Many Colorado communities are struggling to get their economies under control as 2021 heads into winter — not so much from the illness of COVID, but even more so from the illness of excessive tourism.
The villain in the story is often framed as the Short-Term Rental (STR) industry and the monstrous online platforms that have made the industry possible: VRBO; AirB&B; Booking.com; Trip Advisor; etc.
Nothing much Colorado towns can do about VRBO and AirB&B. But we can do something about taxes. Right now, in Colorado, the vacation rental industry has a sweet deal, in terms of property taxes. For example, a commercial hotel valued at $500,000 is assessed by the State of Colorado at about $132,000. The $500,000 STR next door is considered to be a ‘residential property’, so the assessed value is only about $34,000. If the community’s total mill rate is 100 mills, the hotel will pay $13,200 in taxes. The STR will pay only $3,400.
Knowing that property tax is the primary local funding stream for fire districts, schools and county governments, Colorado communities — especially, perhaps, mountain resort communities — are putting new taxes in place for two reasons:
1. To fill the financial hole left by Colorado property tax assessment rates, as it relates to STRs; and
2. To discourage the conversion of residential homes into mini-motels, and to encourage landlords to switch back to long-term rentals.
The town of Crested Butte, Colorado, presents an interesting example. Finally noticing that the town was being overrun by tourists and vacation rentals, and finally admitting that local workers can no longer afford homes, the Town Council put in place a 12-month moratorium on new vacation rental licenses, and has approved the “Community Preservation Tax” on the November ballot, for possible voter approval.
From the Crested Butte News, October 6, 2021:
The Crested Butte town council will hold a public hearing on October 18 on the ordinance that will detail the “Community Preservation Tax” if it is passed by voters this fall. The proposed tax would basically charge owners of residential property $2,500 per year (adjusted for inflation) if it is not rented more than six consecutive months in a year-long period. That fee proposal is also tied to a half-cent increase in town sales tax (excluding groceries). All the money raised would go to affordable housing projects…
We all want our communities to be preserved, I suspect, so the name “Community Preservation Tax” probably matches the intention well.
As we notice, the proposed ballot measure has two parts. First, it increases the sales tax by 0.5%. Secondly, it requires second home owners and vacation rental operators to rent out their houses for at least 6 consecutive months each year, or pay the “Preservation Tax”.
Here in Archuleta County, we’re in the midst of a housing crisis — but amazingly enough, we don’t have an actual shortage of houses. We have more than enough houses to accommodate everyone who lives here, full-time. The crisis has resulted partially from the fact that maybe half of these homes are second-homes that sit vacant most of the year, or are being used as vacation rentals. That creates a shortage of available houses for full-time residents, and has been helping to drive up home prices, vacant land prices, and rental rates.
There is no evidence that the “free market” is doing anything to solve this crisis. Just the opposite, in fact. Every year, more homes get built, but the majority are not available for local working families, or else are so expensive that they would constitute a serious financial burden.
Ideally, the approach taken by our local governments would kill two birds with one stone.
Ideally, a new “Community Preservation Tax” would discourage unchecked growth of vacation rentals… and would at the same time create a funding stream that local governments could use to encourage and promote more housing that working families can afford. The Crested Butte tax — if approved in November — appears to be attempting to do both things.
Here in Pagosa, a volunteer group known as Pagosa Housing Partners (PHP) has been meeting with local business and government leaders to promote a permanent funding stream, aimed at addressing the crisis here. The proposal, which has been discussed at Town Council and Board of County Commissioner meetings, consists of two possible tax changes. (Disclosure: I serve on the PHP board.)
The first tax change — a reallocation of the Town Lodgers Tax — was discussed back in Part Two of this editorial series. The proposal would not increase anyone’s taxes; it would merely allocate half of the existing Lodgers Tax collections to workforce housing efforts. The Pagosa Springs Area Tourism Board would still have more revenue to spend on marketing than they had in 2015.
The second proposal from PHP would establish a new excise tax within the Town of Pagosa Springs, aimed specifically at vacation rentals. In its preliminary draft form, the proposed tax would require vacation rental owners to pay an annual tax of $2,000 per licensed bedroom. Thus, a three bedroom vacation rental — the most common size rental within the town — would owe $6,000 per year for the privilege of operating a mini-motel.
The tax would be half the amount per bedroom, however, for local vacation rental operators who live full-time (at least 9 months of the year) on the same property where the vacation rental is located.
The draft proposal states that the funds raised by these taxes would be used exclusively for encouraging and promoting workforce housing by:
- Purchasing property intended for housing;
- Participating in public-private partnerships;
- Providing subsidies and grants to housing providers and housing developers, which may include funding for renovation of existing housing;
- Such other uses determined by the Council to encourage or promote the production of workforce housing options.
The Town Council will discuss the PHP proposals — and other possible ballot measures for the Town’s April election — at their regular meeting this Thursday, October 21 at 5pm at Town Hall. You can find the agenda here.
From that agenda:
Excise Tax on Vacation Rentals
Some communities charge an excise tax on short term rentals with funds dedicated to workforce housing. For example, the Town of Crested Butte has a 5% excise tax that funds an affordable housing fund. Due to the number of STRs in Town (approx 150) vs the County (700-900), this would yield more revenues as a countywide tax.
Taxes are often used to discourage certain types of behavior. The special taxes on alcohol, tobacco and marijuana might be seen as such attempts, though I’m not convinced that they truly work effectively.
But they definitely raise money.