Taxing tourism: The case of rental cars in Mallorca

Tourism statistics point towards increased tourist mobility in holiday destinations, with a subsequent rise in associated externalities, above all those related with the use of hire cars. This paper therefore suggests that a fixed-rate tax should be levied on vehicle hire in order to reduce congestion externalities and thus achieve more efficient traffic levels. With this purpose in mind, count data models were used to assess alternative ways of modelling the demand function for hire cars in Mallorca (Spain) so that the corrective potential of the proposed tax could then be analysed. Although the inelasticity that was observed might indicate a low short-run capacity to internalise costs, it also represents a high potential for raising revenue that could be used to fund alternative means of group transport. In the mid-run, this would lead to increased elasticity and, in consequence, to better internalising effectiveness.