Of all the principles of good tax policy, none should be less controversial than “neutrality.” Rather than picking winners and losers, tax systems should strive to treat similar situations in a similar way. It makes no sense, for example, to charge tax on a DVD while offering an exemption for a movie theater ticket to view that same film. Likewise, there’s no reason that hotel guests should pay tax on their room while fellow travelers that book rooms or homes through websites like Airbnb are allowed to stay in a city tax-free.
Apparently, lawmakers in both Pennsylvania and the city of Cleveland agree on this last point—though it took a major surge in Airbnb bookings to spur them to act. This week Cleveland plays host to the Republican National Convention and next week Philadelphia will be doing the same for the Democratic National Convention. The number of Airbnb bookings made in Cleveland this week is roughly four times above normal, while in Philadelphia bookings have increased threefold. Not wanting to miss the potential tax revenue gain associated with these bookings, Cleveland and Pennsylvania both took action, just in the nick of time, to ensure that their lodging taxes will apply to room rentals booked via Airbnb.
Airbnb’s agreement with Pennsylvania to begin collecting the state’s 6 percent lodging tax was struck barely a month ago. The city of Philadelphia, for its part, has been collecting its 8.5 percent tax from Airbnb guests for over a year. Philadelphia’s tax was initially proposed by Councilman Bill Greenlee after he realized that Airbnb bookings were going to “hit the roof” last September during Pope Francis’ visit to the city.
In Ohio, Cleveland extended its 3 percent occupancy tax to include Airbnb rentals in a vote just last month, though Cuyahoga County (in which Cleveland resides) managed to work out an agreement regarding its 5.5 percent tax a bit earlier, taking effect in April. Unlike in Pennsylvania, however, it does not appear that the state government will be receiving any direct tax revenue from Airbnb rentals. While the state does apply its 5.75 percent general sales tax to hotels, Airbnb offers no indication that this tax is currently being charged on its bookings.
Nonetheless, most applicable taxes will be charged on Airbnb rentals during the conventions in Cleveland and Philadelphia. This is a victory for good tax policy, but most jurisdictions still lag behind. Far too many states and localities still need to update their tax systems (and regulations) to account for Airbnb and similar companies.
The lesson learned from Cleveland and Pennsylvania is that, at least in regard to tax policy, reform is within reach. But while the revenue gain associated with a major event such as a political convention is helpful in focusing lawmakers’ attention, other state and local governments should not continue procrastinating until such an event comes to town. With the current boom we’re seeing in the sharing economy, it’s time for lawmakers across the country to begin dealing with these issues.