Abstract

This paper studies the issues related to a tourist tax in a scenario of multi-jurisdictional tax competition between cities with major tourist attractions. On the one hand, tourism expenditure has a positive effect on production, income and government revenue. On the other hand, too many tourists cause damage to city infrastructure and higher congestion costs. To assay the impact of “free riding”, two types of tourists are identified: excursionists (day-trippers), who are assumed not to be subject to taxation and are thus free-riders, and overnight tourists. It is found that an increase of the overnight tourists/excursionists ratio will increase the government expenditure on maintenance of infrastructure and that, while tourism improves the quality of tourist sites, the public good level falls short of the first best efficiency level.