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Determinants of Government Tourism Tax Revenues on Aruba; a Search for Sustainable Development

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Determinants of Government Tourism Tax Revenues on Aruba; a Search for Sustainable Development Determinants of Government Tourism Tax Revenues on Aruba; a search for sustainable development. Walter E. Mosher Master’s Thesis May, 2008 Supervisor: Dr. Wim Westerman University of Groningen Msc. IB&M, specialization IFM & Uppsala University Msc. IB&E Email: [email protected] Student number: s1623184 Abstract This study researches the determinants of government tourism tax revenues on Aruba. The island’s economy is highly dependent on the tourism industry. Organizations in charge of managing the tourism industry and economy on the island are often dependent on government tourism tax revenues. By looking at previous research and theory several determinants of government tourism tax revenues are identified, including: Average daily rate, total visitors, total visitor nights, total room revenue, total rooms, and occupancy rates. Room tax revenue is used as a proxy for government tourism tax revenues, because it is found to be the largest source of government tourism tax revenues, and also the most direct method of taxing tourism. The determinants found are then empirically tested using a linear multiple regression to find a best fit model. When using a stepwise procedure, the multiple linear regression finds that average daily rate together with total visitors best explains room tax revenues. Finally, when interpreting these results it important to take the current economic and social situation of Aruba into account. As a result it seems that a wise policy is to find ways of increasing average daily rate, while cautiously considering any plans to attempt to increase total visitors. Key words: GTTR, room tax revenue, ADR, occupancy rate, total room revenues, total rooms, total visitors, total visitor nights. 2 W. E. Mosher Table of Contents Chapter 1: Introduction 1.1 Introduction 4 1.2 Problem indication and research question 5 1.3 Conceptual model 7 1.4 Aruba 8 1.5 Outline of theory and methodology 13 Chapter 2: Literature review and theory 2.1 Literature review 16 2.2 Theory 19 2.3 Related studies 24 Chapter 3: Translating theory into variables and data 3.1 Dependent variable, GTTR 27 3.2 Independent variables 29 Chapter 4: Results 4.1 Analysis of data 37 4.2 Regression results 40 4.3 Analysis of results 42 Chapter 5: Conclusion and recommendations 5.1 Summary and conclusion 48 5.2 Recommendations 50 3 W. E. Mosher Chapter 1 1.1 Introduction Tourism and travel demand is estimated to have generated $7,060 billion of economic activity worldwide in 2007 (WTTC Caribbean T&T Economic Research, 2007). It is projected that the tourism industry contributed 10.4 percent of the world GDP in 2007. Many small island economies, particularly in the Caribbean, are highly dependent on tourism as an economic driver. When we look at small island economies in the Caribbean with a population below half a million inhabitants, we find that the travel and tourism economy represents an even higher portion of total GDP. In Aruba, the travel and tourism economy represents 70.1% of total GDP. In the rest of the Caribbean’s small economies, the share of travel and tourism economy as a percentage of total GDP lies, for the greater part, between 30% and 70% (see table 1). As the tourism industry continues to grow worldwide, small island economies in the Caribbean increasingly take advantage of their unique natural resources to produce tourism services. They do this with the goal of growing their economies and improving the welfare of their people. This research focuses on the tourism industry and economy of Aruba. The economy of Aruba is highly dependent on tourism, and resources used to manage the tourism industry and economy consist primarily of government tourism tax revenues (GTTR). GTTR is essential to managing the tourism industry and economy, and is the main focus of this research. 4 W. E. Mosher Table 1. Caribbean Small Island Economies T&T Economy Population (CIA wold % of total GDP Country fact book) (WTTC) WORLD 6602224175 10.4 Anguilla 13677 71.1 British Virgin Islands 23552 42.6 Saint Kitts and Nevis 39349 33.4 Cayman Islands 46600 42.1 Bermuda 66163 13.6 Antigua and Barbuda 69481 75.8 Dominica 72386 25 Grenada 89971 35.2 Aruba 100018 70.1 Virgin Islands 108448 41.6 St Vincent and the Grenadines 118149 32.3 Saint Lucia 170649 46 Netherland Antillies 223652 21.6 Barbados 280946 43.4 Bahamas 305655 53.6 Martinique 436131 7.9 Guadeloupe 452776 47.3 Sources: WTTC, CIA World factbook 1.2 Problem indication and research question It is becoming ever more important that destinations are managed, marketed and developed, and that destinations have organizations/institutions responsible for doing this. In order to facilitate and increase the economic benefits that tourism can offer, many nations create tourism organizations that manage the marketing, infrastructure and investment, and various other aspects necessary to grow tourism. These tourism organizations are often described as destination management organizations (DMO) or national tourism organizations (NTO)1. (Sheehan and Ritchie 1997). These organizations/institutions require the capability and resources 1 Tourism organization, destination management organizations, and national tourism organizations, are used as synonyms throughout this paper, and are considered to all be organizations that manage the marketing, infrastructure and investment, and various other aspects necessary to grow tourism. 5 W. E. Mosher necessary to manage, market, and develop their respective destinations. Tourism organizations usually secure funding from government tourism tax revenues. Bonham, Fujii and Mak (1992) explain that special tourist taxes are often levied to finance public services demanded by tourists and residents. Because tourism organizations are dependent on these GTTR, it is important to identify the determinants of GTTR, in order to be able to optimize GTTR. Furthermore, this topic is particularly important to Aruba for several reasons: First, because of the island’s high dependence on the tourism industry; Second, currently many other tourism organizations and government departments are dependent or partially dependent on government tourism tax revenues to help develop and maintain the tourism industry on the island; Third, there is discussion about transferring all or part of room-tax revenue (the largest source of government tourism tax revenue) to an independent institution, namely the Aruba Tourism Authority (ATA)2. Fourth, Aruba is at a crucial juncture with regards to the tourism industry and economy. The tourism industry and economy seems to have reached a stage of maturity as visitor growth has shown signs of flattening (see figure 3 in section 1.4), making an understanding of the determinants of GTTR even more essential. As a result, there is the following research question: What are the determinants of government tourism tax revenue on Aruba? This research question then results in the following sub-questions: What does GTTR consist of? (e.g. room-tax, casino-tax, timeshare tax, etc) How can the determinants GTTR be used to optimize GTTR? 2 The Aruban Tourism Authority functions as a National Tourism Organization and its purpose is to foster and promote sustainable development of the Island’s tourism industry 6 W. E. Mosher Why is GTTR important and why is the optimization of GTTR relevant, what is its utility? The rest of this chapter presents an overview of a conceptual model of this research, an overview of Aruba, an outline of the theory that will be used and an explanation of the methodology. 1.3 Conceptual Model Based on what has been explained we can look at the GTTR stream as a cycle. Tourism organizations use their finances to invest in the tourism economy, marketing, infrastructure, transportation, etc. and are also influenced by private investments, investment climate and other such factors. These investments then result in changes in actual tourism demand and result in changes in expenditure made by tourist. External factors beyond the control tourism organizations may also influence tourism demand and expenditure (e.g. hurricanes, terrorism, economic crisis, etc.). Tourism expenditure in turn influences government tourism tax revenues and thus the finances available to tourism organizations, of course changes in taxation policy can also influence GTTR. And so the cycle continues. The focus of this study is on the determinants of GTTR. 7 W. E. Mosher Model Figure 1 Taxation policy: -Changes in tax rates -Changes in tax law Tourism Organization Finances (Government Tourism Tax Revenues) Tourism Organizations’ Tourism Expenditures investment in tourism industry and economy Other investment factor: External Factors: Investment from: private sector, Hurricanes, terrorism, other goverment.org, general economic conditions. investment climate 1.4 Aruba Aruba is a small island in the Caribbean that is part of the Dutch Kingdom. The island has gone through several economic booms and transitions. In the 19th century gold was discovered on the island. This economic boom was followed by the establishment of an oil refinery in 1928. In the mid 1980 the future of the oil refinery became doubtful, and the island turned to tourism to grow its economy. The island succeeded and experienced rapid economic growth. 8 W. E. Mosher mentioned otherwise. 3 Figure 2 Source:CBS Aruba on (1988-1995)ascanbeseenintable3. Room taxgrew452%from1988to2006.Thegrowthforroomwasalsomuchlargerearly 1986 to1995.Table3alsoshowsthegrowthoflargestsourceGTTR,namelyroomtax. experienced tremendousgrowthoverthepasttwentyyears,particularlyduringperiodof
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