The plans could see visitors charged an extra rate during the August festival season in order to plug a rumoured £10m a year hole in the Scottish capital's finances.
While proposals have initially focused on a £1 a night hotel charge, council discussions have switched to a voluntary tax levied at all businesses taking part in the festival, The National has reported.
However, with average hotel prices in Edinburgh already rising 39 per cent in August, there are concerns an added charge could price visitors out of the city.
VisitScotland told BigHospitality that it was ‘imperative’ the capital remain ‘economically viable’ for tourists.
“There are concerns that a tax could hinder our tourism growth and damage one of Scotland’s most successful areas of economic activity,” a VisitScotland spokesperson said.
“However, if a tax were to be introduced in Edinburgh [we] would argue that the revenue raised should be reinvested in tourism, events and festivals.”
Hotels already hit hard
Ricky Kapoor, commercial director at The Edinburgh Hotel Collection, said that the council should focus on more 'proactive' means of boosting tourist numbers.
“Existing proposals such as reducing tourism VAT and abolishing air passenger duty should be pushed forward to send a clear message that visitors are welcome in Edinburgh," he said.
Kapoor – whose portfolio includes four hotels in the city – added that sky-high business rates and additional charges meant Edinburgh hoteliers were ‘already contributing more than their fair share’ to the public purse.
“[Tourism tax] could be seen as just another stealth measure to try and improve the dire financial situation Edinburgh finds itself in instead of working on other measures to increase the visitor experience," he said.
The Cut Tourism VAT campaign warned that any extra charge in Edinburgh would damage the city’s competitiveness on an international scale.
“The UK is only one of three European countries not to have a reduced rate of tourism VAT,” said Dermot King, managing director of Butlins and chairman of the Cut Tourism VAT campaign.
“Any additional tax on top of the existing 20 per cent could result in directly discouraging tourists from visiting.”
Councillor Frank Ross, economy leader at Edinburgh Council told The National: “We have a very clear commitment to the city’s festivals and need to think innovatively about how we maintain this support.
“Talks about the workability of additional funding methods are ongoing. It’s important we share this challenge and explore a variety of options.”
Tourist tax is nothing new in Europe - visitors to Berlin, Paris or Barcelona and will all find themselves paying an extra charge for a night’s stay.
Councillors in Westminster, Camden, Brighton and Birmingham have all considered introducing a levy in recent years, but so far none have gone ahead.