The Unforeseen Fiscal Challenges of Uber-Like Services

On-demand services like Uber and Airbnb will force state and local governments to rethink taxes, zoning and retirement.
March 2015
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By Frank Shafroth  |  Columnist
Director of the Center for State and Local Government Leadership at George Mason University

The explosion of sharing or on-demand services like Uber and Airbnb is the beginning of an economic upheaval every bit as significant as the industrial revolution. The on-demand economy promises to radically reshape the cost of services and change the face of the workforce. These upheavals, in turn, are altering state and local government policies -- imposing unforeseen fiscal risks.

One of the fallouts, for instance, is an upsurge in the growth of temporary or part-time workers, such as Uber drivers, Airbnb hosts and Axiom Law attorneys. These workers are providing on-demand services at rock bottom prices. They are not working in downtown or suburban office buildings or for traditional employers, nor are they eligible for traditional health-care or pension benefits. The challenges for states and localities, therefore, will be how, in light of these changes, they adjust tax policies, revise regulations for zoning and public safety, and provide retirement benefits.

Take Airbnb. It is forcing cities to reevaluate their local zoning ordinances, which either do or do not allow homeowners to offer their abode for boarding or motel use. If they don’t and a homeowner rents out a room via the website, the zoning office can fine the violator. If they do, the owner will need a business license and will need to pay taxes, such as a transient occupancy tax that some states levy.

Another challenge of even greater potential impact will come from a sector of the U.S. workforce that is moving off the grid. An ever greater share of the workforce is leaving traditional jobs where retirement benefits are common to jobs where they aren’t. Leaders will need to be part of a discussion about changing rules for “contract workers,” and of an even larger federalism and governance discussion about how pensions and health-care benefits are delivered in the future.

In January, outgoing Illinois Gov. Pat Quinn signed into law a new requirement that all small businesses of a certain size that don’t have a pension or 401(k) plan offer their workers an individual retirement savings option. Two years ago, California began moving in this direction, and states from Arizona to Connecticut are similarly exploring ways to provide state-based retirement plans for the benefit of private-sector workers who are not covered by traditional pension benefits.

There are other public money consequences as well. In January, Virginia Secretary of Finance Ric Brown reported that the new budget would include $1.7 million in revenues from online travel companies, like Hotel.com. But the budget does not anticipate a dime from Airbnb, which advertises nearly 2,500 places to stay in the state. States and localities will have to develop and implement policies to address the shifts in conventional state and local lodging revenues -- to say nothing of the issues regarding the health and safety of such guests.

Similarly, the ride-service companies Uber and Lyft continue to undercut the licensed, regulated and revenue-producing taxi industry. State and local officials confront not just equity issues, but also declines in traditional taxi-related revenues -- and a singular switch from a highly regulated industry of licensing and insurance requirements. Virginia is moving forward with universal regulations for Uber-style companies to address driver ability, criminal records and insurance requirements.

Amid these challenges, there are on-demand opportunities for state and local governments. They too can meet a growing number of public needs at substantial savings in salaries and benefits. For instance, borrowing the ride-services approach of Uber and Lyft, they could provide alternatives for elder citizens who, though they may no longer be able to drive safely, need access to transportation.

It’s not for nothing that the on-demand economy is simultaneously dubbed the disruptive economy.