The city is poised to repeal a tax. But not really.

Tomorrow a bill will be introduced into the City Council’s legislative process that repeals the tax imposed last year on short-term rentals such as those offered through AirBnB and HomeAway. But if you thought the city might be turning over a new leaf in its tax policy, think again.

Last year the city enacted new restrictions on short-term rental operators, and at the same time imposed a tax of $8 per night for a private or shared room and $14 per night for an entire unit. It was expected that the tax would generate revenues of between $3 and $6 million per year, with startup costs of $2.8 million the first year and ongoing administration and enforcement costs of about $550,000 per year after that. The revenues are earmarked for equitable development programs and affordable housing projects.

One of the reasons for imposing the tax on short-term rentals was to level the competitive playing field with hotels and other lodging operators that are forced to pay a lodging excise tax to the Washington State Convention Center Public Facilities District (PFD).  State law authorized PFDs to impose a lodging tax, but it exempts businesses with less than 60 rooms as well as short-term rentals.

In March of 2018, Governor Inslee signed into law HB 2015, which changes some of the rules for PFD lodging excise taxes:

• It removes the exemption for businesses with less than 60 rooms;
• It removes the exemption for short-term-rentals, in any county with a population of 1.5 million or more (i.e. King County) — but only for those short-term rentals not subject to a city-imposed tax on short-term rentals (i.e. Seattle’s).
• If a PFD collects taxes on short-term rentals, it must pass those tax revenues on through to the city. The city must use those revenues for equitable development programs and affordable housing projects.

The state bill is setting the ground for a tax-swap: if the City of Seattle repeals its own excise tax on short-term rentals, then the Convention Center PFD is authorized to collect it on the city’s behalf and pass the revenues through. By the city’s estimates, the replacement tax would generate $2.7 to $5.5 million, but taking into account the startup and ongoing administrative costs, the city would break even or possibly even come out a bit ahead. And it wouldn’t have to run its own tax administration program — though it would be at the mercy of the PFD’s ability to administer and enforce it. The city would also lose the flexibility to change its mind later on how the revenues should be spent, since the restriction would be codified in state law.

There is one other notable change in the tax on short-term rentals because of this tax swap. Instead of a flat fee of $8 or $14 per night, the tax will be proportional to what operators charge. Operators of cheaper rooms will pay less, and operators of more expensive rooms will pay more. Since the expected revenues are about the same as the current city-imposed tax, that means more expensive short-term rentals will provide a larger share of the total revenues.

Apart from the change in state law and the repeal of the city’s tax, there is a third step that needs to happen in order to realize the tax swap: the Convention Center PFD needs to vote to impose the tax on short-term rentals in Seattle. That was on the agenda for its Board of Directors meeting last week. It was also discussed at the previous meeting in March, including how the Convention Center PFD and the City of Seattle worked together to lobby for the change.

The bill being introduced tomorrow to repeal the city’s tax won’t go through a committee; instead, it will get a hearing and discussion in the Tuesday morning Council Briefing and could come up for final vote as early as next Monday afternoon’s Full Council meeting.