there were 41.2m inbound tourist visits to the UK in 2024 and those tourists spent a total of £31.5bn. Of course tourist taxes also apply to domestic visitors – they clocked up a total of 117.4m overnight stays in 2023 and spent another £31bn.  ²⁵ https://commonslibrary.parliament.uk/research-briefings/sn06022/

That does not suggest there are vast amounts of revenue to be raised from tourist taxes – 34% of overseas visitors for instance come to visit friends or relatives so a good proportion would not pay a hotel or holiday rental tax. But reasonable estimates suggest a tourist tax set at a similar level to other countries could raise around £500m nationally.  ²⁶ https://commonslibrary.parliament.uk/tourist-taxes-in-the-uk/  That does not move the fiscal dial at national level. Nor should it be seen as sufficient to fix a creaking local government finance system. But it could make a useful addition to local budgets. 

The real benefit of allowing a tourist tax as a local tax is that mayors or other local leaders will have much more direct feedback on the impact on local tourism businesses and jobs and be much better placed to weigh the benefits of the tax versus the costs. If a high Liverpool tourist tax diverts people away from Beatles experiences into Oasis experiences in Manchester, the mayor can recalibrate. But if it allows reinvestment in improving local transport and cleaning up the local realm, it may both benefit local residents and attract more visitors. 

The Treasury needs to be more consistent on fiscal devolution

Both Wales  ²⁷ https://www.bbc.co.uk/news/articles/cj6195kg11lo  and Scotland  ²⁸ https://www.gov.scot/policies/tourism-and-events/tourism-tax-discussion/  are already moving on taxes on overnight stays with new charges to start next year. In England, the UK government is relaxed about parking charges, which have become quite a big element in some councils’ budgets. It has allowed congestion charges, having consistently been unwilling to embrace road charging even as it faces the prospect of losing billions in fuel duties. 

But in other areas it seeks to clamp down on local discretion. England is an international outlier in how little taxation is set by or assigned to local government. While this government has committed to further devolution to mayors, tax devolution was not even mentioned in the white paper. This is a gap in the agenda. For strategic authorities to become a mature layer of government as the white paper envisages, over time more revenues should be local.

A long-term, comprehensive strategy for more fiscal devolution would be welcome. But even without a bigger strategy, there is little case for the government to deny mayors’ ability to raise specific small levies like tourist taxes. Denying even this small step suggests the Treasury retains a strong centralising instinct, especially when it concerns their policy domain.

It is not too late for the devolution bill to be amended to include these mayoral powers as part of the new devolution framework. If it is not, we should expect mayors to request this power (as part of a new ‘right to request’ provision in the bill) once it receives royal assent. The government would have no strong case to refuse that request.