British holidaymakers could have to pay a nightly tax on hotel stays and Airbnb-style visits in plans expected to be announced by Rachel Reeves in the budget next week.

The chancellor is reportedly preparing to give mayors powers to raise taxes by charging tourists on the cost of an overnight stay in their cities.

The tax could raise hundreds of millions of pounds for mayors to invest in transport and public services, but it would represent a further blow for the hospitality industry, which was squeezed by tax rises and extra employment costs announced in the last budget.

The trade body UKHospitality, which represents thousands of restaurants, hotels and pubs, said a tourism tax of 5% – the rate to be set by Edinburgh from next July – would mean an effective consumer tax of 27%. That figure includes standard 20% VAT on the hotel stay, as well as VAT on the holiday tax itself, making it one of the highest tourist tax rates in Europe, the trade body said.

It estimated that a 5% holiday tax would cost Britons £518m in additional costs.

Kate Nicholls, the chair of UKHospitality, said: “I know the government is worried about the cost of living, but this holiday tax is little more than a higher VAT rate for holidaymakers.

“Brits take more than 89m overnight trips in England, and stay for a total of 255m nights. This is a bill we will all have to pay, and will only serve to ramp up prices and drive inflation.”

Government sources told the Times, which first reported Reeves’s plan, that England was an outlier among developed countries for not having a tourism tax. The levy is also being introduced by the devolved Scottish and Welsh governments.

The changes will be introduced using amendments to the English devolution and community empowerment bill, the Times reported. The legislation is going through parliament.

This summer a coalition of mayors across England – including the London mayor Sadiq Khan and the Greater Manchester mayor Andy Burnham – wrote a letter to the culture secretary, Lisa Nandy, and Reeves urging the government to introduce a visitor levy.

They argued that a £1 to £5 a night levy in Greater Manchester would raise between £8m and £40m a year, which could help fund infrastructure projects such as the regeneration of Old Trafford or airport development.

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Edinburgh is poised to become the first city in Scotland to introduce a tourist tax at 5% next July, after the Scottish parliament passed a law last year granting councils the power to implement their own visitor levies. In Wales, councils will have the power to charge £1.30 a person a night tax for most accommodation from April 2027.

The chancellor is also expected to introduce a “milkshake tax” in the 26 November budget by ending the exemption that milk-based drinks have from the sugar tax, which had been mooted earlier this year.

The soft drinks industry tax applies to drinks such as Coca-Cola and Irn-Bru. Producers pay at least 18p a litre on soft drinks containing 5g or more of sugar for each 100ml.

This threshold could also drop to 4g for each 100ml, in a change that could raise between £50m and £100m.

A Treasury spokesperson said: “We do not comment on budget speculation. The budget later this month will build stronger foundations to secure Britain’s future and focus on the priorities of working people: cutting waiting lists, cutting the national debt and cutting the cost of living.”