Taxation Beats Regulation for Amsterdam’s Tourist Dilemma

Much to the irritation of Amsterdam’s citizens, the city attracts more tourists every year, leading to several problems. Firstly, citizens are incredibly annoyed by the number of ice cream shops in the city centre. This is part of a wider problem in which companies focused on Amterdam’s citizens are replaced with companies focused on tourists, making the city centre less and less a place for Amsterdammers.

The fear is that this encourages citizens to avoid the city centre, leading to a city centre without a soul. Secondly, new hotels and Airbnb lets are crowding out the people who would like to live in the city centre, making it increasingly expensive to live there. Thirdly, currently existing companies active in the tourist sector are afraid that the increased competition from new companies will hurt their profits.

To limit Amsterdam’s ‘touristification’, Amsterdam’s municipality has started to take several measures, with the focus on mitigating the problems caused by tourism and by limiting the number of tourists coming to Amsterdam. Two such measures include increasing expenditure on cleaning the city centre and maintaining law and order.

In addition, the city is trying to attract tourists who have higher purchasing power, such as families, instead of the less affluent backpackers and young people. They hope this will be achieved by changing the kind of tourist attractions on offer. To limit the number of tourists, the municipality sees a solution in regulation. By micromanaging which kind of companies can be located at which exact location, they can limit the number of hotels, ice cream shops, and other tourism-focused establishments in that area.

These measures have not been proposed in a political vacuum. Rather, the ‘polder’, the colloquial term for the cooperation between government, business, and civil society, is the source of these measures.

In November 2015, the association, Friends of the Amsterdam City Centre (Vereniging Vrienden van de Amsterdamse Binnenstad, a.k.a. VVAB) and several other business associations, presented proposals to limit tourism. In November 2016, another association representing Amsterdam’s citizens, WIJ-Amsterdam, organised an evening to put touristification on the agenda. In other words, the measures that the Amsterdam municipality has taken are entirely in line with the wishes of most interest groups in Amsterdam.

However, while there is broad public support for these measures, they are not the set of measures that would do most for the public good. David Zetland, Assistant Professor at Leiden University College in economics, argues that regulations, such as how many hotels there can be, protect companies that already exist.

For existing hotels and ice cream shops the regulations mean they will have fewer competitors, meaning they will be able to hike up their prices, as the supply of goods is fixed. Lower supply means higher prices, but greater demand also means higher prices. In this case the regulations fix the supply, while the demand increases quickly, so prices will increase. This leads to excessive profits for all existing companies. Moreover, as competition is decreased, companies will feel less of an urge to innovate.

Even worse, innovators with great ideas in those branches will not be able to start a new hotel or restaurant, because the municipality will not allow them to. There should be little sympathy for hotel owners afraid of increased competition, because it is competition in the hotel sector that stops them serving a terrible breakfast after a night on a horrible bed.

Therefore, Professor Zetland argues a much better solution would be to use Pigouvian taxes, which are taxes levied on products or services which have negative externalities. Negative externalities occur when two people make a deal (say, you pay a hotel to sleep in their room for a night), and a third person ends up with a problem because of this (say, you make a lot of noise outside the hotel at night, keeping the neighbours awake).

In this case the negative externalities are that too many tourists go to Amsterdam’s city centre, which means that it becomes too crowded, there are problems with drunk and drugged tourists and that there are too many establishments focused on tourists, crowding out services focused on Amsterdam’s citizens.

By far the easiest way to stop this is to raise taxes on sleeping in a hotel or Airbnb. This way the market keeps functioning as it should, making sure those who innovate are rewarded for innovation, and making sure companies are at the optimal location, while at the same time reducing the number of tourists.

Moreover, while limiting competition leads to excessive profits for existing companies, the tax revenue from a Pigouvian tax on sleeping in a hotel will go to the public purse. This money can be invested in public transport, cleaning the city centre, or preventing public disturbances caused by tourists, etcetera. Many of the solutions proposed by civil society, the police and business associations could be funded by this tourist tax. In addition, by making overnight stays in Amsterdam more expensive, less purchasing powerful tourists will stay away, while the more affluent customers will keep coming, which also mitigates negative externalities such as noise and drug abuse.

Besides, higher tax incomes for the municipality are not exactly unwelcome. With an extra tax on overnight stays of €10 per head, and around 13.8 million overnight stays in 2016, the municipality would receive €138.000.000. Considering that the local governments in Amsterdam (stadsdelen) need to cut €14.000.000 from their annual budgets, the money made by increased taxes on overnight stays should be extremely welcome. Instead of increasing the profits of hotels using regulation, the municipality could fund projects that serve the public good.

Unfortunately, there is little attention to this aspect of increased regulation amongst political parties in Amsterdam. A short round of emailing to several political parties in the municipal council found that D66, CDA and PvdA support raising taxes on tourism, although they disagree on the exact execution. The VVD is against raising taxes, as it is afraid those taxes would be used to fill gaps in the municipal budget, rather than mitigating the negative externalities of tourism.

All parties contacted agree that mass tourism has negative externalities, that more purchasing powerful tourists should be stimulated to come here, and that maintenance of law, order and public cleanness are priorities. However, none of the parties subscribe to the view presented here that regulation of the number of hotels and Airbnb locations is a suboptimal measure compared to taxing those companies.

Amsterdam’s municipality has decided to listen to the complaints of its citizens about touristification of the city centre. There is broad support for measures against touristification, and many of the proposals to mitigate the problems are sensible.

However, regulating the number of hotels and shops in certain sectors is not an optimal solution from society’s point of view. The regulation will increase the profits of hotels and Airbnb landlords, while it will do nothing for the city at large.

On the other hand, a tax on overnight stays will achieve the same goal, namely halting the steady growth of tourists coming to Amsterdam. However, instead of funding hotels and Airbnb providers, it will fund the public purse, allowing the municipality to pay for policies aimed at mitigating the negative externalities from tourism and it could remove the need for major budget cuts in the stadsdelen.

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