The shared economy, which brings people together through apps such as Airbnb and Uber, has streamlined travel significantly. But cities across the country like Madison have gotten the short end of the stick.
During the last recession, tech startup Airbnb launched, jeopardizing the hotel monopoly with a low-cost, home-sharing model that managed to find the sweet spot between hotel and hostel. The direct client-to-host model left both parties pleased, but the iconoclastic app drew criticism from local governments.
Across California, the company’s state of origination, city ordinances vary and are constantly changing. In Santa Monica, city officials banned short-term rentals to avoid Airbnb complications, according to Southern California Public Radio, while Los Angeles took a subtler approach; it imposed a tax.
With estimated potential tax revenue of $5.8 million, Los Angeles city officials were surprised just five months later with $13 million in tax revenue from the decision, according to SCPR.
The company is not trying to disguise this fact. Last year, it released a report highlighting the tax revenue available to cities who partner with the app. “As we meet with Mayors,” the company stated, “we’ll be encouraging them to work with us to expand this initiative.”
At a press conference in early 2016, Madison Mayor Paul Soglin criticized Airbnb’s effect on the city’s affordable housing, saying it minimizes availability “by turning apartments and single-family homes into hotels.”
Despite such drawbacks, the city is now working with the home-sharing company.
In an attempt to increase regulation, the Madison Common Council recently approved an agreement that puts a 9 percent tax on Airbnb rentals. Instead of the city directly collecting from hosts, the plan stipulates that Airbnb would collect it through their online software and then pay the city, as they already do in cities such as Los Angeles.
“As it stands now, hotels and motels are required to collect and remit room tax,” Nicholas Zavos, the government relations director at the Madison Mayor’s Office, said. “But very few short-term rentals currently do it.”
Only a handful of Airbnb rentals in Madison adhere to current regulations, according to Zavos.
“Our estimates are roughly about 350 [Airbnb] hosts in the city,” Zavos said. “I think there are about 10-15 hosts who are complying currently, so it’s a tiny fraction.”
Many complying hosts raised concerns of economic disadvantage compared to other renters who can cut costs and offer low rates.
It’s an aspect of the new agreement that Zavos says will “[level] the playing field among everyone.”
Madison hotels have also expressed frustration over certain standards they are held to which Airbnb users are not, including safety and health tests.
While the approval may appease critics, it could also stifle economic and environmental benefits provided by the home-sharing model.
“At the end of the day, sharing spaces and rentals is a smart thing to do,” said Lorenzo Magnolfi, UW-Madison assistant professor of economics. “It reduces energy waste. It may provide an alternative income source for many.”
Additionally, Airbnb hosts may increase the list price of their rentals in order to pay the tax, causing a customer decline.
“When prices go up, people buy a little less; the question is how much less,” said UW-Madison professor of economics Alan Sorenson. “It depends on how much of this tax is passed through to the consumer, some of it will be.”
Despite possible repercussions, the city estimates an additional $183,000 in revenue from the tax, according to the Wisconsin State Journal.
The plan was unanimously approved by the Madison City Council. An Airbnb spokesperson told the State Journal that renters will be notified before tax collections begin, as early as May 1.
Though the regulation may increase Airbnb prices in Madison, the agreement could encourage more people to become hosts by simplifying the tax payment process.
“If you’re exclusively going through Airbnb, you won’t have to go through all the record keeping and reporting requirements and submission of tax to the city anymore,” Zavos said. “Airbnb will take care of all that for you. It will make it easier, if anything.”