Polls suggest that most Palo Alto voters will probably support a November measure to raise the city's hotel-tax rate to pay for a host of infrastructure projects.
Winning the approval of merchants and hotel owners, however, is another matter. At a Wednesday debate on the proposed ballot measure sponsored by the Chamber of Commerce, the proposed increase was panned by many in attendance as unfair and ill-advised.
The debate, which took place at Boston Private Bank & Trust on Cowper Street, pitted Councilman Larry Klein against Barbara Gross, general manager of the Garden Court Hotel and former chair of the Chamber's board of directors. Klein, who chairs the council's Infrastructure Committee, argued that raising the hotel-tax rate from 12 to 14 percent is the best way to raise the money needed to pay for a host of projects: a new public-safety building, the rebuilding of two outdated fire stations, new garages in downtown and on California Avenue and the city's many bike improvements in the pipeline. Gross countered that the tax is inherently unfair because it targets one industry to pay for projects that the entire community uses.
With more than 20 business professionals in the audience, Klein characterized the proposed hotel-tax hike as an important step in the council's nearly decade-long effort to fix the city's aged infrastructure. The city plans to leverage the funds from the hotel-tax increase to obtain roughly $30 million through "certificates of participation," a borrowing mechanism commonly used by municipalities. When coupled with other funding sources, such as the city's Infrastructure Reserve and the Stanford University Medical Center development agreement, it would raise the amount the city has to spend on infrastructure to about $125.8 million.
Klein went through a list of infrastructure priorities Wednesday, including most notably the police building, and argued that the time is right to make the needed fixes. Because a hotel-tax increase is more likely to win the voters' approval than other revenue-raising measures, the council agreed to pursue it, Klein said.
"It looks like the TOT (transient-occupancy tax) is the most likely to pass and we don't think it harms our city and our hotels," Klein said.
But while the tax hike would boost the city's quest to replace obsolete infrastructure, it would also give Palo Alto one of the highest rates in the region. The proposal would raise the city's tax rate from 12 percent to 14 percent, the same as in San Francisco and Oakland. Most neighboring cities have a rate of 12 percent, though some have 10 percent.
Being on the higher end of the tax scale would put local hotels at a disadvantage, Gross argued.
It would increase the "total spend" of their corporate clients and force them to look elsewhere for rooms.
"We absolutely have leisure guests as well, but people are driven here not because we have a view of the ocean, but because there's lots of business done here, not just with the university but with all the companies that are local to our area."
She also characterized the proposed tax hike as patently unfair because it places too great a burden on hotels. When the city raised the rate from 10 to 12 percent in 2007, this represented a 20 percent hike. The current proposal to bring it to 14 percent would raise it by another 16.6 percent, she said.
Architect Tony Carrasco shared Gross' view and called the hotel-tax hike "unfair."
"A small group of people whose interest and livelihoods depend on revenue from hotel rooms are being asked to pay the majority share of this tax," Carrasco said. "It doesn't sound fair to me that the majority votes that the minority should pay the tax."
Others in the audience raised different concerns. Russ Cohen, executive director of the Palo Alto Downtown Business and Professional Association, said he was concerned about "the unintended consequences of increasing the TOT and what it would do to total spending downtown." He suggested that the city look at other sources, such as a general-obligation bond, which requires a two-thirds vote. Polling has showed that for projects like the police building, public support for a bond falls just short of that threshold.
Klein suggested that opponents of the measure are overstating the impact of the tax increase. If the average hotel room rate in Palo Alto is $200, the 2 percent increase would add $4 to the bill. This is not enough to prompt people who may be visiting Stanford or local companies to travel to another city for a less expensive room, he said.
"You're going to spend more than the $4 just to drive from Sunnyvale to Palo Alto," Klein said. "The case on the economic basis just doesn't wash."
Klein acknowledged that the hotel tax was targeted because it is the one most likely to get voters' support. He also argued that every form of tax has "elements of unfairness." The sales tax, for instance, has a greater impact on younger and low-income people. One of the fairest taxes, he said, is the income tax, which local governments by law cannot impose. Klein said the city has "an opportunity here to have a model community" by fixing its infrastructure problem.
"We have needs that need to be accomplished. We have momentum for it. It'd be a shame if we didn't do it," Klein said.
Though the Chamber hasn't yet taken a position on the tax measure, that is soon expected to change. More than three quarters of those in attendance raised their hands when asked if the Chamber should take a position on this issue (the remainder had no opinion). When asked whether the Chamber should support the measure, hardly anyone said yes. When asked whether it should oppose it, more than a dozen people raised their hands.
During the discussion, some asked Klein to have the council consider other tax proposals, including pairing a hotel-tax increase with a sales-tax increase. Klein replied that the council hopes to keep the measure simple and that splitting the proposal into multiple taxes would create confusion. He also pointed out that Palo Alto's hotels are continuing to thrive and that several new hotels have either just opened or are preparing to do so.
Even so, Gross said, the tax increase could have an impact.
"I don't think the sky will fall," Gross said. "I just think it's a very cavalier attitude to impact an industry without understanding that the 'total spend' means something."