TAX NEWS - JUNE 2010

Rome Tax: Rome Plans Hotel Tax as City's Credit Rating Under Siege at S&P

Rome is planning a hotel tax on the 9 million visitors to the Eternal City each year, a revenue raising measure that may hurt tourism in the Italian capital and put further pressure on its credit rating.

Prime Minister Silvio Berlusconi's government proposed the levy to reduce the 500 million euros ($600 million) it contributes annually to help Rome control 9.6 billion euros of debt. Italy authorized the initiative in its 24.9 billion-euro budget-cutting plan, prompting Standard & Poor's on May 27 to change the outlook on Rome to negative, saying the government was scaling back its commitment to bolster the city's finances.

Berlusconi will discuss the tax of as much as 10 euros per night at a five-star hotel when he addresses a meeting of Federalberghi, Italy's largest hotel trade lobby, today in Rome. The city estimates the tax will raise about 100 million euros.

"I don't understand why everyone is so scandalized by something that is just going to help the city clean up its accounts, which are strongly penalized by the huge amount of visitors who weigh on our services," Maurizio Leo, Rome's top budget official, said June 1 in e-mailed responses to questions.

Federalberghi is urging the government to drop the plan. Italian consumer group ADOC estimates the hotel tax will cut visitors to the city by about 5 percent and reduce annual tourism revenue by 70 million euros.


'Utterly Stupid'

"Adding a tax on tourism, the industry that brings the most added value and jobs to the country, is utterly stupid," , Federalberghi Chairman Bernabo Bocca said in a June 4 Bloomberg Television interview. In France, visitors are asked to pay a fixed tax of 15 cents to 1.07 euros per person per day collected by the hotel owner.

The surcharge may help the city avoid raising taxes on its 4 million residents as the city tries to compensate for the drop in central government funding, Leo said.

Italy plans to trim 200 million euros, almost half its annual contribution to Rome's debt-reduction program, as the government tries to avoid Greece's fate and ensure investors it can control the budget deficit and Europe's biggest debt. The Italian budget package that includes the Rome tax was prompted by contagion from Greece's near default, pushing the risk premium on Italy's 10-year bonds to a euro-era high and causing a surge in borrowing costs.


Credit Rating

Cutting government aid without adequate revenue to replace it may jeopardize Rome's A+ rating, Roberto Stasi, an S&P analyst who covers Rome, said in a June 3 interview. The government funding is equivalent to one level for the credit rating, he said.

"Should Rome lose that support, the city's rating would be immediately affected and only the success of new measures, which include proposed taxes, may help it regain the A+," Stasi said.

Consumer and hotel groups say the tax would hurt Rome's economy, especially its 1,000 hotels.

Every euro of tax will weigh on the spending power of tourists and "negatively affect the income of local businesses," Rome-based consumer association Adiconsum said in a May 28 statement.

Rome Mayor Gianni Alemanno at a May 28 press conference said other cities also have similar levies. New York applies a 14.75 percent tax on hotel bills, while Amsterdam charges 5 percent and Barcelona 7 percent, according to a statement on Rome's municipal website.

"Rome needs to compete with other cities worldwide, so to keep its position as a top tourist destination, any hotel tax should be accompanied with additional services and investments," said Chema Basterrechea, chief executive officer of NH Hoteles SA in Italy and a vice president of AICA, the Italian Association of Hotel Chains. "Unless people believe they will get something back, they may decide to go elsewhere," he said.


Tourist Spending

Foreign visitors spent less time and money in Italy last year, according to Federalberghi. The average length of visits fell almost 3 percent last year to 4.95 days and the average hotel expenditure dropped 7 percent to 690 euros per trip. Tourists visiting Rome declined 3.5 percent in 2009 to 8.86 million, according to data compiled by the Bank of Italy.

"Even if it only deters 1 percent of visitors, the hotels and other businesses lose income and the balance of payments is worse off," said Ian Gamse, a director at London-based Otus & Co., which advises Marriott International Inc. and Hilton Worldwide, in an interview.

Taxes would be assessed based on the number of stars assigned to the hotel. Of the city's almost 50,000 rooms, more than half are four or five stars, meaning those visitors would pay as much as 10 euros a night.


Roman Holiday

The expense would be "irrelevant for luxury travelers, while it may have a different impact on three-star hotels and low-budget tourists," said Luca Magni, Baglioni Hotels Group's head of branding and communications. Regina Hotel Baglioni, the company's only hotel in Rome, is a five-star hotel on the city's most famous street, Via Veneto.

The hotel tax isn't the first time that Rome has hit tourists for additional revenue. The city began charging tourists 50 euro cents last year to put their hands inside the Mouth of Truth, an ancient sculpture of a pagan god carved in marble that was immortalized in the Audrey Hepburn movie "Roman Holiday." It ranks among the city's top 10 tourist draws, along with the Coliseum, St. Peter's Basilica and the Trevi Fountain.

"Rome is expensive and 10 more dollars is going to deter more tourists from coming here," said Antonio Williams, an engineer from the U.S. who was visiting the city last week. "I'm definitely against it."