County Taxes and Vacation Rentals – Part II: Who Should Carry the Burden of New Tax Increases?

By Gorge Volsky, Instant Software - Director of Research
 
My last blog posed three questions that arise any time a county government wants to increase taxes that affect vacation rentals.

Should your County react to slowing tax revenue by increasing taxes or should the County be pushed to reduce its budget?  Arguably, most counties can identify services that are “nice-to-have” but not “essential.”  But this always involves political fighting.  Make your views known, but be prepared if you are unable to forestall tax increases. 

Could a tax increase decrease tax revenues over the long-term? The answer to this question may depend on whether the tax burden is imposed on renters or homeowners.

Which industry stakeholders are best able to shoulder tax increases?  

• Managers can and must pass any new taxes on to either the renter or homeowner.
• Homeowners, as investors in real estate, must ultimately pay any new taxes that the renter can’t or won’t absorb.  But counties must be cautious about increasing property taxes:
  • Property tax increases could trigger distress sales that undermine existing property tax valuations and fuel demands that property taxes be reassessed and lowered based on “comps.”
  • While I believe that homeowners and managers cannot raise rents without losing renters, I nonetheless believe that renters may be willing and able to pay higher occupancy taxes that are imposed by a county government.  
    • Many consumers who cut out vacations did so as a general belt-tightening response to an unstable economy (they are unemployed, underemployed, or fearful);
    • Many vacationers who do come are using the Internet to play one homeowner against the other to obtain a rent that is lower than the rent they can actually afford to pay;
    • Most renters take taxes for granted and I have not seen evidence that their selection of vacation destinations are influenced by a percentage point or two in the tax being imposed; 
    • If counties raise occupancy tax (or food and beverage tax), it is possible that the counties will simply be staking claim to a portion of the savings that consumers are able to exploit from homeowners/managers by using the Internet to bargain rents down. 
         

What You Can Do.  Review your county budget to see how much your county stands to lose if an increase in property taxes were to trigger distress sales that, in turn, generate demands for reassessing (lowering) property valuations.  Remind your county commissioners, if necessary, that property values dropped when the housing bubble popped and it would be nice to hold existing tax valuations steady until property values catch up.  If taxes must be raised, it is just possible that the least intrusive impact can be achieved if the County raises lodging tax or food/beverage taxes.

Let me know if this triggers other thoughts on the topic.  Respond by posting a comment on this Blog or e-mail me at gvolsky@instantsoftware.com.