Taxing Tourism: the effects of an accommodation tax on tourism demand in the Balearic Islands (Spain)

Abstract

Tourist taxes have become an easy way for governments to collect extra revenue for investment purposes, infrastructure and social services. However, because tourism represents a primary source of wealth and focus of new employment for different destinations, it is important not to levy disproportionate taxes on this sector. On the occasion of the recent introduction of a tourist tax in the Balearic Islands (Spain), one of the most leading destinations in the Mediterranean, the objective of this paper is to evaluate its price effects on tourist arrivals. In order to estimate this effect, a review on methodologies for analysing the price effect on tourism demand and empirical applications focused on the Balearic Islands or Spain is undertaken. The results show that the tourist tax now in operation will lead to an expected drop of between 0.4 per cent and 0.8 per cent in the total demand, measured in terms of tourist stays.