The collapse of the conservative Independence Party led coalition government on Friday might be good news for the tourism industry. The government budget bill, which had been published before the government fell, is all but guaranteed to be rejected by the incoming parliament and a new budget bill to be introduced after the 28 October elections.
The budget bill and the government's long term fiscal plan included a number of major tax hikes which would have hit the tourism industry, raising prices of everything from guided tours and whale watching to hotel accommodation and rental cars.
Large tax-increases
After the government unveiled its budget last week the tourism industry warned that it included excessive new taxation on the industry, threatening to strangle the growth of Iceland's fastest growing export industry. Among those who criticized the budget bill were the Icelandic Travel Industry Association.
According to the government budget proposal, which was unveiled last week by the Minister of Finance Benedikt Jóhannesson, steep increases in several taxes paid by businesses in the tourism industry would have taken place next year, followed by a doubling of the Value Added Tax on tourism on January 1 2019.
Read more: 2018 Budget surplus will be 1.6%. Higher carbon taxes, tax-breaks for electric cars announced
The most consequential were a tripling of the hotel tax which is levied on each stay at hotels and guesthouses and the canceling of tax-breaks to car rentals. Car rentals have been mostly exempt from import duties on new vehicles.
Doubling of tourism VAT
The plan to double the value added tax levied on tourism, from 11% to 22,5% has been in preparation for some time. The tourism industry has criticized these plans, arguing that the industry was already facing significant difficulties due to the appreciation of the Icelandic currency, the króna. As the króna appreciates Icelandic services and goods become more expensive in foreign currencies. A stronger króna means that the price of hotels, tours and other services foreign visitors purchase has increased by 20-30% in the past year.
Read more: Tourist spending down by 10% per visitor, puffin shops hardest hit
The effects of this are already being seen in foreign visitors making shorter trips and spending less during their stay. Destinations further away from Reykjavík are already seeing a significant drop in the number of visitors, and many fear that higher taxes will lead to an even further reduction and a concentration of tourism at the most popular sites in South-West and South Iceland.
Tourism industry favors entry fee
Many in the tourism industry, especially smaller businesses, have argued a more reasonable approach would be to impose an entry-fee on foreign travellers which would then be earmarked to investment in infrastructure. An entry fee, paid by all foreign visitors upon entering the country was also seen as more sensible than a nature passport which the 2013-16 center-right government wanted to introduce. The 2009-13 left-wing government had tried to impose an entry fee, but backtracked on those plans after the several powerful tourism companies, including Icelandair, came out in opposition.
Read more: From the editor: Proposed nature passport is costly and stupid
After the plan to introduce nature passports had been abandoned the government embraced the idea of parking fees at tourism destinations and a general increase in taxes levied on tourism as a way to raise income to pay for necessary investments at popular sites. When the government first floated the idea of raising the VAT on tourism the industry urged the government to revise those plans and impose an entry fee instead.
The minister of finance has said the government had reviewed the options, rejecting the entry fee on the grounds that it would also raise the price of domestic flights. However, it would postpone the doubling of the value added tax, which was scheduled to go into effect in the summer of 2018 until January 1 2019.
The effects of the elections on tourism
It is of course too early to say what kind of budget parliament will pass after the election. A renewed mandate for the outgoing government is unlikely, but that does not rule out the possibility that a center-right government would follow a tax-policy similar to that outlined in the current budget.
Read more: See the spectacular waterfalls in Skjálfandi river which would to be sacrificed for more electricity
A center-right government would have to rely on the support of the right-wing populist People's Party and the culturally conservative center-right Progress Party. Opinion polls have shown that the voters of these two parties are most likely to view tourism and foreign visitors negatively. Historically the Independence Party and the Progress Party have also been the main supporters of new hydropower plants and the damning up of rivers to generate electricity for industry. Many in the tourism industry have warned that large new hydropower projects threaten untouched wilderness areas which are a major reason travellers visit Iceland.
Read more: Plans to destroy unique waterfalls in an abandoned fjord meets stiff resistance
A political victory by the left is expected to lead to increased taxes on the wealthy, the trawling industry and foreign corporations. The parties on the left have not outlined major tax increases for the tourism industry. The Left-Green movement has also fought for years for the protection of the Central Highlands by establishing a new national park covering most of the interior of Iceland. This idea has enjoyed wide support outside the ranks of the Independence and Progress parties.
The collapse of the conservative Independence Party led coalition government on Friday might be good news for the tourism industry. The government budget bill, which had been published before the government fell, is all but guaranteed to be rejected by the incoming parliament and a new budget bill to be introduced after the 28 October elections.
The budget bill and the government's long term fiscal plan included a number of major tax hikes which would have hit the tourism industry, raising prices of everything from guided tours and whale watching to hotel accommodation and rental cars.
Large tax-increases
After the government unveiled its budget last week the tourism industry warned that it included excessive new taxation on the industry, threatening to strangle the growth of Iceland's fastest growing export industry. Among those who criticized the budget bill were the Icelandic Travel Industry Association.
According to the government budget proposal, which was unveiled last week by the Minister of Finance Benedikt Jóhannesson, steep increases in several taxes paid by businesses in the tourism industry would have taken place next year, followed by a doubling of the Value Added Tax on tourism on January 1 2019.
Read more: 2018 Budget surplus will be 1.6%. Higher carbon taxes, tax-breaks for electric cars announced
The most consequential were a tripling of the hotel tax which is levied on each stay at hotels and guesthouses and the canceling of tax-breaks to car rentals. Car rentals have been mostly exempt from import duties on new vehicles.
Doubling of tourism VAT
The plan to double the value added tax levied on tourism, from 11% to 22,5% has been in preparation for some time. The tourism industry has criticized these plans, arguing that the industry was already facing significant difficulties due to the appreciation of the Icelandic currency, the króna. As the króna appreciates Icelandic services and goods become more expensive in foreign currencies. A stronger króna means that the price of hotels, tours and other services foreign visitors purchase has increased by 20-30% in the past year.
Read more: Tourist spending down by 10% per visitor, puffin shops hardest hit
The effects of this are already being seen in foreign visitors making shorter trips and spending less during their stay. Destinations further away from Reykjavík are already seeing a significant drop in the number of visitors, and many fear that higher taxes will lead to an even further reduction and a concentration of tourism at the most popular sites in South-West and South Iceland.
Tourism industry favors entry fee
Many in the tourism industry, especially smaller businesses, have argued a more reasonable approach would be to impose an entry-fee on foreign travellers which would then be earmarked to investment in infrastructure. An entry fee, paid by all foreign visitors upon entering the country was also seen as more sensible than a nature passport which the 2013-16 center-right government wanted to introduce. The 2009-13 left-wing government had tried to impose an entry fee, but backtracked on those plans after the several powerful tourism companies, including Icelandair, came out in opposition.
Read more: From the editor: Proposed nature passport is costly and stupid
After the plan to introduce nature passports had been abandoned the government embraced the idea of parking fees at tourism destinations and a general increase in taxes levied on tourism as a way to raise income to pay for necessary investments at popular sites. When the government first floated the idea of raising the VAT on tourism the industry urged the government to revise those plans and impose an entry fee instead.
The minister of finance has said the government had reviewed the options, rejecting the entry fee on the grounds that it would also raise the price of domestic flights. However, it would postpone the doubling of the value added tax, which was scheduled to go into effect in the summer of 2018 until January 1 2019.
The effects of the elections on tourism
It is of course too early to say what kind of budget parliament will pass after the election. A renewed mandate for the outgoing government is unlikely, but that does not rule out the possibility that a center-right government would follow a tax-policy similar to that outlined in the current budget.
Read more: See the spectacular waterfalls in Skjálfandi river which would to be sacrificed for more electricity
A center-right government would have to rely on the support of the right-wing populist People's Party and the culturally conservative center-right Progress Party. Opinion polls have shown that the voters of these two parties are most likely to view tourism and foreign visitors negatively. Historically the Independence Party and the Progress Party have also been the main supporters of new hydropower plants and the damning up of rivers to generate electricity for industry. Many in the tourism industry have warned that large new hydropower projects threaten untouched wilderness areas which are a major reason travellers visit Iceland.
Read more: Plans to destroy unique waterfalls in an abandoned fjord meets stiff resistance
A political victory by the left is expected to lead to increased taxes on the wealthy, the trawling industry and foreign corporations. The parties on the left have not outlined major tax increases for the tourism industry. The Left-Green movement has also fought for years for the protection of the Central Highlands by establishing a new national park covering most of the interior of Iceland. This idea has enjoyed wide support outside the ranks of the Independence and Progress parties.
