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<i>The Week in Public Finance:</i> Affordable Housing Shortage? Massachusetts Might Tax Airbnb to Pay for It.

The state is considering a policy that goes further than most places that tax short-term rental companies.

Under a new bill, any tax collected on Airbnb or other short-term rentals would be targeted to affordable housing.
As Airbnb and other short-term rental companies have increased their presence in cities, so too has the struggle to provide affordable rental housing.

Massachusetts, however, is on the verge of becoming the first state to dedicate revenue generated from Airbnb and other short-term rental taxes toward affordable housing. The Bay State is considering legislation that would apply its state hotel tax to short-term rentals and require at least 35 percent of separate, local "impact taxes" on those rentals to fund investments in affordable housing or infrastructure.

The new tax was passed by the House and Senate this week. But Republican Gov. Charlie Baker has added amendments that would exclude property owners who casually rent their houses or apartments (for two weeks or less per year) from the law. The bill was sent back to the legislature and a spokeswoman for Baker said he hopes to work with lawmakers to reach an accord soon.

The bill comes amid growing concerns that the short-term rental market is enticing more landlords to take their properties off the market because they can earn more money renting it out for a few days at a time. This developing trend is a particular concern in places like Boston and San Francisco, where the availability of affordably priced rental housing is already a problem.

What's more, a 2016 study by the University of Massachusetts found that areas in Boston with the most Airbnb listings had higher rents by an average of $93 per month.

While some cities and states tax the short-term rental industry, few target any of that revenue to affordable housing or related services. In fact, only four major cities do so.

In addition to its hotel tax, New Orleans charges a $1-per-day short-term rental fee that also helps fund affordable housing efforts. Starting in January, Seattle will charge a daily short-term rental fee of up to $14 in a similar effort. Meanwhile, Miami requires 5 percent of all fines collected from short-term rental violations (which range from $100 to $2,500) to go into Miami-Dade’s Affordable Housing Trust. And in Chicago, a 4 percent surcharge on short-term rentals is used to help fund services for the homeless.

But while dedicating short-term rental revenue is a “nice” acknowledgement of the strain the industry might place on the overall housing market, says George McCarthy, president and CEO of the Lincoln Institute of Land Policy, it alone won’t make much of a dent. “What it costs to produce affordable housing units is pretty substantial,” he says, noting that per unit it runs between $500,000 and $1 million in major cities. “When you match it up to the affordable housing needs, it’s not enough to move the needle.”

Over 15 months in New Orleans, Airbnb reported the $1 fee contributed about $541,000 into the city’s neighborhood fund. The low amount has housing advocates now calling for a percentage-based carve-out rather than a per-day dedicated fee.

In Massachusetts, no one views the bill under consideration as a cure for affordable housing problems. It’s expected to generate roughly $25 million in local tax revenue per year -- that is, if cities vote to apply an impact tax to short-term rentals. The legislation also allows them to earmark that new revenue for affordable housing or infrastructure.

“All of those things don’t make it easy to reach that goal of having a town say, ‘We’re going to add that fee and dedicate it to affordable housing,” says Eric Shupin, director of public policy for the Boston-based Citizens’ Housing & Planning Association, which advocated for the bill. “We think that any new revenue stream for affordable housing programs is a good thing. But we’re realistic about the amount of money it would raise.”


In other public finance news:

A Stand Against Private Prisons

This month, New York Comptroller Thomas DiNapoli sold the last of the state pension funds’ stocks in private prisons, making it the first state to fully divest from the industry. The move follows votes by pension boards in Philadelphia and New York City last year to divest from private prisons.

An op-ed by New York City Comptroller Scott Stringer and Javier Valdés, co-executive director of the community organization Make the Road New York, explains the decision to do so: In recent decades, private prisons have gotten into the business of running immigrant detention facilities. The two men call upon other governments to drop their investments in private prisons. “The industry’s bottom line depends on locking people up,” String and Valdés wrote, arguing that’s a problem from a moral and fiscal perspective.

“Consequently,” they wrote, “as an investment, they’re at the whims of a seesawing political climate. This combined with the moral issues surrounding private prisons has convinced us that they are imprudent for investors to own and for banks to finance.”


Despite Good Year, State Revenue Outlook is Just So-So

States collectively posted one of the most positive revenue years in fiscal 2018 since the Great Recession, but observers are cautioning not to count on that next year. State tax collections grew by 5 percent over 2017, but Fitch Ratings warns that “most of the increases could be one-time.” That’s because income tax revenue was a big driver in the higher collections this year thanks to some key policy changes.

Preliminary figures on income tax revenue show that total collections increased a whopping 7 percent for 28 reporting states through June 2018. (That’s compared with just a 1 percent increase at this same time last year.) Fitch notes that income tax hikes in Illinois and Kansas accounted for nearly half of the gains. The report also finds that strong stock market performance, as well as the federal tax overhaul's repatriation of overseas hedge fund profits, could be a factor, particularly in California, Connecticut, New Jersey and New York.

Fitch further notes that these factors and the remaining uncertainty about how taxpayers and businesses will adjust to the federal tax overhaul will complicate states' forecasting efforts in the near future. And “less revenue certainty,” the report warns, “could mean more volatile budgetary management.”

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Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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