July | August 2017

By Jennifer Burnett, CSG Program Manager, Fiscal & Economic Development Policy
“What happens when a person becomes a business?”
That’s the question Airbnb cofounder and CEO Brian Chesky posed in an interview with McKinsey & Company in November 2014.
Founded in 2008, Airbnb allows people to rent out just a bedroom or an entire house for a short period of time by listing the offering on their website. The company has grown quickly and now has more than 1 million listings worldwide in 34,000 cities across 190 countries.
It is just one example of the explosive growth potential in what is being called the “sharing economy.”
What once might have been a difficult task—like finding a bedroom to rent for the night in a private residence while on vacation—has been made easier and cheaper by technology that allows people to connect.
When it comes to governing this emerging business landscape—which might include renting out a room in your house for the weekend, catching a ride with Uber or hosting a meal in your house with strangers, and everything in between—policymakers are playing catch-up.
“Fundamentally, the idea of the sharing economy is going to be great for cities,” Chesky said in the McKinsey interview. “It means that people all over a city, in 60 seconds, can become microentrepreneurs. And they can be empowered. And they can make an income.
“Now, this is amazing, but it’s also complicated because there are laws that were written many decades ago—sometimes a century ago—that said, there are laws for people and there are laws for business,” said Chesky. “Suddenly these laws feel a little bit outdated. They’re really 20th century laws, and we’re in a 21st century economy.”
Shared Housing
In New York, a debate about where services like Airbnb fit into the legal landscape has been heated.
In 2014, New York Attorney General Eric Schneiderman released a critical report, finding that up to 72 percent of Airbnb listings were illegal and that commercial users of the site were running multimillion dollar businesses. For example, a group of more than 100 users collectively booked 47,103 reservations and earned $59.4 million in revenue.
“This report raises serious concerns about the proliferation of illegal hotels and the impact of Airbnb and sites like it on the City of New York,” Schneiderman said in a press release. “We must ensure that, as online marketplaces revolutionize the way we live, laws designed to promote safety and quality of life are not forsaken under the pretext of innovation.”
For New York state Sen. Liz Krueger, appropriately regulating the room-sharing market is about the public safety of both her constituents and visitors to New York.
“When residential housing ceases to be residential—via online businesses, like Airbnb, turning residential apartments into illegal, unregulated hotel rooms—all kinds of undesirable and illegal activity can be brought into a residential building,” said Krueger.
After hearing complaints from her constituents, Krueger sponsored the “Illegal Hotel Law,” which passed in 2010. The law helps to remove ambiguities and more consistently define what a permanent resident is and helps officials pursue enforcement action against illegal short-term rentals in residential buildings.
Krueger said that, although business models may have evolved, the fundamental issues raised by companies like Airbnb are not new. She said she has worked for a decade to understand and address the growth in an industry where residential apartments are converted into short-term units for visitors.
“In that time, the locus of illegal activity has shifted from a few local operators, to large online companies such as Airbnb and others,” she said.
“These companies have become highly profitable by ignoring state and local laws and the damage their business model does to communities. Although illegal hotel activity now takes place in a wide variety of forms in New York City, the key challenges remain the same—preserving affordable housing and protecting the safety and quality of life of residents and communities.
Shared Transport
Washington state Sen. Cyrus Habib agrees that novel business models in the sharing economy pose some difficult questions for state regulators.
“The emergence of services like Uber and Lyft and Sidecar has been greeted with a lot of enthusiasm by customers,” said Habib. “The challenge is most of our regulations tend to respect a boundary between personal and commercial activity.”
Habib in January introduced Senate Bill 5550, which would provide a legal framework for on-demand transit companies like Uber and Lyft—often called transportation network companies, or TNCs—so they can operate legally in his state.
“This creates a statewide standard that is no more or no less invasive or burdensome than necessary,” said Habib. “You want to offer just enough to protect drivers and the public.”
Habib’s bill would require transportation network companies to conduct background checks, provide appropriate insurance, supply data to the state and pay for permits.
One of the more sticky issues in the ridesharing market is insurance. Where does commercial activity end and personal activity begin? While Uber provides insurance that covers commercial activity, drivers must have their own insurance to cover personal activity.
“Private insurance isn’t interested in paying out for commercial activity,” said Habib.
Having a bright line where one type of coverage ends and begins is important, according to Habib, “so it isn’t messy and people don’t end up in court.”
Habib believes the private sector eventually will catch up, offering hybrid policies that makes allowances for both personal and commercial activity.
“We have every reason to believe insurance companies will do this,” said Habib. “For this to work, we need some of those tools, like hybrid policies, and the government can’t do this on its own. But we can incentivize those kinds of solutions.”
In January, Nebraska state Sen. Heath Mello introduced a bill to regulate transportation network companies.
“My legislation creates a comprehensive policy framework that would allow transportation network companies to operate in this state lawfully while ensuring both consumers and drivers are protected,” said Mello.
Like Habib’s legislation in Washington, Legislative Bill 629 would require companies to carry appropriate levels of insurance and conduct driver background checks.
“(Companies) like Lyft and Uber play a unique role in both fostering innovation and developing the ‘sharing economy’ in Nebraska,” said Mello. “Providing consumers new options for safe, reliable, and affordable transportation is vital to both growing our cities and attracting innovation-based businesses and high-skilled workers.”
Mello said working with stakeholders when crafting legislation is key to making sure the regulations work for everyone. He said he’s worked with representatives from taxi companies, the insurance industry and Public Service Commission, as well as these new transportation network companies and their drivers and riders.
“Collaboration has been key to making sure that these companies can operate lawfully, as well as be appropriately regulated to ensure the safety of consumers, protect the rights of drivers and foster economic development in our communities,” said Mello.
Balancing Act
In the sharing economy, balancing regulations with worker and consumer protections will be difficult, but necessary.
“I want to make the system work—protect workers as much as possible. But I still worry about what this is doing on a macroeconomic level,” said Habib. “We want to find a way that doesn’t curb entrepreneurs, but also doesn’t reverse all the gains we have made in security in employment.”