Thursday, September 6, 2018

But Wait! there’s more. Why a bed tax on Airbnb in Auckland really is a bad tax


The opposition is growing
A couple of blogs back I said that imposing a bed tax on informal accommodation mostly offered through peer-to-peer web sites is a bad idea.  My reasons: it is a targeted tax, it ignores the fact that the accommodation capacity made available through platforms like Airbnb is already paid for by rates and user charges; and visitors who pay to use spare rooms or backyard cottages can be expected to have no more impact on public services than family members or friends who don’t pay. 

The informal sector provides low cost capacity at the margins to support the expansion of the visitor industry, thereby reducing uncertainty for commercial investors in tourism.  The Auckland Chamber of Commerce made the additional point that Airbnb, Book-a-Bach, and the like cater for visitors who might not otherwise visit Auckland.  So I struggle to understand why the Council should take this stand, especially when the idea of a bed tax on commercial accommodation is already under attack. 
The more I read about the policy the less I like it. Here are four reasons.

1             A Poorly Designed Tax
The tax is complicated, intrusive, and consequently inefficient. It is being added to the rates bill, confounding what is otherwise a generally straightforward levy based on the capital value of property.  This confusing revenue collection process by local government will impose new administrative costs for little gain.  
The Council evidently identified between 8,000 and 12,000 households renting out rooms or properties, and has managed to target 1,100 of them.  It sent out two letters to those it identified and set the rate depending on whether the owners replied or not[1].  Too bad if you were away at the time, or failed to clear your mail, or simply thought it was all a bit silly, and didn’t reply. The result, a higher rate set as punishment. 
Oh, if you only rent out one room or let rooms for fewer than 29 nights in a year you won’t have to pay. Good luck enforcing that. I wonder if the cost in wages (and political capital) is worth the effort.

2              Compounding the tax impost
The new rate taxes providers rather than consumers.  Bed-taxes  are generally an expensive form of revenue collection compared, with say, a visitor levy collected at port or airport. Anyway, the amount they might generate is trivial in the bigger picture with GST, rates on commercial tourism properties, and income tax derived from the hospitality sector already contributing substantially to government revenue. [2]
In the case of the informal sector, the revenue received by owners who use booking platforms to attract short-stay visitors to their spare room, empty cottage, or bach is already captured in the income tax net. They also pay additional user charges for the services consumed through their property.
In several ways, then, the rates-based bed tax is inequitable.  Owners are treated differently from those who let rooms or baches to long-stay tenants or outside formal booking platforms, or anyone else running a small business from a residential area. The use of spare capacity in the housing sector, a sector in which many households are over-invested, is penalised when many would think it should be encouraged. 

The inequity is compounded when the providers of bed and breakfast services are working to make ends meet with a little additional income.  There are many households in Auckland having to do this with long-term sub-lets.  Why should those that take the short-term rental path instead be treated differently?

3              A new ratepayer business subsidy
According to the Mayor, the revenue raised by bed taxes generally (including from AirBnB operators) is used to fund Auckland Tourism, Events, and Economic Development (ATEED), Auckland Council’s development agency.  

ATEED incurs marketing and promotion costs to boost demand for selected commercial goods, services (including underwriting events), and sectors.  This may be justifiable for emerging sectors, to support innovation, and even for city branding. 
But these are items that might be more appropriately charged to general revenues of the Council in a clearly transparent, politically contestable process.  Beyond that, initiatives to promote established sectors like tourism may be best funded by direct charges on the beneficiaries.  The capacity to fund would then be based on capacity to deliver, rather than on coercion; on revenue earned rather than a targeted rates or tax- based subsidies. 

4              An Anti-Competitive Move
Finally, the new bed tax appears to be an anti-competitive move by the council. The Mayor saysit was introduced after representatives from the hotel and motel industry approached him about Airbnb’s advantages”.  Hmmm – are these the same interests benefiting from the subsidies ATEED receives?  It begins to look like that want it both ways. 
Either way, I question the role of local government in manipulating rates to manipulate the market.
Informal accommodation has always been around.  It is better organised today, and demand has grown as a result of innovative, web-based innovative booking systems – which, incidentally are increasingly relied on by those hotel and motel operators.  The new platforms are also raising standards through such measures as user and provider feedback.

It is a pity to levy rates on the properties being used to reduce their competitive advantage, consequently suppressing innovation and enterprise. 

So why bother?
Tourism has boomed in New Zealand and around the world.  The question is how much we want to participate in that boom.  Here’s what Statistics NZ estimates tourism was worth to New Zealand in the year ending March 2017:[3]

·         Total expenditure $36.0 billion;
·         International tourism expenditure $14.5 billion;
·         Domestic tourism expenditure $21.4 billion;
·         Direct contribution to GDP: $14.7 billion (5.9% of NZ GDP);
·         Indirect value added of industries supporting tourism $11.3             billion (4.6% of NZ GDP);
·         230,793 people directly employed in tourism (8.4% of NZ                  employment);
·         $3.3 billion in goods and services taxes.

This is a business worth maintaining.  More detailed 2016 figure indicate that spending was close to $1,.000 for every international visitor night recorded.  The guests in Airbnb and Book-a-Bach may spend a little less, and many of them will be New Zealanders, but surely we don’t want to exclude participation by home based providers in a sector that returns so much to the country.

Tourism in Auckland
How about tourists in Auckland?

Here are some figures from the ATEED website.  There was an estimated 7.32m guest nights in commercial accommodation in the year ending June 2018, based on a total of 5.59 domestic overnight visits and 2.69 international arrivals.  Their estimated spend of $8.36bn in the region must have done a fair bit to sustain Auckland businesses and their rates payments, on top of a contribution of over $1bn in GST. 

Conclusion
The Council is wasting resources and political capital on chasing a minor sum that will discourage a valuable activity on the fringes of our visitor sector.

If it really wants to play in the tourist pool, why not lobby government to splash out a share of all the GST that visitors generate in Auckland.  

Or else simply be grateful for the support visitors give to the retail, entertainment, and hospitality sectors, and continue to collect rates from the properties and businesses they support. But think again about implementing a bad tax to fund a promotional agency, ATEED, with revenue of $84.6m in 2017 (up 37% on 2016), 83% of which is in any case funded by grants and subsidies (up 29% on 2016) primarily provided by the ratepayer. 


[1]              Interview with Mayor Phil Goff on the AM Show
[2]              The Council is not sure what the take will be from a commercial bed tax, although it appears that last years collection was just over $13m.
[3]              Satellite Tourism Accounts 2017, Statistics NZ, p7

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