Bill Would Tax Vacation Rentals to Give Cities Funding to Build Affordable Housing

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A proposed bill in the Washington State Senate would give cities a tool to fund affordable housing construction by taxing vacation rentals listed on sites such as Airbnb and VRBO.

Introduced by Sen. Liz Lovelett, an Anacortes Democrat, SB 5012 would allow municipalities to levy an additional tax of up to 10 percent on "internet-based" short-term rental bookings. The tax would be paid by consumers at the time of purchase.

The revenue must be used to fund capital and operating costs of affordable housing programs.

A fiscal note attached to the bill projects that if every municipality imposed the tax at the highest rate, it could generate $31.4 million, or roughly one-third of what the state spent in 2019 on the Housing Trust Fund, the primary funding mechanism for constructing affordable housing. (Gov. Jay Inslee has proposed to increase spending for affordable housing to $220 million in his 2021 budget.)

The bill would not create the tax, just allow local governments to do so if they choose.

Lovelett, who was appointed to the state senate and subsequently won election in 2019, was previously a member of the Anacortes City Council. She recalls that the city wanted to create a similar tax on vacation rentals, but lacked the authority to do so. (Cities and counties in Washington do not have "inherent taxing authority" unless the state legislature gives it to them.)

At a hearing for the bill on Wednesday, Lovelett argued that in areas where seasonal tourism brings an influx of demand for vacation rentals — such as Anacortes and the San Juan Islands — landlords are increasingly converting apartments to short-term vacation rentals, taking housing away from residents in an already tight market.

"While working on the affordable housing strategic plan for our jurisdiction, we realized that one of the things that was severely exacerbating our rental shortages was the fact that we now had a whole host of internet-based rentals that used to be out there on the market," Lovelett said.

Skagit and Whatcom counties both have a vacancy rate of half of 1 percent, the lowest in the state, according to data from the University of Washington's Center for Real Estate Research.

Lovelett described the tax as intending to balance out the effects of tourism on localities, similar to how an impact fee accounts for the additional costs that development incurs on cities.

"I look at this as being a simple option for local governments to be able to start bringing in money at the local level," Lovelett said. "Much like the lodging tax that is collected in order to promote tourism, this is going to be collected to offset the challenges that it provides to the rental markets in any local jurisdiction."

Because it's an opt-in tax, local governments can choose how high to set it, she added.

Several taxes already apply to both hotels and short-term rentals, although it was only in 2019 that the state legislature passed HB 1798, which clarified that short-term rental operators must pay them too. Previously, individual cities like Seattle, Bellingham, and Spokane had passed their own short-term rental laws, although the Department of Revenue (DOR) may have been collecting taxes as early as 2015, according to the DOR website.

In addition to the state's 6.5% sales tax and any local sales taxes, municipalities have the option to levy an additional 2% tax on lodging, known as the "hotel/motel tax." and most choose to.

That revenue, however, must be spent on government activities related to tourism.

Like hotels, short-term rental operators also have to pay business and occupation taxes, unless they're small enough to be exempt. According to the DOR's website, property owners who owe less than $841 in B&O taxes per year can use the small business tax credit.

HB 1798 also required short-term rental operators to obtain a business license from the Department of Revenue (DOR) and buy liability insurance.

The bill was backed by the Washington Hospitality Association and the sponsor, Rep. Cindy Ryu, a Democrat from Shoreline, said at the time that the bill was meant to "even the playing field" between Airbnb operators and hotels.

At the hearing on Wednesday, operators of short-term rentals argued that the new tax, if enacted by cities, would tip the scales in favor of hotels.

Don Mackenzie rents the basement of his Seattle residence part-time and his family owns a second cabin in Chelan County that they operate as a short-term rental. He said the tax singles out "small-scale entrepreneurs" like himself, putting him at a disadvantage compared to large corporate hotel chains.

In Seattle, a special convention center tax pushes the total rate up to 15.7% for both short-term rentals and hotels.

Other property owners testified that even if their vacation homes were on the long-term market, they wouldn't be affordable.

But housing advocates from across the state praised the bill, which they said would give municipalities more options to fund the creation of much-needed affordable housing. They were joined by local officials and residents of the San Juan Islands, who placed part of the blame for the region's housing shortage on the vacation rental industry.

Jamie Stephens, chair of the San Juan County Council, described the short-term rental industry as "contributing to the problem" by taking units off the market. Just days before, Stephens voted, along with his two fellow council members, to enact a six-month moratorium on issuing permits for vacation rentals. He added that creating a funding mechanism for affordable housing is thetop priority in the county's housing plan.

"I support this tax because the activity that is fueling the problem is now providing resources to help mitigate the problem," said Lisa Byers, the executive director of the Opal Community Land Trust in San Juan County and a member of a local group that advocated for the moratorium.

Research on the "Airbnb effect" tends to focus on major cities such as Los Angeles, New York, and Boston, where data does show that an increase in Airbnb listings pushes rental prices up and removes units from the long-term rental market, decreasing supply.

However, there's much less data on smaller communities such as Anacortes and the San Juan Islands. And in cities with negligible tourism industries, it's not clear how significant of an effect short-term rentals have on housing prices or supply.

A 2017 study from researchers at the University of California-Los Angeles and the University of Southern California collected data from Airbnb, Zillow, and the U.S. Census Bureau between 2012-2016.

Using zip codes from across the country, the study found that a 10% increase in Airbnb listings caused rental prices to increase by .4% and house sale prices to increase by .7%.

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