Hotel tax increase to go before council July 9

Boost, first since 1983, is expected to add less than $3 to average room cost, but is opposed by hotel industry

Hoping to tap one of the few revenue sources available to it, Palo Alto's Finance Committee agreed unanimously this week to pursue plans to charge overnight visitors a bit more for a hotel room.

Before it is enacted, the proposed 2-percent increase of the Transient Occupancy Tax, also known as the TOT -- currently at 10 percent of a room rate -- would need the approval of the full City Council and more than half of the voters in November.

The increase is expected to reap between $624,000 and $1.2 million annually for the city, city staff estimates. It would add about $2.60 to the cost of an average $130 hotel room.

Nonetheless, the city's hoteliers, and the Chamber of Commerce, oppose the increase.

"Any kind of cost of doing business increase for any company is a challenge," Chamber CEO Sandra Lonnquist said. "(The hotel owners) feel this is an industry selection rather than sharing it throughout the community."

Lonnquist said the hike would hurt smaller hotels south of Oregon Expressway the most.

"With the bust, they barely kept their doors open. Their feeling is if we increase on any level the cost for them, they're going to see a problem," Lonnquist said.

Vice Mayor Larry Klein disagreed. A difference of less than $3 for most rooms would be less than the cost of transportation from a farther away but cheaper hotel, he said.

"Real estate people tell us all the time the driving force is location, location, location," he said.

If the tax increase is approved, the hoteliers would like to receive something in exchange, Lonnquist said.

"Consider what kind of services, what kind of support could this raise do to ensure that the increase in TOT will not decrease the number of heads and beds in Palo Alto," she said.

City and community leaders are currently working on a tourism promotion program, Destination Palo Alto, that can provide the support the hotel community seeks, Councilman Bern Beecham said.

The committee asked city staff and hotel representatives to meet with them in the fall to discuss the issue.

Although revenues from the hotel tax have dropped recently, particularly following the closure of the 350-room Hyatt Rickey's in 2005, it still comprises 5 percent of the city's non-utilities fund, more than $6 million annually, according to Director of Administrative Services Carl Yeats. Palo Alto has 28 hotels or inns with 1,865 rooms.

On the ballot measure, city staff would also like to close a loophole in the law that can be exploited by Internet travel companies such as Expedia, Orbitz and Travelocity, Yeats said.

The companies purchase blocks of rooms at a discount and pay the hotel tax on that rate. Then they raise the room rate for their customers, pocketing the difference, according to Yeats.

Yeats said he thinks the companies should pay the tax on the rate actually paid by hotel visitors.

Other cities, such as Los Angeles, have challenged the practice by suing the companies, Yeats said.

The city introduced a 5 percent hotel tax, also known as the TOT, in 1970. It has stood at 10 percent since 1983, Yeats said.

East Palo Alto recently increased its hotel tax to 12 percent. Mountain View and Menlo Park charge 10 percent. San Francisco's rate is 14 percent.

Councilwoman Dena Mossar said she is a bit troubled that Palo Alto's rate would be higher than neighboring cities, but she concurred with her colleagues that other cities will probably raise their hotel taxes too.

Because the money will not be directed to a specific purpose, it needs only the approval of more than half of voters.

The hotel tax is one of the most accessible sources of additional income for California municipalities. Property taxes and most sales taxes are set by counties, Yeats said.

The council plans to discuss the issue July 9. The issue would be placed on the Nov. 6 ballot.


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