After the legislature last year approved the ability to tax second homeowners more, one ski town is going all in establishing a “vacancy tax” for property owners.  Ironically nightly rentals can be considered “vacant”.  

What is in the new Vacancy tax proposal?  What is the cost?  How will “vacancy” be determined?  Will other ski towns follow?Who is covered by the prospective tax?

Who knew that Colorado ski towns would be taking economic lessons from Portland Oregon even though Portland is one of the worst performing cities economically in the country.

 

What is the proposal to tax vacant homes in Steamboat?

Steamboat is putting forward a ballot initiative to tax second homeowners 3100/year if the property is used less than  183 days a year by the owner or a tenant.

Why is Steamboat proposing a vacancy tax

Regardless of if someone is in that unit or not in that unit, we still have to provide the same level of stormwater maintenance, the same level of street maintenance,” Weber said, adding that parks and recreation costs were also included, based on data derived from artificial intelligence about actual usage.

The fiscal impact, according to Weber’s calculations, is substantial. The net cost to the general fund for servicing vacant units is estimated at $6.6 million annually, compared to $3.2 million for full-time units.

To recover these costs, staff proposed a flat-rate tax of $3,100 per vacant unit, which could generate between $3.9 million and $10 million annually, depending on the actual number of qualifying properties and compliance rates.

 

Fundamental flaw in Steamboat’s reasoning

Steamboat is missing a basic economic principle, a vacant home is actually the best thing for a community, especially expensive homes.  Roads, sewer, etc… are sunk costs that must be maintained whether people are in the houses or not.  People who are leaving their houses vacant and only using them for a month or so are awesome for communities as they provide substantially more in taxes than they use in services as opposed to rental houses.  The person who only uses the house for 30 days or so a year is still going out to eat, buying furniture, paying utility bills, in many cases donating to local causes, etc… They are the ideal candidate for what you want in a high end ski town.

Increased tourism not paying their fair share

Vacant homes are not the culprit for the budget woes that ski towns like Steamboat are feeling due to “loss of sales tax”, the increase in tourism is having a much larger budget impact.

Unfortunately the numbers do not lie, regardless of what fancy “modeling” the city council did the numbers do not add up.  If increased tourism leads to increased sale tax revenue and in turn the city budget, then why are we even having the budge discussion.  For example in Steamboat tourism  and in turn sale tax revenue has increased every year the last 5 years and yet we still have a budget crisis.

At the same time, the number of full time residents is about stable.  Based on this information, the increased services (fire, police, public works) for the increase in tourism are not being paid for by the increased sale tax revenue from tourists.

Long and short, the numbers do not add up, increased tourism is already not paying its share and now the proposal is to incentivize more tourism????

Are nightly rentals considered “vacant”

This brings up an interesting question, are nightly rentals exempt from the “vacant” tax?  Yes, as long as they are rented less than 183 days a year.   This brings up a huge issue, why would local governments encourage even more nightly rentals through this legislation while at the same time they are restricting the number of licenses, locations, etc…  This makes no sense from a logical point of view.  Furthermore, by incentivizing more nightly rentals, each town would in turn need more service workers that can’t afford to live in the area further perpetuating the housing crisis we are seeing in each ski town. Along with exacerbating the housing crisis, more government workers will also be needed for police, fire, etc… in order to accommodate the influx of visitors.

Note, commercial properties are exempt from the rule so if a hotel is only utilized lets say 180 days a year then they would not be subject to a vacancy tax.

 

Is taxing vacant homes really the best strategy

First, as a side note, any economic policy that Portland Oregon is championing should be a warning sign for everyone else as Portland is one of the worst performing cities economically in the country, so clearly their policies are not working!

When you think of Colorado’s ski towns, I’m going to differentiate between second homeowners that solely use their properties for personal use as opposed to nightly rentals.  Assume there is a second homeowner who has a 4m dollar home in Steamboat.  That owner currently pays the same amount as a primary resident yet uses very few services.  For example, they don’t use the schools for their kids, yet still pay taxes for them.  They only drive on the roads maybe 90 days a year yet pay the same as a resident who uses them daily. They spend tons of money when they are in town on restaurants and other services as they are high net worth spenders.  So, I’m not sure from a “fairness” standpoint second homeowners should pay more.

On the flip side the argument is that someone who has a 4 million second home can afford to pay more taxes.  Regardless of which camp you are in, segregating property types based on occupancy creates some thorny questions of fairness, etc… and it defies the basics of economics!

 

Vacancy tax will make budgets worse for ski towns

The root cause of the affordable housing crisis in every Colorado resort town is that lower paid workers are required to run the resort economy from servers to lift operators, etc… Very few, if any, of these employees are making enough to buy property in the towns they work.  With median home prices in many Colorado resort towns averaging 2 million and up it is not feasible to afford a market rate property.

Unfortunately the solution continues to be to tax property owners more which incentivizes even more short term rentals for property owners to make ends meet with the increase in expenses.  This in turn requires even more workers that still can’t afford to live in the town thereby making the crisis even worse than we are in today.

Summary Steamboat Springs Colorado Vacancy tax

The vacancy tax is not just theoretical.  Steamboat is running full force to use vacant homes as the scapegoat for their budget woes.  Ironically the reason for the budget shortfalls is huge overspending coupled with unfettered growth of tourism that is not paying its way for the services required.  Instead of actually addressing the root causes of budget issues (see my prior article on this topic), the city council is merely grabbing more money to sweep away the problem.

 

A vacancy tax is a bad idea for Colorado ski towns as it will have the opposite impact by requiring even more workers and housing due to increased nightly rentals.  The vacancy tax will do nothing to “incentive” owners to rent long term as the numbers just do not work.  It is not possible for workers to make enough money in order to pay for the rent on a multi million dollar home.

By implementing a vacancy tax, Colorado ski towns will make matters considerably worse for current workers and demand will merely increase for housing.  Furthermore, a second home provides substantial value to a community, they pay the same taxes as a full time resident and yet use very little of the same services (schools, etc..).  Ski towns should be taking the exact opposite approach and encourage more to keep their houses vacant if they cannot rent to a local worker.  This would substantially help the community as tax revenue remains high and the impacts of tourism are mitigated.

I would encourage everyone to contact your local ski town legislator to let them know what a bad idea the vacancy tax is and to remind them of how basic economics of supply and demand work :<.

Additional reading/resources

 

 

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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner.  He is the owner of Fairview Commercial LendingGlen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors MagazineThe Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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