KI Traveller's Levy Economic Impact Assessment - Kangaroo Island ...

Commercial-in-Confidence
KI Traveller’s Levy
Impact Assessment
2. THE ECONOMICS OF A TRAVELLER’S LEVY
In considering a possible Traveller’s Levy for KI, a range of economic considerations must be
taken into account – both in conceptualising and analysing its likely impacts and determining
the optimal design (in terms of setting the rate, its base, administration and collection). This
section overviews some of the key principles underpinning the economics of a Traveller’s
Levy.
2.1 EFFICIENT DESIGN CRITERIA
In assessing alternative mechanisms for collecting revenue (such as taxes, levies or
charges), economists draw on a range of criteria against which to evaluate different options.
In some cases these criteria are complementary, in others they are competing and hence
must be traded off based on priority. Ultimately, it is never possible to meet all criteria
simultaneously.
Revenue sustainability: does the levy generate sustainable, reliable revenues for
Council to meet its expenditure requirements over the longer term
Simplicity: are the compliance costs to business and collection costs to Kangaroo
Island Council excessive Is the levy a cost-effective revenue-raising instrument
Efficiency: does the levy significantly distort behaviour in a way that results in large
dead weight losses
Equity: does the burden of the levy fall disproportionately on particular parts of the
community that may be a concern
Cross-border competitiveness: does the levy reduce KI’s competitiveness as a
tourist destination in a way that overly encourages tourists to visit alternative locations
Competitive neutrality: are businesses conducting similar activities treated in similar
ways
2.2 EFFICIENT TAXES AND THE ELASTICITY OF DEMAND
An important construct in the analysis of a Traveller’s Levy – both its design, and by
extension its impacts – is the relationship between the elasticity of demand, efficiency and
economic incidence.
Economists generally measure the efficiency of a tax or levy by the level of ‘deadweight loss’
that it generates. A perfectly efficient tax is one which does not change behaviour and
therefore imposes no efficiency-cost or deadweight loss on the economy. The extent to
which behaviour changes in response to a change in (tax-inclusive) price is determined by
the price-elasticity of demand. Where demand is invariant with price (perfectly inelastic), the
introduction of a tax or levy will have no impact on demand, therefore resulting in no change
in behaviour and hence no deadweight loss to the economy. Alternatively, where demand is
highly responsive to price, the introduction of a tax or levy will induce relatively large changes
in behaviour and result in relatively significant deadweight losses. That is, where demand for
visitation to KI is relatively inelastic, the introduction of a levy will have little – or in the
extreme, no – impact on visitation and the impact on tourism-orientated businesses will be
minimal.
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