Front Porch | Tourism: Fueling even greater growth
The practice of adding large fixed taxes to airline tickets tends to produce an outsized negative effect on a tourism destination, including The Bahamas, which was discussed in a column two weeks ago, of which this article is a continuation.
A former tourism chief argues that ticket tax increases over the years, including the introduction and addition of passenger facility charges to airline tickets, compounded by relentless increases in departure taxes, stymies many potential tourists from visiting the country.
The Bahamas is experiencing phenomenal tourism numbers, including the number of stopover visitors. Many hotels are experiencing high occupancy, restaurants are busy and tourists are flooding into the country in great part because Americans are feeling buoyant about their economic prospects.
Still, the minister thinks that The Bahamas can enjoy even more explosive growth, including during non-peak seasons, if we addressed the high level of taxes on an airline ticket, especially from the Florida market.
There is a copious number of studies under labels such as “The Southwest Effect”, “The JetBlue Effect” and “The Ryan Air Effect”. The studies indicate that low price airfare is a substantial stimulator for travel to a destination. The results are unequivocal.
There are those with little experience in the travel and tourism business who say that “our upscale visitors can easily pay those kinds of ticket increases without even thinking about it”.
Most of those making such comments are not aware of three factors that come into play for our Florida business: the power of impulse buying from nearby markets, the substantial potential for Florida-Bahamas combination vacations and the economics of tourism.
A former senior tourism official noted an experiment that the Ministry of Tourism ran between 2008-2009 during the height of the Great Recession.
The ministry tested the impact of low price airfares from South Florida and New York and saw unequivocal and significant spikes in business when the low price airfares were offered. Even at the height of a recession there are travelers who seek and purchase a getaway on impulse if the price is right.
Moreover, the ministry found an almost equal share of travelers purchasing the considerably less expensive Towne Hotel as the much pricier Ocean Club, thereby debunking the notion that low airfare prices appeal only to travelers of little means.
In the past, many of the Florida/Bahamas combination vacationers were visitors to Florida who, on discovering how nearby The Bahamas is and how inexpensive it was to travel to The Bahamas, decided to add a Bahamas sidetrip to their travel plans.
Many of us understand this phenomenon from our own experience. Quite often whenever we have to travel a very long distance away from home, we make a side trip because we don’t know when we will be back to that distant destination again.
For many travelers from Florida, the total cost of the vacation, including airfare, matters. Many people would rather spend their funds enjoying themselves at the destination instead of paying to get to the destination.
Notably, the lower the airfares, the greater the likelihood for the traveler on a fixed budget to spend more at the destination. That is precisely the outcome that The Bahamas seeks.
It has been demonstrated time and again that many upscale travelers, who travel on first-class and business-class flights when funded by their companies, become much more frugal travelers when the vacation costs for themselves and their families are paid from their own pockets.
Each limited budget traveler still uses a hotel room, a taxi and patronizes a restaurant. So the number of visitors does matter to some segments of our tourism economy as compared to whether the individual traveler is upscale or not.
There is also the matter of understanding the economics of tourism. The former tourism minister observes that approximately 60 percent of our GDP is derived from tourism. In an efficient tax system, it means that 60 percent of the taxes collected by the Public Treasury should come from tourism activities.
But the best estimate, according to the former minister, suggests that some 50 percent of the taxes in our treasury is so derived. He advises that in order to understand these numbers one has to understand direct, indirect and induced taxes and direct, indirect and induced employment.
He avers that the very simple but peculiar conclusion is that the tourism economy is one in which the combined indirect and induced taxes are substantially larger than the direct taxes such as departure taxes and hotel room taxes.
In most cases, the only tax directly collected and therefore directly measured by governments are those such as departure taxes and hotel room taxes. It is estimated that those account for less that 10 percent of the taxes collected by our treasury.
The simple but powerful conclusion is that most of the taxes collected by government from tourism, by far, are collected because of and during the stay of the visitor.
For example, he notes that 95 percent of the wages and salaries of staff at Baha Mar and Atlantis is derived from the expenditures of visitors. Whenever those staff go to the supermarket and pay VAT, that VAT is therefore originally derived from a visitor.
The same applies when those members of staff make a local purchase of a vehicle or furniture. All of those are derived from but are not recorded as tourism taxes.
The former official offers this analogy. Whenever a trucking company collects items from a port to be consumed by visitors and the government collects the import taxes on those imports, they are lumped into the general import duties and taxes, but they are tourism taxes also.
When the trucking company is paid by the resort and the company pays their driver and the driver goes to the supermarket and pays his VAT, some portion of that tax stream is a tourism tax. And so on and so on.
If we want to see explosive growth in our tourism economy, the recommendations are obvious. We need to focus on those initiatives that make for increased hotel occupancies and increased average room rates.
One compelling such initiative is the need to adjust the fixed taxes on airline tickets, which disproportionately punishes our nearby and therefore most important markets.
The taxes should not be eliminated. They could be converted to percentage taxes or a combination of the two. The outcome would mean boosting our proximity advantage to Florida, which would be reflected in the price of tickets from the state to various destinations throughout our archipelago.
We need to take another look at the level of airline passenger facility charge that is added to the airline ticket, which helps pay for the development of the airport. When the Bahamas government dredged the harbor of Nassau, there was no cruise passenger facility charge added to pay for the dredging.
Why skip such a charge for your least valuable customers, cruise passengers, and add it for your most valuable customers, airline visitors? As difficult as this may be, the government may wish to take another look at this financing arrangement.
While we struggle to address the bombardment of our financial services sector, we need to simultaneously focus on ways to expand our tourism economy, tackle a vexingly high rate of youth unemployment, and provide more business opportunities for Bahamians throughout the Islands of The Bahamas.
Addressing the high level of taxes on airline tickets may lead to even more economic growth. It is a tax policy decision that rests squarely in our hands and not in the hands of other powers intent on decimating certain sectors of our economy.