You know, if I were you quite honestly I would do a search of your city and see who is operating airbnb's, and message all of those people in the airbnb app - and I am not at all talking about being hot headed or sky-is-falling here, but just first attempt to gather them together for a meeting. Maybe ask for their email contact, explain the letter you received, and that you want to discuss how to proceed in a short, informational meeting.
It is quite likely the case that the city doesn't really have a plan, and they are in a way blowing smoke. I know because I am on the board of my hoa, and my hoa was blowing smoke threatening to sue an airbnb operator, but we have now received multiple legal opinions saying that they don't have a leg to stand on. Did the hoa tell the homeowner that the lawyers said that? Of course not. They are continuing to posture.
So anyway, contact maybe three lawyers and ask them if they would be willing to write a legal opinion with a pretty defined scope. That might set you back a couple hundred dollars. It is simply a letter that will explain where you likely stand legally and where you have to go. That's why I think you should contact others in your area - if say 20 people get together and are willing to donate $10 each, you could really conver this thing. And with a large group in Washington State, you might even be able to find a lawyer who would give you 30 minutes of their time for free - who knows.
While I haven't specifically dealt with issues of short-term rentals in Bellingham, I have dealt with other neighborhood-ly issues successfully and I would just encourage you to get together a large mass of people, welcome everyone's voice, and advocate for your cause respectfully, with a very level head. Your city officials may be imagining a bunch of 20 somethings renting out their houses for crazy orgy's or God knows what. Put a face on Airbnb that is suburban, boring, and relatable, and hopefully you can get some traction in the right direction.
Also, for what it is worth, I have chosen to pay taxes from the get go (it's about 13% here for the hotel tax) just so that if we start getting push-back I can easily show that my intentions are honest and I am contributing to the economy through my business.
It may be worth your time to demonstrate that you are complying with any regulations as much as possible. And also, yourself and your fellow bnbers in Bellingham may do well to get into as many advisory positions as possible to steer things in a bnb-friendly direction. I serve on my HOA for this purpose, but participting on any kind of volunteer advisory committee for the city, county, or neighborhood is totally a good idea if you can make the time for it.