Fianna Fáil TD Niamh Smyth, chair of the Oireachtas Tourism Committee, said tourism bodies will find it extremely difficult to sell Ireland as a destination if there is nowhere for people to stay.
On Tuesday, the Irish Daily Mail reported that 98% of accommodation in the capital is sold out for St Patrick's Day.
What's left was available only at massively inflated prices, or offering dormitory accommodation in hostels. With around 700 hotels under Government contract to supply housing to asylum seekers and refugees, significant shortages are expected to continue into the tourist season.
Those contracts are up for review and it is expected many hoteliers will not seek to renew the deals with the Government. Ms Smyth believes it will be difficult to market Ireland as a great place to visit if there are no rooms available.
She cited her own constituency of Cavan and an issue facing tourism chiefs there. She told the Mail: 'There's a new push on for Cavan to be part of the Hidden Heartlands initiative. But ultimately all the hotels in the rural parts of the county have given over their rooms to Government contracts. Fáilte Ireland, with the best will in the world, wants to package us a fabulous place to visit, and we are, but on the flip side of that there are no beds for people to stay in and there is a huge problem coming this summer.
'There's not going to be enough for everyone. We have seen that what is left for weekends like St Patrick's Day are not suitable or affordable'.
Beds are so scarce that one hostel in the capital is charging €1,800 for two nights for two people that weekend, which equates to €450 per person a night. Ms Smyth said she has borne the brunt of the accommodation crisis in Dublin. She explained that she tried to book a room in the capital for this summer but was unable to secure one.
'I was looking to get a night in Dublin on June 24. I tried to get a room for that date on February 1 and I could not find anything,' she said.
She added: 'I don't think the lack of hotel rooms is going to be an isolated incident for Paddy's Day. We've seen from your [the Mail's] articles that what is left to book is going for extortionate prices. Whatever's left should not be going for daylight robbery.'
The current VAT rate for the tourism industry has remained at the reduced 9% following intensive lobbying by the sector. It had been reduced from 13.5% at the start of 2020 to help out struggling businesses during Covid. It had been due to be reinstated to its pre-Covid level today but that has been pushed back to August.
Ms Smyth said the Government's decision not to hike the VAT rate is something hoteliers should not take for granted. She said: 'The Government listened very closely to the industry which led a very strong campaign around the VAT rate - they will be expecting the sector to look after the consumer fairly.
'But those types of prices we have seen are nowhere near fair. I think people's patience will wear thin.'
Fine Gael TD Ciarán Cannon, also on the Tourism Committee, said that, despite the prices, Dublin city centre still represents value for money.
However, he warned that this is something that could be jeopardised by hotels hiking prices to unprecedented levels. He said: 'The hotels need to be careful that they don't go over the top to gain additional revenue. We don't need Ireland to be perceived as a high-cost destination. Tourists vote with their feet.'