Tuesday 10 March 2015

Soak the tourists?

Gareth Morgan argues that New Zealand needs to do a better job in extracting all the surplus from tourists.

He first argues that foreigners buying property here would pay a fairer tax share under comprehensive capital income taxation on the value of their purchased property.

A lot here would hinge on relative elasticities.

Suppose that foreign demand for NZ property is completely elastic (there are close substitute countries where rich people might go instead) and that domestic property supply is completely inelastic. Under those assumptions, we would see a one-off drop in property values equivalent to the present discounted value of the future tax flow. Some money currently being paid by foreign investors to Kiwi owners would instead go to the government. If demand for NZ property is more elastic than the supply of NZ property, which seems likely, then the proposal mostly transfers money from current owners to the government. And the more elastic the demand for NZ property among foreigners, the more foreign buyers are deterred by the regime.

He goes on to worry about costs imposed by tourists. In some cases, he's right - but in those cases it points to a problem that's broader than tourists. He points to costs imposed by tourists when they have car accidents; if tourists do have disproportionately more accidents, then ACC car registration levies on cars run by car rental agencies should be higher than those on residents' cars - the problem is one of inadequate premium sensitivity to realised risk than one of tourists per se. And while he's right that the system should charge tourists when they wind up needing costly rescue operations from mountaintops or ravines, the system really should charge whenever there's recklessness - whether from tourists or locals.

Morgan continues:
But we could and should go even further. This season the Great Walks are enjoying record numbers of tourists. Again these are taxpayer-funded facilities so why shouldn’t the taxpayer get a direct return on that investment, at least to cover the track maintenance? We already charge for hut beds so clearly are not allergic to the user-pays ethos, but extending this to foreigners having the right to use of National Parks again seems a no-brainer. Again that levy could be collected at the airport as part of a bundled “taxpayer-provided services levy”.
And it shouldn’t stop here. In instances where there are direct charges for the services provided by central- or local-government funded or part-funded amenities, we could simply have a separate and higher charge for foreigners. Zoos for example could levy that – as the example in the photo illustrates at Darjeeling zoo, foreigners pay 2.5 the entrance fee that locals do.
We already do this at the Waitangi Treaty Grounds, presumably because there is value in New Zealanders visiting this historical site. Why not extend this approach to other sites – such as Te Papa, Zealandia, and the plethora of other Zoos and Museums that receive taxpayer and ratepayer subsidies?
On the other hand, tourists pay 15% GST on everything they buy here and only can reclaim GST on those goods they bring home with them - if they can be bothered to fill in the paperwork. Further, tourists already pay more for facilities like zoos where locals can often profit by purchasing annual passes that pay for themselves after two or three visits.

And where tourists are cost sensitive, tourist-soaking levies on some facilities will reduce the amount tourists spend elsewhere.

Bigger picture, cities like Wellington do pretty well out of tourists. Sure, they can be a bit annoying for locals when Lambton Quay is jammed if two cruise ships are in port at the same time, but we're able to support a better variety of restaurants and bars than we could without them.

Finally, in a world where public facilities are directed to soak tourists, they need a way of identifying locals. That means we'd all need to show our driver's licence for entry to these facilities. But why stop there? Councils fund a lot of art galleries; you might need to bring your power bill or some other proof of local residence to get discounted admission: a driver's licence wouldn't be enough. Or maybe Councils would start issuing special residents' cards. People who sound local would likely not be bothered to pull out their IDs when entering facilities, but folks like me who still have a Canadian accent after being here for more than a decade would have to stump up every time.

It's that last bit that sounds particularly unappealing. I know Morgan's framing this as being an anti-Winston-Peters thing, but I'd reckon that Morgan's soak-the-tourists proposals have a lot better chance of passing in a world in which New Zealand First has the balance of Parliamentary Power than one in which they don't.

I'd hit on related topics in last week's NZ Initiative "Insights" newsletter.


  1. Given that the elasticity of supply of property is close to zero, it doesn't really matter whether the foreign demand for property is high or low; a capital tax would still be just a lump-sum tax (takings) on existing property owners, foreign or otherwise.

    For the rest, Gareth seems to be invoking the optimal tariff argument, for which it is necessary that the country have some monopoly power over its exports. I would be very surprised if the elasticity of demand for NZ tourism services implied an optimal tariff even as high as the 15% currently levied through the GST.

  2. I worry too about problems akin to double marginalisation where Morgan would extract at the airport, then all the venues would extract, when we already have a backdrop of some existing price discrimination.

  3. To me, this sounds like a modern-day version of Fortress NZ. But even ignoring that unappealing aspect, I struggle to see how it could pass any conceivable cost-benefit test. The administrative costs, the enforcement costs, and the foregone goodwill costs (incurred by both locals and foreigners) will be substantial, and never-ending.

  4. I think he may have a point with the user pays option for the Great Walks though (ignoring the blatant xenophobia in the motive). I keep reminding everyone that even if the government as a whole may be cash neutral in a set of transactions, lots of different agencies can be cash positive (or negative) in the process, leading to some very odd incentives and over or under serving final customers and taxpayers.

    In general I'd argue that DOC should be able to levy a charge to users to cover its costs - and to further improve and invest in services for park users, the only question is how. So long as those costs incurred are efficient and reflect the desires of park users as customers.

  5. Funnily enough I was today looking into a weekend away and noted that some Taupo businesses already practice price discrimination in favour of locals: http://www.taupodebretts.co.nz/taupo-hot-springs-pools/hot-mineral-pools-prices
    Proof of address is indeed required.

    I've always thought we should do away with GST rebates at the border. The tax paid probably roughly covers the cost of services used, more to the point though, the current system unfairly favours those organised enough to collect receipts, creating a perverse incentive towards visitors who are boring!

  6. User charges on the walks - that don't discriminate between Kiwis and others - I could totally support.

  7. Have a look at DOCs budget for 2014/15, at $430m and with around 1.2 million visitors each year to the major national parks, a fully cost recovering charge would come out at around $350 per visitor. Which obviously isn't going to fly.

    Even a notional charge of $10 per visitor (maybe $12m total annual revenue ignoring collection costs) still isn't going to make a dent in the $430m Departmental budget. Which might explain why this option hasn't been pursued harder before: lots of political pain for not much gain.

    All that said, if I was DOC, I would still put a donation box at the start and end of major hikes and hold some fancy networking dinners to shake the can and ask for donations. Free money is free money, and lots of people value this stuff very highly (myself included).

    Other option might be hitting commercial operators with a special user fee. The commercial operators are effectively making money off a freely provided asset, and not paying the taxpayer for the incremental operating costs imposed. The benefit here would also be that commercial operators' visitors have a higher willingness to pay, and their numbers can be audited.

  8. DOC already charge commercial operators fees for using DOC managed land and receive donations, this was just under $40m for the last couple of years.