Balearic Islands score an own goal

Another day, another counter-productive economic measure brought in by a left-wing government. 

This time it’s in the Balearic Islands, where a coalition of socialist parties has announced plans to cap the number of beds available for tourists and are introducing serious penalties to those using sites like AirBnB without a license (including fines of up to €40,000 for the individual listing and €400,000 for the company holding the advert).  

This isn’t a tourist tax; they’ve had a tourist tax since 2016. That tax is quite modest, with a maximum charge of €2 a room per night for the most expensive classification (applicable to hotel chains and individuals using gig economy listings). No, this is a full licensing system for both the formal and informal tourism sector. 

Given that UK visitor numbers rose throughout the economic downturn, and have continued to go up through recovery and during the recent period of stagnant purchasing power - even after the introduction of their tourist tax - you would be right in thinking that British tourist numbers to Spain and the Balearics are pretty inelastic. If you were a left-wing government looking to raise revenue to provide services you would think you would be pretty enthusiastic about a source of income that seems guaranteed.

 

Indeed the evidence for tourist taxes is pretty positive for those that want to control numbers. When Malaysia introduced one they found the tax was paid where the burden really should fall: by tourists (89% in the short run and 74% in the long run) with the revenues raised being quite predictable.

The reason that these taxes are quite a good idea isn’t purely because they can raise money but because they also correct externalities. Tourists can often come with externalities, like alcohol fuelled crime and anti-social behaviour, congestion and pollution. It makes sense to charge for costs incurred. 

But no. Instead the Balearic Islands’ government will hit the supply side. No new licenses will be issued from this year for at least twelve months, with almost 70% of the beds on the isle of Mallorca and over half in large chain hotels. The aim being to reduce the number of beds listed in the islands by 120,000

It will hit all manner of Mallorcans and Minorcans. It will hurt those now forced to apply for licences to list their spare rooms online or risk exorbitant fines. It will force restaurants and bars to adapt to reduced revenue from lower tourist numbers. And it will curtail innovation as large established hotel chains seize control of bed licences. Not to mention, of course, that a reduced number of beds will lead to a reduced revenue take from their tourist tax. 

The Balearic Islands have fared better than the Spanish mainland during the long recession the country has endured but the number of businesses there has only this year risen above its 2008 peak. Its citizens are looking for a way to profit from the huge interest in visiting its sunny shores and it’s reasonable to suggest that a tourist tax may help distribute the proceeds of visitors quite equitably. 

Instead of being reasonable and increasing taxes to fund programmes that the government wants to run, while letting the economy and incomes of its people grow, the socialists want to plan. Who would have guessed? 

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Thanks to Ananya Chowdhury, an intern at the Adam Smith Institute this week, for the help with the research!