The following op-ed appeared recently in The Asheville-Citizen Times. Reprinted with the author’s permission.
The Asheville Citizens-Times recently reported that Buncombe County officials were reviewing whether short-term rentals (STRs) operated by commercial companies like VRBO and Airbnb could be valued at a higher property tax rate than single family residences. The rationale for the review is that STR units are actually business properties rather than neighborhood homes. The short-term rental industry has impacted communities across the country and such arguments about whether or not STRs are commercial enterprises abound, along with contentious discourse over the impact of STRs on community life.
The article in the Citizen-Times went on to emphasize that a strong case can be made that state law prohibits the higher tax valuation on short-term rental properties. I see the merit in state statutes that require a level playing field when it comes to property valuation.
On the other hand, another tax source that should necessitate more scrutiny by elected officials, especially at the state legislative level, is the hotel and motel room occupancy tax. When implemented several decades ago, this room tax was specifically targeted for hotels, motels and vacation rentals. The proceeds from the tax went to various tourist development authorities throughout the state for the limited purpose of promoting tourism. Municipalities were not the actual beneficiaries of this tax source. Enabling legislation for the room occupancy tax did not allow any substantial funding for local infrastructure projects such as sidewalks, road paving, etc.
Short-term rentals have been subjected to this tax in North Carolina, even as the STR industry contends that they should be free of other commercial regulations but not subject to higher property taxes.
Meanwhile, the allocation of room occupancy taxes from STRs has created a windfall for tourist development authorities. At the same time, local elected officials must provide more services to address tourist issues, yet no significant revenues from room occupancy taxes are available. Local governments are also increasingly looked to for solutions to housing affordability, in part, caused by short term rentals.
Like many mayors of towns in the crosshairs of these issues, I believe it is time for the state legislature to revisit the room occupancy tax. It is time to jettison the local enabling legislation and have consistent statewide statutes for room occupancy taxes.
We can maintain the tax rate for hotels and motels at a low rate of around 3%, but increase the rate for short term rentals to a rate of 10% or more. Tax coming from commercial hotels could continue to go to the promotion of tourism, but for STRs the distribution should be shared between local governments and the state. A distribution formula might provide 3% going to local governments for infrastructure and public services, while the remaining 7% could go to the state to meet critical needs such for workforce housing and related infrastructure projects.
We also need better accounting at the state level to ensure that local governments where the rentals took place receive the revenue.
Finally, the entire concept of using tax dollars to recruit tourists, under the rationale that many visitors will also relocate to the state, needs careful review. While growth may translate into a robust and expanding economy, growth also means more pressures for local governments to provide additional services. How to meet these new service requirements involves securing additional revenues and/or increasing taxes for current residents. The way the existing room occupancy tax is structured does nothing to address these expanding growth pressures.