Seeking to tap into the riches generated by the city's flourishing hotel scene, a Palo Alto council committee on Wednesday recommended asking voters to raise the hotel-tax rate by 3 percent, which would make the city's rate one of the highest in the state.
If the full City Council approves the recommendation from the council's Infrastructure Committee, the city's rate would rise from 12 to 15 percent, placing the city in rare company. Most neighboring cities currently have rates ranging from 10 percent (Mountain View, San Jose) to 12 percent (Menlo Park, East Palo Alto). San Francisco and Oakland each have a rate of 14 percent, while Anaheim is the only city in staff's analysis that has a rate of 15 percent.
The Wednesday recommendation came by a 2-1 vote, with Larry Klein and Greg Scharff supporting it and Marc Berman dissenting. The vote came after a long discussion in what could have been the final meeting for the council committee, which was charged by the council with charting out the city's path toward a November ballot measure. The goal of the measure is to raise money for funding infrastructure projects, including new garages, bike improvements and the restoration of Byxbee Park. According to staff estimates, increasing the hotel-tax rate by 3 percent would bring in proceeds that would be leveraged to obtain $46.2 million in funding.
The city had initially included a new police headquarters and downtown garage atop the project list for a bond measure. But with the city's tax revenues increasing in just about every category, council members now believe they have enough funds on hand to pay for these high-priority items without going to the voters.
Instead, the list of projects that the hotel-tax increase would fund includes additional garages; restoration at Byxbee Park; road improvements on Charleston and Arastradero; and replacement of obsolete fire stations near Rinconada and Mitchell parks.
Over the course of the past year, the Infrastructure Committee considered numerous revenue-raising options, including increases to tax rates, bond measures and creation of Mello-Roos assessment districts. In recent months, members settled on the hotel tax (also known as the transient-occupancy tax) as the most promising alternative, particularly after polls suggested that it would be the likeliest to win favor with the voters. Members disagreed, however, over whether the hike should be 2 percent or 3 percent, with Berman advocating for the lower number and Scharff for the higher.
On Wednesday, Klein sided with Scharff in arguing that a jump from 12 to 15 percent is unlikely to hurt local businesses. Klein pointed to 2007, when the city raised its hotel rate from 10 to 12 percent despite some concerns from local hotels that the change would drive customers to other communities. The fact that the city is now undergoing a hotel boom and an occupancy rate of about 85 percent suggested to council members that the tax hike did not, in fact, have a negative effect. Klein noted that in 2007, the city became the first in the area to go to 12 percent and that since then, other cities have followed suit.
"My guess is that this will happen again," Klein said. "Certainly the hotels in Palo Alto did not suffer at that period of time, when we were at 12 percent and other jurisdictions were at 10. I don't see the argument that we are going to do harm to the hotel industry."
So far, the tax-hike proposal has not generated too much opposition from local hotels. Though the Chamber of Commerce has come out publicly against a proposal to increase hotel taxes, committee meetings have not attracted much participation from the business community. Hal Mickelson, member of the Chamber's board of directors, told the council last month that the organization's stance is "based on economics," as well as a belief that the decision is being driven by polls and not a sense of fairness.
"If the transient-occupancy rate in Palo Alto would be 14 or 15 percent, and the corresponding rate in Santa Clara, Sunnyvale and Mountain View will be 10 percent, there is every reason to think people will be booking hotel rooms in other places," Mickelson said.
He warned the council that corporate clients will begin to book rooms in other communities to trim their travel budgets.
Jim Rebosio, general manager of the Sheraton Hotel, told the Weekly in a recent interview that there is some concern in the hotel industry about the prospect of higher taxes, particularly if the city's sizzling economy cools off. Many people forget, Rebosio said, that just as recently as in 2009, occupancy rates in Palo Alto were about 20 percent lower.
"These things change really quickly," he said.
Even so, the local hotel industry hasn't been very vocal in opposing the tax increase currently on the table. Hoteliers have been conspicuously absent from recent Infrastructure Committee meetings and have not been deluging council members with opposition letters. Rebosio said he believes the council isn't very interested in hearing from hotels. That, at least, was the feeling of many in the industry in 2007, when the council went forth with its last hotel-tax increase.
"I don't think the City Council is super interested in hearing how the hotels feel about it because they view the hotels as having an ulterior motive," Rebosio said.
The committee didn't buy it. Klein's biggest concern with going to a 3 percent hike (as opposed to 2 percent) was "the optics" -- an impression by voters that this would be a big change. But he ultimately sided with Scharff, who proclaimed on Wednesday that the "hotel business is booming." Scharff said he has spoken to local business people and hotel operators and said he believes the tax increase would have virtually no effect on hotel stays. He said he has yet to hear anyone say that they will be staying in Mountain View instead of Palo Alto because of the change in the hotel-tax rate.
"I know when I book a hotel, I've never ever looked at what the TOT is," Scharff said. "I heard arguments that corporate users do, but I don't see that in Palo Alto. We're completely full."
City Manager James Keene also said he doesn't believe visitors who come to town for events in downtown or at Stanford University would drive to other cities just to save a few dollars on the hotel bill.
"We have a much larger problem than hotel rates that's traffic," Keene said. "No one will drive further away to save two bucks or three bucks."
Berman was more cautious. Though he said he might ultimately support the larger tax hike recommended by his colleagues, he was tilting toward 2 percent. He also recommended that the council explore a 1/8 cents increase in the sales tax, though that proposal fizzled when neither of his colleagues (Pat Burt was absent) voted to support it.
"I'm not comfortable getting so much higher than surrounding cities," Berman said, explaining his apprehension about a 3 percent increase.
The full council is scheduled to discuss the committee's recommendation on Feb. 24.