Ministers went against the advice of officials in deciding to hike a tourism tax by nearly 200% to $100.
Officials said increasing the charge by too much risked turning visitors off New Zealand – and even potentially negatively affecting our relationship with other countries.
But Tourism and Hospitality Minister Matt Doocey said on Tuesday that “there is no evidence that it will impact on demand”.
Documents released by the Ministry of Business, Innovation and Employment (MBIE) show officials recommended increasing the International Visitor Conservation and Tourism Levy (IVL) from its current rate of $35 to $70.
“This option is at a price point that provides the most reasonable balance between increasing revenue to cover the costs of tourism and ensuring that border costs are not a deterrent for visitors to travel to New Zealand,” a regulatory impact analysis (RIA) said.
The IVL is charged to most tourists, people on working holidays, some students and some workers coming into New Zealand. Australians and most Pacific Islanders are exempt from the levy. It goes towards public services used by tourists while in the country and supporting tourism and conservation sites.
Doocey and Conservation Minister Tama Potaka explained their decision to go with the $100 levy by saying it remained less than 3% of an average visitor’s spend, received the support of a majority of submitters on the proposed changes and provided a “long-term system view to address the costs of tourism and conservation”.
However, some in the sector – as well as former National Finance Minister Steven Joyce – have expressed concern about the impact it may have on the sector.
Tourism Industry Aotearoa chief executive Rebecca Ingram said after the announcement it would “dent our global competitiveness”, while Board of Airline Representatives executive director Cath O’Brien said it showed the Government “didn’t appreciate the impact of softening demand”.
The RIA by MBIE in July shows the $100 option would bring in the most additional revenue – about $149 million per year – and would have the “largest impact on cumulative border costs for visitors”.
A $100 levy reflected 2.9% of an average visitor’s spend, while the $70 option would have been about 2.1%.
Modelling found the $100 option could decrease visitor demand in New Zealand by 2.4% (compared with a 1.3% decrease for the $70 option). Caution was advised with using this model though, as it was based on travel data from pre-Covid (about 3.87 million visitors in 2019) and airfares from 2022.
The analysis said one of the main objectives of the review of the IVL was to ensure any increase “does not materially impact demand for travel to New Zealand”, noting New Zealand is a “premium and often expensive destination”.
“There is a risk that increasing the IVL too much could slow growth in travel demand for more price-sensitive markets, or lead to visitors spending less while in New Zealand.”
But as there was a range of other costs associated with international travel, the analysis said an increase “is unlikely to materially impact the volume of visitors to New Zealand”.
“A study from the United Kingdom suggests that the responsiveness of demand to travel is low for moderate increases in visa rates, which may suggest a similar pattern for the IVL as it is paid alongside the immigration system.”
In a Cabinet minute, ministers said they didn’t recommend delaying the decision to get more analysis about potential effects on visitor demand.
“Our officials will monitor visitor numbers in reaction to any change in the IVL amount and other visitor-related costs.”
Both options were found to be a “high one-off rate at the border” when compared with similar charges in other countries. As a per night rate, the $70 option was about $3.43 per average visitor, while the $100 option was about $4.90.
MBIE officials earlier advised in June that if the amount was increased too high, “there is a risk of increased inefficiency, where visitors will reduce their spend while in New Zealand to account for the higher cost at the border or will not travel here.”
“Given the Government’s goal of doubling export revenue, it is important that there is minimal impact on visitor arrival and visitor spend,” the briefing said.
But it acknowledged it was “critical” to increase the IVL amount to ensure adequate funding. Estimates in 2019 projected the unfounded costs of international visitors were around $250m per year, but this is likely now higher due to inflation.
The status quo was only generating up to 32% of those estimated costs. The $70 option would cover up to 64% and the $100 option would cover up to 92%.
Officials said a greater range of tools were also necessary to address the costs of tourism and increasing the IVL significantly “creates the risk that other tools cannot be introduced”, or if they were, travel to New Zealand could be “overwhelmingly expensive” for some.
The documents also highlight the feedback from other agencies. Treasury officials didn’t have a preference between an increase to $70 or $100, while the Department of Conservation provided talking points to its minister highlighting the rationale for increasing the levy to $100.
According to comments in the Cabinet minute, the Ministry of Foreign Affair and Trade (MFAT) “expressed concern that rising costs for travel and trade with New Zealand may impact our air connectivity to the world”.
MFAT and the Ministry of Transport also noted “that the proposed increase to $100 may negative impact some bilateral relationships and affect business decisions of airlines about their operations in New Zealand”.
Asked on Tuesday for his views, Labour leader Chris Hipkins said it was “somewhat ironic” that given National opposed the introduction of the IVL in 2019 that it was now nearly trebling it.
“Over time, I have no problem with the visitor levy increasing,” he said. “I think that doing it all at once at a time when the tourism industry is still recovering from Covid-19 is probably not the greatest timing for the tourism sector.”
Jamie Ensor is a political reporter in the NZ Herald Press Gallery team based at Parliament. He was previously a TV reporter and digital producer in the Newshub Press Gallery office.