Friday, August 3, 2018

The Bed Tax is a Bad Tax

Auckland Council has introduced a tax on properties providing online accommodation services by way of a targeted rate.  This a bad tax and a bad precedent.  If we think about it, the only rationale must be to raise more revenue to reduce the Council’s fiscal risk (more on that below), and to protect the accommodation sector. 
Distorting the tax system
New Zealand has a simple tax system based on general income and consumption taxes and property rates.  Government has long resisted targeted taxes. Yet that is precisely what this new rate is  - a bed tax.  It is aimed at households supplementing their income through renting spare capacity.  But the income raised in this way is already subject to income tax –Airbnb and other the peer-to-peer platforms ensure that the income earned is transparent.
Yet there is no justification for targeting rating at the occupancy of houses because this is covered under existing capital value-based residential rates. More valuable homes incur higher rates. The more bedrooms, larger the home, the higher the rate, all else being equal. Where a house is in a desirable area and the occupants can charge more for the bed and breakfast service; but they will already be paying higher rates. 

Incidentally, building consent costs reflect house size and value, providing an expectation that all the rooms so consented will be occupied.
No impact on public costs
The anomalous nature of this form of tax is obvious: what happens when the children start earning and are asked by Mum and Dad to pay board. Do we increase the rates then?  Or when people take in a permanent boarder to help make ends meet?

Should we lower rates on a property when the children leave home? We can always increase them again if they come home. But if they move elsewhere -- to Dunedin, Wellington, Tauranga, or Sydney perhaps -- their demand on Auckland services disappears.  And if they stay in Auckland they will pay rates in their new abode.  
Either way, there is no impact on demand for public services if their place is occupied by occasional visitors. In any case, much infrastructure is paid for directly through user charges. So if we accommodate visitors in an empty bedroom the services they consume are already accounted for.

Renting a room is rational economics
Look at it another way. We are constantly told that we are over-capitalising our residential assets, at the cost of more productive investments.  Well, here’s an example of people taking an initiative to increase the productivity of housing; and what does the Council do? Increase the rates on the asset, in effect taxing a productivity gain. And that positive outcome is supplemented by the additional demand that the visitors make on commercial goods and services, and the support they provide for recreational and cultural facilities.  All of this adds to the health of the economy (and the rate take).  So why would the Council discourage it with yet another impost?
 What about the accommodation sector?
Web-based services like Airbnb and are disrupting the accommodation sector. Low cost airlines and their web-based sales did much the same to air transport.  Since then we have experienced a travel and tourism boom and, incidentally, a long overdue restructuring of the aviation sector.

Why should formal accommodation be protected from such innovation? While web-based booking platforms have cut into the traditional travel agent sector and make a claim on the commissions of transport and accommodation operators, they are also a tool for increasing occupancy to the point that few accommodation providers operate without them.
The emergence of a substantial informal accommodation sector might provide just the smoothing mechanism needed to reduce investment risk in accommodation.  Traditionally capacity shortfalls constrain tourism growth in destinations until an investor is prepared to bet another 50, 100, 200 or more hotel rooms on demand.  When a whole lot of new rooms are introduced in one hit, the uptake is often slow, putting the investment at risk and eroding other operators’ occupancies. 

All too often the early investors are burnt, and it is only the second or third investors that begin to make any money out of formal accommodation.  In this environment, development stutters along, demand potential is unrealised, and the quality of investment  - in all respects - is questionable.

But when growth can build smoothly through an active informal sector in which entry and exit is easy and capacity dispersed, the environment for new investors is less risky.  The informal sector in effect provides a proving ground for growth and a buffer should growth falter.  If the bed and breakfast sector is a threat, why are there so many new hotel beds planned for Auckland?
So why bother?
Auckland Council is facing a fiscal squeeze.  It has opted for a growth model – a compact city - that places pressure on outmoded, under-capacity, and increasingly obsolete infrastructure, and consequently is facing major retrofitting challenges.  That model, defined in large part by the revamping of the Central Business District, creates a host of external costs, including congestion, loss of green space, heavy investment in mass public transit, and rebuilding underground infrastructure no longer fit for purpose.  Politically it is difficult to keep raising general rates to do this, and to levy sufficient area-of-benefit rates on CBD landowners could undermine the model. 
Perhaps the council should consider the adverse fiscal and equity consequences of such a model.
Instead, taxpayer subsidies and new forms of local taxation are being called on to support it.  The petrol tax is an obvious one, a tax that, among other things, penalises people who do not regularly access the CBD and inner suburbs. The targeted bed and breakfast rate is another one that will hit people who may well need the small amount of income it yields to meet their own commitments.

In its scramble for fiscal respectability, Auckland Council appears not to be respecting the financial needs of its citizens, nor is it looking to the long-term prospects of the visitor sector within Auckland.