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Iceland considers dynamic pricing for its tourist tax

NNothing has hurt Iceland’s tourism machine in recent years. Not even Covid. (While the pandemic brought a temporary pause, tourist numbers recovered to pre-pandemic levels.) Not even the threat of volcanic eruptions. (Despite the Icelandic Meteorological Office warning of an impending eruption last November, inbound tourism reached pre-pandemic numbers.)

Last year, Iceland welcomed around 2.2 million visitors – almost six times the country’s population. The country’s tourism industry generated export revenues of 598 billion Icelandic Krona (around $4.2 billion), equivalent to almost a third of the country’s total annual export revenue, according to the Icelandic Central Bank. According to Statistics Iceland, tourism accounted for 8.5% of Iceland’s GDP in 2023, higher than in pre-pandemic years.

But despite the welcome economic boost, sometimes all those visitors can be too much of a good thing. Like a growing number of European destinations – from Seville to Amsterdam to Dubrovnik – Iceland imposes a tourism tax to counter overtourism. Hotel guests pay a small fee of 600 krone ($4.31) to raise money for sustainability programs.

But now the land of fire and ice seems to be considering a change. “We are still trying to shape the tax system for the tourism sector for the future,” Iceland’s Prime Minister Bjarni Benediktsson told CNBC this week. “We would move more towards a system where the user pays. In my view, we would focus more on access fees for the magnets, as we call them, across the country.”

Benediktsson then brought up the idea of ​​raising prices. “This would allow us to control traffic,” he said. “So at the peak of demand we could impose a higher tax, which we could control by changing the fees both within a day and between months or during parts of the year.”

The price hikes – higher prices when demand is high – are an example of Venice’s rules of the game. The Italian city already has a moderate hotel tax of between 1 and 5 euros per person per night, depending on the season and the location, type and classification of the accommodation. But this spring, Venice introduced an additional entrance fee, in effect from April 25 to July 14: day-trippers pay 5 euros ($5.37) to visit the city.

Critics claim that these taxes exploit visitors, but officials argue that the intention is to encourage visitors to come at quieter times, thereby easing congestion and creating a more sustainable tourism model.

Dynamic pricing in travel is nothing new. It’s been part of flight and hotel prices and Uber prices for as long as anyone can remember. But recently, prices that fluctuate based on demand have started creeping into other travel experiences, like dining and sightseeing, or even enjoying a pint in a British pub.

Airlines are even inventing new ways to increase demand. Since March, JetBlue has been applying dynamic pricing for checked bags. If you fly economy class during peak travel season, you’ll pay up to $5 more each way for the first bag and $10 more for the second bag.

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