A ballot measure to raise hotel taxes in Palo Alto on Friday took its biggest leap yet toward this November's ballot, though city officials remain undecided on how big the increase should be and what exactly it should fund.
The City Council's Infrastructure Committee voted unanimously Friday to recommend proceeding with a ballot measure that would raise the city's transient-occupancy tax rate (that is, its tax on hotel stays) and use the proceeds to pay for municipal infrastructure repairs. But even as the four committee members agreed that the hotel tax is the best way to go, they remained at odds over whether to raise it by 2 percent or by 3 percent. They also have yet to determine which items from the city's infrastructure backlog the revenue would fund.
The recommendation to pursue a hotel-tax increase was hardly surprising. In recent months, the city has commissioned polls on a variety of possible revenue measures, including different bond packages and a sales-tax increase. Surveys by the city's consultant, Fairbank, Maslin, Maullin, Metz and Associates, have consistently indicated that the hotel tax is by far the most likely to win voter approval.
According to the firm, about 79 percent of survey respondents said they would be willing to support a ballot measure that raises the hotel tax. Though the support dipped slightly when other revenue options were brought up, it remained above 62 percent in every scenario, making it by far the strongest alternative. The council has the option of making it either a general tax, which would require a simple majority to approve and would send proceeds into the city's General Fund, or a special tax, which would require a two-thirds majority and would allocate funding for a specific purpose.
If the council were to place the item on the November ballot and the voters were to approve it, Palo Alto's hotel-tax rate would become among the highest in the Bay Area. Its current rate of 12 percent is on par with Redwood City's and Menlo Park's, and 2 percent higher than Mountain View's. If the city goes to 14 percent, it would join Oakland and San Francisco. If the city chooses to increase its rate to 15 percent, it would join Anaheim and Santa Monica at the highest echelon.
The committee had no consensus on the rate increase, with Councilman Greg Scharff lobbying for a 3 percent hike and his three colleagues -- Chair Larry Klein and Councilmen Pat Burt and Marc Berman -- favoring 2 percent. The consensus, they agreed, will be hashed out in a future meeting.
Burt argued that while the city could probably get voter support for 3 percent, having the highest rate in the area might dent the city's reputation as a hotel center.
"I don't want to be that greedy," Burt said.
Scharff said his concern is having enough funds on hand to pay for the needed infrastructure, most notably a new police building to replace the small and seismically deficient one at City Hall. As part of its Friday vote, the committee directed staff to start putting together a plan for funding the building, which currently has an estimated price tag of $57 million.
According to a staff projection, a 2 percent tax increase would bring the city $4.6 million in annual revenues that could be leveraged to obtain $64.4 million in infrastructure funding. A 3 percent increase, meanwhile, would net $5.7 million, or about $79.8 million in project funding.
"The difference between 2 and 3 percent is an extra $16 million," Scharff said. "It's a significant amount of money that gives us confidence that we'll actually build a public-safety building."
In addition to the police building, the city's $200 million list of infrastructure projects also includes $14.2 million to replace two outdated fire stations; new parking garages downtown and on California Avenue ($35 million combined), and numerous improvements relating to the recently adopted Bicycle and Pedestrian Master Plan ($25 million). The city has already committed about $20 million in existing funds to these improvements, leaving a gap of about $180 million.
According to the city's polling data, an increase in the city's sales-tax rate also had a good chance of getting support from a majority of voters, though it lagged far behind hotel tax as a viable option. Berman was the only council member who recommended further exploring the idea.
So far, there has not been an outcry about the proposed tax increase from the city's hotel community. Not a single hotelier addressed the committee Friday, though economist Steve Levy warned that opposition might soon materialize. Levy told the council committee that the Chamber of Commerce's Business Policy Committee recently recommended to the Chamber board that the organization "vigorously oppose" the proposal. He also warned that raising taxes might lead to loss of hotel business, with some corporate customers choosing the cheaper rates in neighboring cities such as Menlo Park and Mountain View.
Joe Saccio, the city's deputy director of the Administrative Services Department, said that fears of losing business were also prevalent the last time the city raised its hotel rates, in 2007. The loss of business, however, never materialized.
"We didn't experience any major tail-off," Saccio said.
Even as the committee agreed to pursue a hotel-tax increase, members remained uncertain about the fate of the desired police building. Recent polls suggested that a bond to fund the police building would fail to reach the needed two-thirds threshold by a small margin. This question will now be a leading priority for staff, which in addition to coming up with a plan for a police building was also directed on Friday to come up with a prioritized list of infrastructure projects that could be funded through the measure on the November ballot.
"I still struggle with how we're going to handle the public-safety building, which is my first priority and, I think, everybody's," Klein said.