Can Israel Save Its Tourism Sector by Taxing Tourists?

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Tourists sunbathe on the beach in the Red Sea resort city of Eilat
Tourists sunbathe on the beach in the Red Sea resort city of Eilat, one of Israel's most popular holiday spots, February 17, 2014. Credit: Reuters

Tourists visiting Israel would be subject to a 3.5% tax when they check into a hotel, eat at a restaurant or buy any goods or services in major tourism centers, under a plan by two leading industry figures and now being examined by Tourism Minister Yariv Levin.

The tax would be imposed on hotels and other places tourists stay, tourism-related services as well as all businesses in key tourist destinations, like Eilat and the Dead Sea, according to the proposal prepared by Noaz Ben-Nir, a former Tourism Ministry director general, and Ami Federman, who served as president of the Israel Hotels Association.

The plan comes as Israel’s tourism industry struggles to recover from last summer’s Operation Protective Edge fighting, which led to a wave of cancellations just as the peak summer season was getting underway.

On Tuesday the Central Bureau of Statistics reported that overnight stays in hotels in the first four months of the year were down 10% from the same time in 2014, with stays by foreign tourists down 25%.

“Our proposal is designed to address several issues simultaneously with one simple but powerful tool – a tool that will deal at once with the problem of municipal taxes, marketing, a safety net during security crises and professional training,” Ben-Nir and Federman said in the proposal.

The tax would replace the municipal rates (arnona), which hotel owners have long complained are exorbitant and unrelated to their income or profits.

Of the 3.5% collected on the proposed tax, 1.5 percentage points would be given to local authorities in lieu of arnona, another 0.25 point toward funding professional training for the tourism industry and another half point to a fund for helping hotels, restaurants and related business when a war or other security emergency drives away travelers. The rest would go to a newly created tourism marketing authority.

Under the proposal, the government would match all revenues collected from the tax.

The Israel Hotels Association, however, doesn’t support the idea, saying that adding to travelers’ expenses would be counterproductive as the industry copes with a drop in Russian tourism, once a key source of tourists, and the lingering effect of the Gaza war.

“At a time of deep crisis in incoming tourism since Protective Edge and against the background of the ruble crisis, there is no way we can impose a tax on tourists,” the association said. “It’s not just that imposing a tax and making travel to Israel more expensive offers no solution right now, it would be a serious handicap.”

Eli Gonen, the current Hotels Association president, has been urging the government to mount a major and targeted marketing campaign to lure back tourists to Israel.

Levin is less than two weeks into his job as minister, but the ministry sounded dubious about any new tax.

“The minster plans to study the matter in depth and prepare a program to upgrade the tourism sector and related industries in a way that will also lower costs to the consumer,” the ministry said.

Israel dropped to 72nd place out of 141 countries in the World Economic Forum 2015 Travel and Tourism Competitiveness Index released this month. Noting Israel had dropped for 53rd place in 2013, the WTF cited high prices and security concerns for the low ranking.

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