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 to the Council in enforcing that. I wonder if the cost in wages (and political capital) is worth the effort.

2              Compounding the tax impost
The new rate is actually a tax, a tax on providers rather than on consumers.  Bed-taxes  are an expensive form of revenue collection compared, with say, a visitor levy collected at port or airport. And the amount they might generate is trivial in the bigger picture: GST, rates on commercial tourism properties, and income tax derived from the hospitality sector already contribute substantially to government revenue. [2]

In the case of the informal accommodation sector, the revenue received by owners who use booking platforms to attract short-stay visitors to their spare room, empty cottage, or holdiay home is already captured in the income tax net. They also pay additional user charges for the services consumed through their property.

The bed tax is inequitable in a number of ways.  Owners are treated differently from those who let rooms or cottages 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. 

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 spends on marketing and promotions 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 on 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 says “it 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 passes on?  It begins to look like they 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 booking systems – which, incidentally are increasingly relied on by hotel and motel operators.  The new platforms are also raising standards through user and provider feedback.

It is a pity to levy rates to counter any perceived competitive impact , consequently suppressing some of the innovation and enterprise that a mature sector needs to stay healthy. 

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 and hgrowing.  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 5.59m domestic overnight visits and 2.69m 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 Goods & Services Tax contribution of over $1bn . 

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. 

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[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

What happens when carrying capacity is exceeded? The planning debate we have to have

In 250 words …

The failures of Auckland’s Unitary Plan could have been avoided if it had been based on the physical capacity of Auckland to absorb development, rather than on how to cram in as many households as we can imagine over the next forty years.  This would have focused on the population that the environment can sustain, not the population that comes from extrapolating sseveral years of high migration gains.

Using carrying capacity as a starting point helps rationalise infrastructure investment and enables aspirations for growth beyond “natural” limits to be assessed relative to the additional investment required. It would reveal the fiscal impact of the Plan based on understanding the City's environmental assets and residents’ needs.

Unfortunately, the approach adopted seeks to accommodate inflated population projections in a confined space, raising questions around environmental impacts, economic consequences, fiscal outcomes, and sustainable growth.

It may not be too late to adopt a carrying capacity approach.  It may mean redrawing the map of development and density,though, rethinking connections within Auckland and with other cities, and backing off over-specification of what is allowed, focusing instead  on desirable outcomes within the physical and social limits to growth. 

It also means debating some difficult questions: How many residents is too many? How do we enforce limits? And how does this impact on the national economy?  

A Plan for What?

Auckland’s Unitary Plan appears to be unravelling. Congestion continues to grow.  The infrastructure spending required to keep the city functioning and its waters clean keeps growing. The Central Rail Link budget is blowing out (as far as we know!)  The public costs of running the city are running away.   Between 2012 and 2017 operating expenses jumped 21% in (in 2017 dollars) while population increased by around 12%: that’s an 8% increase per head.  Borrowing went from around $3,600 per resident to $5,010, a 40% jump.

And now the taxpayer is being called on to top up investment as central government steps in to fund a transport package for Auckland, even as additional charges are placed on residents and households by way of fuel levies and, possibly, a bed tax on private short-term rentals.  

And now the government is overriding the Unitary Plan, a plan with  rules that even the people who wrote them – the City’s planners –  apparently struggle to interpret.

The Unitary Plan is all about the metrics of fitting more and more people into a confined space and pouring resources into the central city in the hope that it may retain its commercially dominant role.  This may serve some interests.  But how well does it serve Auckland’s population at large, now and in the future and what are the long-term consequences for the physical and social environments?

Even as our understanding of the risks of over development improves, the Unitary Plan and ad hoc responses to its short-comings threaten to reduce resilience and sustainability by over-running Auckland’s carrying capacity, particularly by emphasis on intensification on the Isthmus.

Fiscal, Economic, and Social Consequences

The fact that we are investing hand over fist in infrastructure may provide some reassurance about the capacity to accommodate growth, but carries its own risks. Infrastructure that is not justified economically, retrofitting under-capacity, aged, or obsolete infrastructure, and unbudgeted overruns all undermine productivity. Getting infrastructure investment right, based on sound land use planning among other things, is critical to sustaining the investment necessary for well-founded city growth.  Otherwise, inadequate or inappropriate infrastructure will undermine investment and productivity.  

Increased housing and commuting costs that arise from a deficient urban plan will also do so.  High living costs translate into high costs of employment.[1]  These, like high land costs and infrastructure deficiencies, also reduce the attraction of the City for productive investment. 

A large and growing rental population is one result of high living costs.  This is inherently destabilising.  It places downward pressure on birth rates as young households delay or abrogate child raising.  It makes recruitment of specialist skills more difficult.  And it creates a large fotloose component within the community, something that also increases the cost of employment.  All this, in turn, raises the risk that what has been a modest net population loss from Auckland to other parts of the country over the past thirty years will accelerate..

The current building boom arising from catch-up infrastructure and housing projects is creating a whole set of issues of its own. Cost overruns are inevitable when major private and public projects, and the drive to boost housing intensify competition for scarce skills and labour, for land, and materials.

Thinking about carrying capacity

If this gloomy prognosis has any crediblity, then its time to confront the question, how much growth can Auckland physically accommodate?

Identifying physical carrying capacity means addressing questions with a mix of science and subjectivity: when will the things we value about the Auckland environment be lost if we over-develop? Where are the environmental thresholds? At what point do we call a halt to untrammelled growth and consider alternative development strategies? 

 While politically difficult, here are some of the matters we must consider.  First, at what population level will we have transformed the city to the point that it hits the threshold for sustainability, and how do we identify that?  When might our valued natural and productive marine and terrestrial ecosystems collapse, or be threatened with collapse from the weight of overuse?  And what are the issues raised by recognising that we cannot continue to pursue hgrowth at any costs?

The answers will change as our knowledge of natural systems increases, along with out capacity to manage the effects of development.  But if we look at the state of our coastal waters, the fishing resources of the Gulf, the risks to our forests, and the dwindling of indigenous wildlife, it seems these things have not weighed in sufficiently in our planning.

Another question: how do we factor resilience into our plans for Auckland, especially in the face of climate change?  This may call for a retreat from the foreshore, or the funding of major structures in the marine environment, and the development of new transport corridors if the central city is not to be subject to regular and inceasingly severe disruption (the more we pack into the CBD, the mre far-reaching extreme weather events will become).. 

There is also a question of equity and social justice: how far are particular sections of the community going to be required to carry the cost of excessive growth, or be excluded from the benefits?

Finally, we need to address the role of infrastructure.  The wrong infrastructure, or infrastructure in the wrong place, will effectively reduce the region’s carrying capacity, just as too little will.  Our refusal to think of the treatment of transport corridors and future demands on them is already emerging as a significant limiting factor.

Start with “How much?” and then move on to “How?”

Identifying and managing carrying capacity is more fundamental than simply debating trains versus cars, public versus private transport, high density versus low density housing, mixed use versus single use zones, heritage versus high rise, greenfields versus brownfields, malls versus local centres, or city centre versus suburbs.

If we had been planning for Auckland based on how much growth the City can support without undermining its natural, economic, and social resources, we would likely have produced a plan quite different from the hotchpotch we are saddled with today. 

And the argument that Auckland must grow if the nation is to grow is simplistic. We already seem to have reached the point at which the diseconomies of agglomeration in the city exceed any benefits it might offer business.  Auckland’s GDP growth from 2000 to 2017, for example, lagged the rest of New Zealand, placing 14^th out of the 15 regions listed by Statistics New Zealand. [2]

It is time to rethink the strategy for our largest urban centre.

Getting ahead

A plan that builds from the ground up would explore technical thresholds and how they might change in the future. It would highlight the unknown and provide for flexibility and adaptability, rather than rigidity and over-written rules. There would be greater clarity on what is not allowed, and why, and ideally a scientifically informed consensus on the limits to growth.

At a practical level the plan would provide the canvas, not the paint.  It would accept that a growing city comprises a collection of connected communities and that, given their varying character and capacity, one set of rules for all does not work.  The attempt at homogeneity has led to a complex current plan which points the way to overdevelopment and uninspiring sprawl. Better that we recognise, among other things, the significance of diverse suburbs and  suburban life and work, and ensure that within them the public realm supports healthy communities.

It should recognise that containing development within an urban boundary is flawed in a growing city, boosting the externalities that occur when carrying capacity is exceeded, and diminishing the quality of life. These include bottlenecks and congestion, infrastructure and service failures, high employment and service costs, water and air pollution, and vulnerability to disruption.  

That contiguity does not lead to efficient urban development, is a reality finally being realised. We should be looking at the evolution of satellite towns and cities in the regional hinterland, and at the quality of connections with them and with provincial cities and regions (although they too will have to address carrying capacity issues as they gear up for a migration-driven boost to growth).  

The promotion of satellite towns and cities, adapting smart growth principles to the sites selected, incorporating modern and sustainable infrastructure solutions, and providing for diverse and dynamic investment and employment, increases the capacity to adapt urbanisation to changing circumstances.  It potentially provides for greater degree of resilience locally, through a high level of community self-sufficiency, and regionally, through multiple sites of production and consumption, and plentiful, accessible  green space. 

A ground-up plan will set broad land-use parameters within which infrastructure services should be provided, and guidelines for their assessment set out, rather than seeking to prescribe and control what will happen, where, and when . The timing and capacity of infrastructure cannot be pre-determined too far ahead of the growth it might cater for without excessive costs and risk. Any major public infrastructure provided for in a plan should be subject to rigorous economic, fiscal, and environmental evaluation. Uneconomic infrastructure is costly and a drag on productivity. 

Local or commercial infrastructure might simply be assessed on environmental and safety standards and the disciplines of finance and market left to determine development within those parameters.

Beyond Auckland

The fact that central government is becoming more and more involved in sorting out Auckland’s problems may signal time for a fundamental change in how we do urban development.[3]  The development of Wellington, for example, has benefited from modest growth.  However, today growth pressure is mounting, pressure which could well undermine its claim to be the world’s coolest little capital.

Wellington, like urban centres Tauranga and Queenstown, faces growth challenges that arise in large part from the costs and constraints physical character imposes on growth.  The challenge many New Zealand centres face is how to retain the character that makes them both appealing and viable in the face of new growth pressures.  

In Auckland and beyond, it is time to address how much centres might grow based not on naïve cohort projections but on just how much we can accommodate.  It is a shift in urban planning and policy that raises some uncomfortable issues.  But it may be better to address them sooner rather than later, before we destroy the very qualities that make our settlements and cities prosperous.

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[1]              This negative impact may be masked by methods used to estimate regional productivity that assume high wages reflect greater output per worker rather than compensation for excessive housing and commuting costs. 

[3]              The fact that the Government asked the Productivity Commission to visit ground aero with respect to urban planning says as much.