Facing another budget crisis, San Jose could ask voters to approve a hotel tax increase
Facing a potential budget shortfall of up to $65 million, San Jose is weighing a ballot measure to raise hotel taxes, as the city needs cash to fund critical services amid faltering revenue.
Over the past two decades, San Jose has solved more than $800 million in deficits through resource cuts and layoffs in its city, earning it the distinction of having the lowest number of full-time employees per capita among the state’s largest cities.
With the local economy still sluggish and other sources of revenue underperforming, city officials say a short-term occupancy tax from 10% to 12% could add $10 million in annual revenue without negatively impacting the tourism industry.
The first poll conducted by Fairbank, Maslin, Maullin, Metz & Associates, Inc. found that 55% of likely voters support the increase, with another 12% undecided.
San Jose’s current tax rate is lower than most of its peers, and the city ranks 76th among the top 150 urban centers in the country for the highest rate of lodging, according to a study released by HVS Global Hospitality Services.
“While the community can be proud of the City as a lean organization, additional ongoing resources are needed to meet the growing level and complexity of community needs,” wrote Assistant City Manager Lee Wilcox in a letter to the City Council recommending the voting method, noting that the council has repeatedly asked staff to look for ways to generate additional revenue.
San Jose’s need to raise revenue comes at a time when the city has already been forced to rebalance its finances for this year.
After navigating a $36 million deficit during last year’s budget, a mid-year report released last week showed the city expects general fund revenue to be $15 million to $20 million less than expected this fiscal year, which ends in June.
The most notable drivers of the gap this year were lower property and utility taxes, which resulted in an estimated $15.35 million in less revenue.
Along with the limited hiring freeze, the city may reduce or cut some previously mandated services to address its financial problems.
The proposed cuts include $2.6 million for a police training center and $700,000 for the relaunch of the fire department’s Med 30 unit, which previously provided drug oversight for its emergency medical services.
San Jose’s budget woes could affect funding for immigration legal services, despite growing conflicts from Immigration and Customs Enforcement operations across the country. Although the city initially allocated one million dollars in this year’s budget, it left open the possibility that this amount could increase to $1.5 million. However, in a memo to the City Council, budget director Jim Shannon did not recommend the increase due to insufficient funding.
At the behest of the City Council, city officials have explored other possible tax or bond options to raise revenue over the past few years as it faces a major infrastructure backlog. But it has generally backed off from moving forward on recent ballot measures because of lukewarm public support.
For example, in addition to the sugary drink tax, a parcel tax has been considered several times to raise money for the city’s park program, which faces a backlog of more than half a billion dollars, but city officials scrapped the idea after polling data showed it would be difficult to pass.
However, city leaders say the lodging tax will be more palatable to voters and successful at the ballot box since the financial burden will fall more heavily on tourists.
A general temporary resident tax increase would only need a simple majority to pass.
“(The city’s) analysis found that San José’s rate (transient occupancy tax) is much lower than other areas,” said Communications Director Carolina Camarena. “Even with the possible expansion, San José will continue to compete with other cities.”
In a recent election, sampled residents were told that the extra money would be used to fund essential city services such as police and fire emergencies, address homeless encampments affecting parks, neighborhoods and waterways, remove trash, illegal dumping and graffiti and maintain playgrounds, recreation areas, park restrooms and trails.
City staff also noted that an academic study by Brookings Metro showed that a hotel tax increase is unlikely to affect occupancy.
Even when factoring in costs other than hotel taxes passed on to customers, San Jose ranked low. For example, many hotels in the city fall under the Convention Center District, which charges an additional 4% room tax to fund convention center renovations and expansions. Some hotels are subject to room-by-room inspections as part of the Hotel Business Development District.
Overall, city officials estimate that the current average hotel tax in San Jose is between 14.5% and 15.1%. However, it is still smaller than most of its counterparts. The effective tax rate for cities such as San Diego, Anaheim, Los Angeles, Oakland and San Francisco was between 15.75% to 17.5%.
The city must decide by March 6 whether to put the tax measure on the June 2 primary election. If passed, the tax increase would go into effect on October 1.
San Jose Chamber of Commerce President and CEO Leah Toeniskoetter said her organization has yet to take a position on the tax, but will analyze how new revenue streams fit into the city’s overall approach and whether the new taxes are aligned with efforts to control costs, improve efficiency, and grow the economy over time.
“Our members will want clarity on how the additional money will be spent, especially given that the proposed increase will go into the city’s general fund,” Toeniskoetter told The Mercury News. “Although the City has outlined key objectives, understanding accountability, transparency, and measurable results will be critical. Second, we will carefully consider the impact of hospitality and the tourist economy, which continues to face revitalization challenges, especially in the city.”
