Are STRs the New Sin Tax

And if they are, will this most-basic public need–affordable, workforce housing– always be underfunded?

If high country ballot questions from November 2022 are a measure, the housing issues are not equally felt across the state, but voters are clear about the problem up here.  CML reports that this November short term rental taxes passed in Aspen, Carbondale, Dillon, Salida and Steamboat Springs.   The Colorado Sun reports voters in 12 Western Slope jurisdictions approved taxes on short-term rentals (STRs) on election day earning $40 million each year toward affordable housing in those communities.  The article notes an Airbnb study finding that 54% of visitors to Summit County stayed in STRs in 2020, an astonishing change from when there was a bright line between housing for residents and lodging for visitors.

The idea of covering the impacts of STRs through a use tax evidently resonated with voters.  Among those 12 jurisdictions, the poster story is Steamboat Springs, as reported by Colorado Public Radio.  Starting January 1^st, 2023, visitors who book an STR in Steamboat will pay an extra 9% in local taxes—that is essentially a doubling of all other combined sales taxes!  The revenues will generate between $11 to $14 million dollars annually toward building housing in Routt County.  With a large tract of land recently donated, it is probably not a coincidence that voters saw a direct line to where that money will be spent.   Aspen voters approved “an additional” 5-10% tax to generate $9.1 million each year.  

STR taxes differ from traditional lodging taxes which are levied primarily in synergy with industry to market visitation—or they were before communities this cycle began eyeing them for affordable housing, essentially turning lodging into another “sin tax.”  During this election cycle, a few high-country jurisdictions successfully asked voters to repurpose lodging taxes for affordable housing, including Glenwood Springs, Gunnison County, and Snowmass Village.  The Colorado Sun reports that similar measures to shift existing lodging taxes to housing solutions were defeated in Grand Junction and Park County. 

STRs are only one recent, acute factor in the overall housing issue.  So many inter-related factors constrict housing supply and drive increases to the cost of housing units, including  a shortage of construction workers, supply-chain issues for materials, regulatory barriers to development, demographic shifts caused by an international pandemic, federal banking & tax policy favoring single-family homes and mortgages over rent, the novelty of many workers suddenly being able to work remotely, big-city problems related crime and homelessness, fear of unrest in a nation on the edge of cultural change, not to mention a generational re-thinking of one’s relationship to work.  One could also point to a failure to embrace more robust government involvement in constructing housing in the past, as well as a continuing fiction that “the market” will build housing types at price points that workers need.  The STR boom benefitted from those factors—why buy a home when you can borrow one.  Many of these factors appear far beyond the purview of local governments to address. 

The migration of units from long-term rental stock to short-term rental units in resort communities has prompted local governments to roll out innovative programs recently to counter the trend.  Most NWCCOG member jurisdictions regulate STRs now.  Yet persuading citizens to spend their own tax dollars on housing has proven problematic.  A “sin tax” is levied “on a specific activity or good that is deemed harmful to individuals or society,” the implication is that STRs deserved penalty to “cover the costs” of the harm, and that the tax essentially is imposed on someone else (the visitor). 

From one perspective, taxing STR users or repurposing lodging taxes are elegant policy solutions, leveraging “the problem” to address a “solution.”  From another perspective, the need to identify a policy scapegoat instead of addressing housing “head-on” as publicly funded infrastructure is unfortunate.  Deep progress in addressing most of the factors listed above will likely require unpopular solutions (like infill, and dense housing that will bring out the NIMBYs and traffic sirens), and will require sacrifices that voters may not so readily embrace – higher property taxes or RETTs.

The STRs concept began innocently enough as a tool to monetize an empty room or vacant home.  VRBO began in 1995.  Airbnb in 2008.  It is fair to say these innovations flew under the policy radar until San Francisco started regulating VROB in 2014.  Many high-country jurisdictions followed in 2018 through today.   In resort areas, STRs absorb a surge in demand for a product that the lodging base cannot.  For some visitors, who wish to inhabit places differently, more authentically like a resident, STRs changes those visits from being “tourism-based” to a hybrid-residential experience.  All that is fine and good, except the overall supply is limited and pricing is pushing out the workers needed for the full-service community those new residents expect.  

Americans at all levels of government tend to be allergic to robust government involvement in such issues as housing, and allergic to taxes no matter what issues may be solved by additional revenues generated.  Perhaps voters in mountain towns are signaling a shift.   Local governments, as with the state or with Congress, entertain an astonishingly narrow breadth of solutions when it comes to addressing even the most acute policy issues, such as housing or climate.  Why?  Because one of the least taxed peoples of a major developed nation in the world have been trained to equate lower taxes with quality of life.  The exception to the tax allergy since the 1980s has been “sin taxes;” for instance, tax gambling to pay for open space and parks (state lottery), or taxing marijuana for law enforcement and substance abuse programs or taxing tobacco to pay for pre-school and health care.  STR taxes are now in that category.    Can the mental health crisis be solved out of the wallets of smokers?  Can the housing crisis be solved out of the wallets of visitors?

While the passage of these STR taxes may be a step in the right direction, because of the premise of a sin tax, over the long term, it will prove inadequate to the magnitude of the housing problems that our communities face.  When we rely on scapegoats to fund basic services, we ensure that basic services will always be under-funded.

The STR issue has come to a head as municipalities are raking-in record sales tax income.  Following the Black Swan pandemic event and reverberations felt across our national economy, this comes as a pleasant surprise to local leadership.   Residents, on the other hand, especially those we learned through the pandemic to call “essential workers” are suffering, and being priced out.   As those leaders finalize budgets for 2023, they should take heed that voters in many mountain towns gave them a strong indication of how to spend those new dollars.

Jason Blevins of the Colorado Sun has been tracking net taxable sales across 18 Mountain Towns, putting together these tables to show Winter and Summer season sales.  Having just compiled the bar chart with 2022 summer sales to compare summers back to the summer before COVID, he reached out to NWCCOG for reasons why so many municipalities sales tax revenues continue to increase.  Though each community is different some explanations include:

1. Prices are higher due to inflation (supply issues, etc.) which increases sales tax per sale
2. South Dakota v. Wayfair has up ended the concept of retail sales tax “leakage”
3. The magnetism of mountain towns is stronger than ever (check out real estate prices)
4. People are staying, with remote work and in-migration towns are at capacity year-round
5. Those visitors and new residents are wealthier and have more disposable income
6. Increased “sin taxes” on tobacco and marijuana represent new revenues

The second conversation of the COVID summer that I had with Aspen City Manager Sara Ott stuck with me.  She said that the winter season that wrapped up just prior to COVID was Aspen’s most lucrative on record, and as early as of September of the COVID year 2020, she was already bullish that the pandemic lockdown was going to be a blip in that upward trajectory of sales tax revenues (my words, not hers).   Aspen is Aspen.  Her confidence is proving prophetic across the region.  That year, it was too soon to know, but many other town managers I spoke with attributed the influx of sales tax to the local portion of on-line sales returning to their coffers following the South Dakota v Wayfair decision in June of 2018.  That income couldn’t be predictably quantified in late 2019 so when 2020 budgets were approved, it more than made up for much suffered local brick & mortar stores and offset the lockdown.   Those wealthier in-migrants appear to be spending.  When Blevins asked, my take was that most towns would be conservative about assuming a continued upward trajectory.  Will the influx be enough for communities to address long-term issues like housing, climate or complete capital planning?  Those on-line revenues have only increased since.  It will be interesting what municipalities choose to do with the “extra” income and if they take a hint from their citizens who just voted.