James Reeman is an airline pilot who spends a lot of time away from home.
When he’s gone, he rents his house in Denver’s historic Highland neighborhood to vacationers. He’s registered with the city — per the city’s regulations for short term rentals — and pays sales and lodging taxes.
That would end, he said, if Colorado lawmakers approve legislation that would convert all the state’s short-term rentals to commercial tax status from residential, a spike that would more than quadruple property-tax bills.
“I like the idea of being able to leverage that asset a little bit. I make a little extra cash. The demand is undeniable,” he said. “I like the idea that an individual can make the environment more competitive, and this tax appears to take that away and put individuals on par with the Marriotts of the world.”
As communities big and small — from Georgetown to New York City — grapple with regulating the explosive vacation-rental industry, Colorado’s plan marks one of the more restrictive proposals. Industry advocates, resort communities and property owners like Reeman are keeping close watch on the regulation, which some say has the potential to extinguish short-term rentals in one of the multibillion-dollar industry’s hottest markets.
The proposal floats from the Alternatives to the Gallagher Amendment Interim Study Committee, six lawmakers tasked with finding a solution to a long-simmering fiscal crisis caused by conflicting constitutional amendments.
Briefly, here’s the crisis scenario:
Colorado voters in 1982 passed the Gallagher Amendment, which requires 45 percent of total property tax collections to come from residential properties and 55 percent from commercial. That balance has lowered property tax rates as home values have risen, leaving the state to cover more of the cost of schooling.
Then, 10 years later, came TABOR, the Taxpayer Bill or Rights. TABOR limits the amount a government or school district can spend, and all tax increases must to be approved by voters. And when economic downturns pinch state tax revenue — with lower property and income tax collections, for example — TABOR locks government spending at that reduced level, making it difficult to restore government spending and services when the economy improves.
Amendment 23, passed by voters in 2000, mandates increased spending for schools.
“Between these three we have bound up the state and local governments from being able to implement public policy that taxpayers expect. They conflict with each other and create impacts,” said Kevin Bommer, the deputy director of the Colorado Municipal League, which hasn’t weighed in on the committee’s short-term rental tax shift but consistently trumpets the need to correct the problem.
When Gallagher, TABOR and Amendment 23 collide, it isn’t pretty for the state or public schools. With cuts to education funding and the loss of residential property tax revenue due to TABOR and Gallagher, Colorado’s support of schools now ranks among the bottom quarter of states, with per-pupil spending $2,000 less than the national average of $11,984.
That’s why the Alternatives to the Gallagher committee spent months ginning up a list of possible fixes including: freezing the residential assessment rate; repealing the Gallagher Amendment; giving local governments more control of property tax rates and mill levies; and converting short-term rentals to commercial tax status.
Rep. Daneya Esgar, a Democrat from Pueblo, chaired the committee, which also includes four lawmakers from metro Denver and Sen. Bob Rankin, a Republican from the Western Slope. The group came up with eight potential bills and hopes to move five on to the legislature in January. They will select which bills to forward on Oct. 3, when they meet for the last time.
Esgar is quick to note that all the proposals are “very preliminary.” The short-term rental idea came from a meeting in Glenwood Springs, where she heard from resort community residents concerned that out-of-state investors were scooping up homes to rent to tourists.
“That made us think for a minute. ‘Wow, is this really happening?’” she said.
But they also heard from residents who were only occasionally renting their homes — or rooms in their homes — to help pay their mountainous mortgages.
“The six of us, we really want to understand both sides of this issue,” Esgar said.
If the proposal moves forward, an in-depth fiscal analysis will lay out impacts — pro and con.
“I really truly think we are the beginning stages of this. We want to be fair and just, but also help economies thrive,” she said. “But we need to figure out something.”
Matt Kiessling is with the Travel Technology Association, which represents an array of online travel platforms like Airbnb, Expedia and Sabre that publish several million short-term rental listings.
He’s the guy who travels across the world lobbying for policies that keep the short-term rental market vibrant. He’s dealt with a variety of municipal regulations corralling short-term rentals but has not seen any policies that seek to convert the tax status of properties.
“We’ve seen conversations about this, but we haven’t seen anyone try it,” Kiessling said.
Massachusetts lawmakers last year floated a bill that raised property tax rates for investors who had multiple short-term rental properties, but the legislation has not passed.
Kiessling said most homeowners who rent on the vacation market don’t have big yields. If they face a tax bill that climbs to 29 percent of their home’s assessed value from around 8 percent, “the majority of the homes would come off the short-term market,” he said.
“I think it would start the dominoes in tourist-dependent communities,” he said. “Really, this would eliminate a huge segment of the tourism industry for your state, and the trickle-down effect on all the jobs associated with that economy would be massive.”
But remember: Kiessling is paid to say things like that. So it’s not surprising that short-term rental companies like Airbnb and Homeaway oppose the proposal. Airbnb, with 5 million listings in 81,000 cities, last year secured $1 billion in funding, which valued the company at $31 billion. The company rarely sits idle when regulation threatens its business model.
The companies have labored to limit heavy-handed regulation, working with municipalities to streamline registration and even collecting sales and lodging taxes from people who use their websites to book short-term rentals.
Airbnb in 2016 sued San Francisco over the city’s law that required the company to make sure its clients had registered with the city before posting ads for properties. Both Airbnb and Homeaway’s parent, Expedia, last month sued over New York City’s rule requiring the websites to share the names and addresses of hosts with the city. Cities across Europe — Paris, Barcelona, London and Berlin — have wrangled with Airbnb over regulations that cap the number of nights a person can rent a property. In each fight, Airbnb repeats a similar refrain: The rules pinch everyday residents trying to make ends meet in a pricey place.
Airbnb said its property owners in Colorado hosted 1.2 million visitors in 2017, a 68 percent increase over 2016. Those hosts earned $183 million. The company has tax agreements with 15 Colorado cities and counties to help collect lodging, special district and sales taxes.
In Breckenridge, the second hottest Airbnb market behind Denver and home to the second-most trafficked ski area in the country, more than a quarter of all the taxable spending in 2015, 2016 and 2017 was on short-term lodging, which includes hotels and stays at the more than 3,500 licensed vacation-rental units in the resort town. That amounts to $428 million spent on lodging out of more than $1.6 billion in total spending over those three years. That’s generated tens of millions in tax revenue for the town and even more money for hosts who rent their properties.
“The majority of Colorado Airbnb hosts are sharing the homes in which they live and many do so in order to help make ends meet,” said Airbnb spokeswoman Molly Weedn in an email. “This proposed change could mean much of this important supplemental income would go to state coffers, rather than helping a host pay their bills.”
In Breckenridge, which ranks among the top communities for short-term rentals with more than 3,600 homes and condos on the vacation-rental market, the median price for a single-family home is $1.15 million. The assessed value of that home — multiplied by 7.96 percent for residential — would be $91,540. The town’s mill levy of 53.895 mills means the owner of a median-priced home in Breckenridge pays $4,934 in property taxes.
If that home was assessed as a commercial property at 29 percent, the owner would pay $17, 974. That’s a difference of $13,040, or about $1,086 a month.
Say that home rents on VRBO for about $500 a night, of which management, utilities, insurance and fees accounts for about half. The owner would need to rent the home for an additional 50 days a year to pay the increased tax bill. That’s more than the average number of days a vacation rental home in Breckenridge is booked for a year.
HomeAway, the parent of VRBO.com which was founded in Colorado and purchased by Expedia in 2015 for $3.9 billion, said in a statement that it was “concerned that raising property tax in this way could negatively impact thousands of homeowners, travelers and small businesses across Colorado.”
“For generations now, the vacation rental industry has found a home in Colorado,” said Philip Minardi, the head of policy communications for Expedia. “Whether it was VRBO’s founding 22 years ago in Denver, or the more recent economic growth spurred on by vacation homes throughout the state, elected officials must recognize the long-standing importance of vacation rentals to the state’s travel and tourism economy.”
Hotel owners often remove rooms from commercial tax status when they can show a guest stayed in the room for more than 30 days.
“It isn’t a stretch to ask ‘Why isn’t the converse true?’ It’s a fair question,” said Bommer with the Colorado Municipal League.
The harder questions involve monitoring and enforcement, Bommer said. Hotels have a financial incentive to report guests that stay for more than 30 days. Homeowners won’t be so keen to report short-term rentals that hike their property tax bills. That puts assessors in charge of seeking out owners of short-term rental properties and monitoring the length of stays in private homes.
“This change may be difficult for the assessors to administer and may require different approaches for an assessor than those used for residential property,” reads a memo on the proposal from the Legislative Council Staff.
Brenda Mosby, the assessor for Chaffee County, a hotbed for short-term rentals with about 6 percent of her 8,500 homes licensed as vacation rentals available for stays of less than 30 days, supports the conversion to commercial property tax rates.
She says the fire departments and special districts in her county, which includes the towns of Buena Vista and Salida, are struggling as residential tax rates drop under Gallagher and can’t climb under TABOR.
“We are not treating vacation rentals like hotels and motels, but they are acting like hotels and motels. I think this could be a good bill, and it’s really necessary for our fire districts that have mostly residential in their district. I’m for … treating everybody the same, and they are in the same business of providing lodging, I think the playing field should be level,” Mosby said. “Someone might come up with a better idea, but I haven’t seen it.”
Steve Schleiker, the assessor for the 300,000-parcel El Paso County, said changing vacation rentals to commercial would be “a massive undertaking” for his office.
His concerns are discovering the properties that are renting short-term and then working with sometimes reticent property owners to determine how much of the property would be taxed commercial. And if a property sells, could the new owner be responsible for the previous owner’s tax liability?
“This would be an extremely challenging endeavor for counties with a larger number of properties, especially the counties along the Front Range,” Schleiker said. “Some counties might be able to absorb this new work, but I feel, for a county like mine, we would absolutely lose revenue.”
Short-term rentals in Colorado have spawned a cottage industry of property management companies, cleaners and more. All those different business owners generally support regulation of the nascent industry.
But sometimes, a community can stifle the market with burdensome regulation, said Brian Egan, the co-founder and CEO of Evolve Vacation Rental Network, which offers 9,000 short-term rental homes for owners. Evolve clients have earned more than $350 million since 2011. Last month Egan announced an $80 million capital infusion from investors, giving the start-up $103 million in funding to support its triple-digit annual growth.
Egan sees three challenges with the currently proposed legislation: Compliance, enforcement and significant additional costs getting passed along to consumers.
“If you are looking at adjusting taxes on this activity, you should want it to be focused on a lodging tax, something that is levied per transaction and fairly disclosed to the traveler, like an X-amount line item. With this, it essentially hides the ball and forces the owner to price inventory at levels that are not viable in the market,” Egan said. “It’s a lose-lose.”
If the legislation passes, Egan expects most owners would pull their homes from the short-term rental market.
“That is going to particularly hit markets where they do not have enough hotel rooms to support tourism at the level of demand that’s there right now. Summit County, for example, cannot exist on just its hotel inventory,” Egan said. “Look, this market is popular with travelers. It starts with demand from consumers. They are attracted because of the value of a two-bedroom home with a kitchen for the price of a hotel room. If suddenly short-term rentals in an area go up by $100 a night, fewer people are going to go there and fewer dollars will flow into the economy. Ultimately that will hurt the workers in those markets because they are so dependent on those tourists.”