Evidence review of elasticities relevant to a visitor levy in Wales
The Welsh Government is in the process of consulting the public on proposals for a levy on visitors to Wales. This visitor levy will be implemented as a local tax with local authorities having discretionary powers to tailor the implementation of the levy.
In support of these plans, we were commissioned by the Welsh Government to conduct a Rapid Evidence Review of elasticities relevant to tourism supply and demand in Wales. This research critically reviewed the evidence for elasticities relevant to a visitor levy, including price, income, and cross-price elasticities of demand, and price elasticities of supply, in order to inform the potential design and implementation of such a levy. In the absence of Wales-specific evidence, our search protocol was designed to prioritise estimates of elasticities from comparable jurisdictions and from the most robust and credible sources.
Our research found that elasticities vary significantly depending on factors such as the visitor market of interest, the source location of the visitor, the nature of the tourist good and service, the methodology adopted by the study, and the timeframe considered. Specific findings included:
A wide range of estimates for price elasticity of demand, with the average estimate across all studies found to be roughly unitary (that is, a 1% increase in prices would reduce tourism demand by 1%).
Evidence that the price elasticity of demand varies depending on the nature of the good or service considered. For example, some evidence suggested that demand for tourist accommodation was slightly less responsive to changes in price than for other goods and services consumed by tourists (such as expenditure on shopping and leisure).
Tourism demand was generally found to be positively correlated with visitor incomes; that is, an increase in visitor incomes was found to lead to an increase in demand for tourism goods and services. The size of this effect though appears to be highly uncertain.
We identified an absence of high-quality evidence relating to the price elasticity of supply, a key parameter in any modelling of the impact of a visitor levy in Wales.
Our work will inform the Welsh Government’s formal consultation on the draft legislation due to be launched in the autumn of 2022 and assist local authorities in their decision-making regarding the implementation of discretionary elements of the levy. More specifically, the evidence we have reviewed should support the modelling of expected revenue generation and other impacts flowing from the implementation of a visitor levy in Wales, informing its design and development.
The full report can be found here.