‘Loved to death:’ New report says tourism that drives the state’s economy can hurt local cities

This story is republished from the Daily Montanan. Read the original article.

We may be loving Montana to death.

Literally.

A new report, published by Headwaters Economics, which specializes in studying, researching and policies for the western U.S., has recently released, “Amenity Trap: How high-amenity communities can avoid being loved to death.” Its authors conclude that, while not focusing on Montana solely, the Treasure State is a perfect example of difficulties faced by mostly small or even rural communities whose locations are “discovered” by tourists.

The report concludes that many of these communities pay an economic and social cost for being popular, and that policies inadvertently make the problems in those places worse.

For example, small gateway communities, like those that line both of Montana’s most-visited places, Yellowstone and Glacier national parks, often see their numbers swell from the Spring to Autumn. But hundreds of local, year-round residents are often outnumbered by thousands of tourists, who need lodging, food and even bathrooms that smaller communities strain to provide.

Montana lawmakers have addressed the problem, in part, by giving small “resort” communities the option of a sales tax aimed at the tourists to help offset the additional costs, which range from law enforcement to sewer systems, but the report says any one tool is often not enough. And in Montana, larger communities like Missoula, Bozeman and Billings, which serve as gateways to popular tourist destinations, are ineligible for the tax.

Sometimes, the problem is an outgrowth of popularity. In other words, places are so popular that tourists become permanent residents, moving to a place they “discovered” while on vacation. COVID-19 and the work-from-home change exacerbated and accelerated the problem.

“The influx of tourists and new residents into these cities and small towns brings economic opportunities and can create a positive feedback loop, whereby new businesses and services make a place even more attractive,” the report said. “More people and new development can put pressures on existing infrastructure and contribute to growing inequality, including dramatic increases in housing costs that force long-time residents out or into the crisis of homelessness.

“The paradox of a place with natural attractions that make it a great place to live but also threaten it with being ‘loved to death’ is what is known as the ‘amenity trap.’”

For example, housing often takes center stage in these communities, and remains the most challenging because it is a problem that exists without an easy solution. Limited buildable land creates soaring housing prices. That, in turn, generates economic hardships that push the labor force out of an area, according to the report. Not enough workers in a local, rural community that depends on tourism is a challenge, and can put an emphasis on planning for growth, the report said.

Some of the examples of western communities achieving some success include Durango, Colorado, which declared an ssory dwelling unit” amnesty in 2016. For example, creating accessory dwelling units in current housing, garages or relaxing zoning laws to create higher density is a way of easing the problem, the report said, especially vacation spots where land may be highly desirable, but scarce and prohibitively expensive.

The report also suggests looking at both buildings and lots that have not been developed, for example, turning older school buildings into viable housing stock. Both King County, Washington, and Raleigh, North Carolina, give priority to affordable housing projects when considering disposing of real estate.

The study by Headwaters also describes a phenomenon familiar to many Montana communities that have experienced an explosive rise in property values.

“Amenity destinations also attract investors and second homeowners, further increasing prices,” the report said. “Oftentimes new residents, second homeowners and investors bring with them greater wealth and can pay for more housing. The challenges are compounded when home buyers pay cash: When a buyer is financing a house, lenders will only sell mortgages that are comparably priced to similar homes that recently sold. Cash buyers, however, do not have this limitation, subsequently freeing the purchase price from modest increases to exponential price increases.”

That, in turn, creates a trickle-down effect that forces residents to lower-quality housing, eventually pushing some in already marginal housing into homelessness.

“A 2020 study found that a $100 increase in median rent was associated with a 9% increase in homelessness,” the study said.

As a city or town explodes with new growth, Headwaters describes an equal and opposite reaction by leaders to curb the growth, whether through zoning, limiting construction, or even adopting other “growth control policies,” which the report concludes backfire.

“(They) often have the unintended consequences of driving up the cost of existing housing,” it said. “They do not affect people’s desire to live in these places or impact businesses’ need to hire and house employees.”

Instead, the report suggests adopting new models that allow companies and communities to anticipate the growth. For example, on-site home creation, which includes housing that can be pre-fabricated, shipped to a site and assembled for a quicker construction time.

“Due to the economies of scale, this approach can save buyers 10% to 20% compared to a house built on site,” the report said.

The Rental Problem

One of the other trends is the rise of short-term rentals, like VRBO or AirBnB. In smaller communities, the problem of short-term rentals becomes even more pronounced because they typically have a lower baseline inventory of housing stock as compared to more urban locations. In those places, homes that would have been sold to other single families or rented to workers are now rented out on short terms. This leads to a situation where supply plummets while demand increases briskly, resulting in rocketing housing prices.

“So many communities don’t see the problem coming,” said Megan Lawson, Headwaters economist and chief author of the report. “Unfettered, you see that the market fails. It does not accomplish what we want to see.”

Some communities have approached this familiar Montana problem in two different ways. A group of towns has put a cap on the number of short-term rentals, requiring them to be licensed. Those rentals, in some cases, are taxed at a higher commercial rate as a disincentive. Another approach, like one used in Big Sky Montana, as well as Truckee, California, provides cash payments to property owners when they lease to local workers.

Finally, another approach that some communities like Breckenridge and Vail, Colorado, have tried are adopting deed restrictions on the property. That entails an owner placing a restriction on the property deed, which will limit who will buy the property, requiring the renter or the buyer to work in the community. A deed restriction follows the property in perpetuity, and owners who participate in the program receive from 15% to 20% of the property’s fair-market value in order to compensate the sellers, who are likely limiting the number of potential buyers.

Lawson points out that subsidies toward things like deed restrictions or creating incentives for long-term rentals become economically more efficient for communities. For example, several hundreds of thousands of dollars can be spread out over multiple properties, while in most Montana cities, the same amount couldn’t pay for a single home.

“And you have the benefit of neighborhoods feeling like neighborhoods,” she said.

Subsidizing Tourism

The report also highlights another problem with tourism in the West—those who pay for the infrastructure—a catch-all term for things like roads, water treatment systems and even law enforcement—are borne by the residents of the area, often a much smaller number than the tourists who pass through.

In the report, Headwaters mentions Bozeman, which hosts around 1.5 million people annually. However, the Montana Legislature has not given larger communities, like Bozeman, the option of a local sales tax, which could help offset the added services that must be provided to feed, house and accommodate the tourists.

“If Gallatin County was able to implement a 3% sales tax on nonessential goods, it would raise an estimated $30 million in revenue to help offset these costs while ensuring that infrastructure costs are spread between visitors and residents,” the report said.

Meanwhile, down the road from Bozeman, in West Yellowstone, Montana, that community of 1,100 people hosts more than 4 million people annually, straining the roads and wastewater systems to the limit. Law enforcement and medical responders “are particularly stressed as most of the calls are related to tourism, but the expenses are paid from local budgets.”

“The real question, especially in a case like West Yellowstone where 1,000 people pay for close to 5 million visitors a year is: Is it fair?” Lawson asked.

Another layer the report pointed out is that providing services is often “lumpy.” For example, things like roads or wastewater treatment plants aren’t usually gradually expanded—they have to be upgraded in more substantial ways. Lawson gives as an example sewer plants: It’s hard to expand capacity by small numbers, and usually the upgrades are by the tens of thousands of hook-ups, rather than a few customers at a time. But, the costs for upgrading are also exponential, forcing small communities to overbuild for a peak usage, not an average.

“They can’t run at a much lower capacity,” she said.

Policy Questions

As unexciting as the topic may sound, the report points to a very real policy conundrum that Montana faces. Lodging taxes in the state go back into promotional efforts to attract more people to Montana. Such campaigns, which can see billboards for the state go up in places like California or Las Vegas, cost millions, but are often seen by state leaders as a business investment with tourism becoming the second-largest industry in Montana, behind agriculture.

But the Headwaters report questions the wisdom of such an investment by asking: Who hasn’t heard of Montana? The problem has grown even more profound after the hit television series “Yellowstone,” which has created a cottage industry around the state’s rugged beauty and independent people.

The Headwaters report suggests that a policy shift might be in order, moving that revenue from beefing up promotional and advertising budgets back into investment in many towns so that the amenities, from housing to water treatment plants, are better equipped for the tourism and growth.

“Tourism gets to be the goose that laid the golden egg. And the tourism in this state is tremendous,” Lawson said. “But talk to gateway communities, and tourism is a four-letter word. We often forget that there’s another side to tourism. Let’s have a conversation about the trade-offs. We’ve done years of good work talking about the good, but we’ve been tone deaf about talking about the drawbacks.”

Take Missoula County, Lawson points out: Lodging taxes promote more tourism to the area, but one of the most costly aspects of the budget is search and rescues, especially where there are limited roads.

“It’s counterproductive (to use those funds) because they just promote the area, which creates more of the problem,” Lawson said. “No funds are going to offset the impacts of tourism.”

Smaller resort communities, like West Yellowstone or Red Lodge, have resort taxes that help offset some of the cost that would otherwise bleed the local tax base. But even that doesn’t appear to be enough.

“It may not be enough or adequate,” Lawson said. “And this approach can work, but the limitation is that it doesn’t reflect the impact on midsize or larger cities. They’re the face of Montana and there are grants and revolving loans, but what we’re finding is that a lot of these small communities, like those affected by the (Yellowstone National Park) flooding, is they don’t have the capacity to navigate the grant or loan programs. Their municipal staff is already stretched thin.”