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Air Departure Tax: A Post-Brexit Analysis

Overview —

This report forms a response to a request for opinion on the Scottish Government’s plan to cut Air Departure Tax (formerly Air Passenger Duty) by 50% starting in 2018 and to eliminate it entirely at an unspecified future date. There is significant evidence that the economic impacts of the cut will not be as great or as beneficial as has been claimed.

Credits—

Dr Craig Dalzell

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This report forms a response to a request for opinion on the Scottish Government’s plan to cut Air Departure Tax (formerly Air Passenger Duty) by 50% starting in 2018 and to eliminate it entirely at an unspecified future date. There is significant evidence that the economic impacts of the cut will not be as great or as beneficial as has been claimed.

An analysis of the SNP’s proposal to half and then eliminate Air Passenger Duty – to be renamed the Air Departure Tax when it is devolved – finds that the economic evidence used to justify the tax cut omits the impact of an increase in outgoing passengers. Once this impact is factored in it is found that cutting the tax may act to reduce the total number of tourists in Scotland and reduce the overall GVA of Scotland and will thus not be able to re-coup the lost tax revenue through increased economic activity.

Other impacts such as the beneficiaries of the tax cut mainly being concentrated in the aviation sector (particularly those Scottish airports which both rely on tourist traffic and have the capacity to expand to cater for extra demand) and the impact of the overall strength of the pound since the 2016 EU referendum are also explored.

KEY POINTS

― Even under the most optimistic circumstances put forward by proponents of the tax cut, additional revenue is unlikely to replace revenue lost by the cut.

― The case for increases in tourist traffic is substantially undermined by the impact of cheaper tickets inducing more domestic tourists taking foreign trips instead. Overall tourism numbers are at risk of reducing as a result of this tax cut.

― The spending of inbound tourists are generally more weakly linked to the economy than the domestic consumers who more likely to be induced to leave which may lead to a reduction in gross value added to the economy even if tourist spending remains constant.

― The reduction of the value of the pound sterling in the aftermath of “Brexit” is likely to have a substantially greater impact on tourism than the ADT cut is capable of inducing. The tax cut can only partially subsidise this Brexit effect.

― The case for business growth due to a cut in ADT appears particularly weak as business flights are driven by need and time pressures rather than price.

― The case for an ADT cut encouraging more visits to Scotland for the purposes of international trade and business deals is particularly weak as long haul business flights between the UK and the US and Asia is almost entirely price insensitive.

― If an ADT cut results in a transfer of revenue from ADT to corporation tax there may be deeper implications for the robustness of the Scottish budget under the devolved tax structure. This will be exacerbated in the case of corporate profits transferred outside of the UK entirely.

― Whilst the economy most directly linked to airport traffic will see an increase, this increase will ultimately be capped by the capacity of the airports in question. The seasonal nature of tourist traffic will exacerbate this impact.

― The greater impact on the transport network due to increased traffic needs to be considered in light of this proposal as do the economic imbalances created by the ADT cut inducing greater traffic in the Central Belt but little growth elsewhere.

― If the reduction in revenue due to the ADT cut is not at least recouped in full then additional cuts in public spending may be required. The negative impacts on the economy of this additional austerity would then be dependent on precisely where those cuts occurred.

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