Palm Springs' short-term rental restrictions have unseen consequences
The city of Palm Springs recently passed Ordinance 2075, establishing a cap on Vacation Rental Certificates at 20 percent of total residential dwelling units. This was the latest major move in an attempt to curb the impact of tourism on the city, which draws people from around the world to its warm climate and popular tourist attractions, including Joshua Tree National Park, the Coachella Festival and Modernism Week, among others. Existing permits were grandfathered in, but the cap will still have significant repercussions for property owners who rely on the income of their short-term rentals – and there are other, less visible consequences for the city as well.
Palm Springs has found itself in the same position as countless other communities in recent years, walking a wobbly line between the benefits of a booming tourist economy and the friction arising in communities comprised of a mix of STRs and full-time residents. Ultimately, the city has to do what’s best for it – but it’s worth considering if implementing a strong cap on the number of rentals will actually be a net positive for the city, either economically or practically.
The main question is this: what are the problems that Palm Springs is looking to solve with this ordinance, and what are the repercussions of taking this action? If the main issues are noise, partying and other neighborhood conflicts, these can be sufficiently addressed with other regulations and modern compliance tools. If this is about freeing up homes for affordable housing, then it's important to take a step back and comprehensively consider the economic impact of imposing a limit on STRs.
A recent Oxford Economics report found that tourism had a total impact of $6.8 billion in greater Palm Springs in 2021, sustaining more than 37,250 jobs and generating $644 million in state and local tax revenues. Even with just one share of that whole, Palm Springs risks economic whiplash when the unseen consequences of cutting down on tourism enabling STRs immediately become evident.
First – and most obvious – is the impact on tourism. Decrease the available lodging and you have a decrease in tourism. Following recent trends, many groups and families are specifically looking for STRs over hotels so as to better suit their vacation plans. Without such conducive accommodations, an untold percentage of travelers will simply choose to either find accommodations in neighboring “second choice” cities – or not visit.
This, in turn, has significant ramifications for local retailers. Should the number of tourists from STRs be cut down, that translates to less traffic year-round for restaurants, grocery stores, bars, coffee shops and all the other businesses serving visitors to Palm Springs. Similarly, all local businesses that directly serve the STR ecosystem would lose a considerable chunk of their clientele.
With reduced tourism, the city will see a remittance of lodging tax plunge, which means less available revenue for essential city services – a loss that is typically recouped through increased sales taxes, property taxes and costs of city services. Ultimately, the economic burden of the STR ordinance is passed on to the very residents it sought to serve.
Lastly, it hasn’t been sufficiently demonstrated that limiting STRs would open the door to more affordable housing. In fact, the evidence points to the contrary. The common argument is that short-term renters, transient by nature, are taking away homes that could instead house local workers. However, even if a STR were to become a long-term rental, the median monthly rental price for a home in Palm Springs, according to Zillow, is hovering at $3,750. What is the practicality of considering this notional housing stock as viable rental property for the average retail or restaurant worker?
In previous communities that have pursued these restrictions, the answer is typically “not practical” – particularly after the cost-of-living increases as a result of cities attempting to make up the economic shortfall of reduced lodging taxes. Even if workers double, triple or quadruple up to make rent more manageable, the impact on the neighborhood – with vehicles stacked up and traffic coming through at all hours – is hardly better than any nuisance issues created by vacationers.
Palm Springs’ leadership is in an unenviable position, having to carefully thread this socioeconomic needle – but so severely cutting down on STRs may not be the solution its leaders are hoping it will be.
Pam Knudsen is an executive at Avalara, leading multi-tax teams. She serves as a leading voice in vacation rental tax compliance and regulation. Her email is knudsen4@msn.com.
This article originally appeared on Palm Springs Desert Sun: Palm Springs' short-term rental restrictions have unseen consequences
