Hotel-tax hike recommended in Palo Alto

City Council committee votes to support a 3 percent hike in transient-occupancy rate

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.


Like this comment
Posted by anony
a resident of Barron Park
on Feb 12, 2014 at 1:34 pm

They're not proposing to raise it by 3 percent, as the first sentence claimed, but by 3 percentage points. Big difference. Does anybody edit these stories?

Like this comment
Posted by Wondering?
a resident of Another Palo Alto neighborhood
on Feb 12, 2014 at 3:52 pm

> They're not proposing to raise it by 3 percent, as the
> first sentence claimed, but by 3 percentage points.

So .. what will the TOT be if this tax increase is imposed?

Like this comment
Posted by stephen levy
a resident of University South
on Feb 12, 2014 at 4:37 pm

stephen levy is a registered user.

The story is quite clear for anyone who bothers to read it.

The TOT rate is proposed to go from 12% to 15%.

Like this comment
Posted by Joe
a resident of Barron Park
on Feb 12, 2014 at 4:54 pm

> The story is quite clear for anyone who bothers to read it.

No, not at all. The tax would rise 25% from the current 12% rate to 15%.
The first paragraph is indeed misleading. There are, of course, other errors as well.

Like this comment
Posted by Chris Zaharias
a resident of Crescent Park
on Feb 12, 2014 at 5:23 pm

I'm sure homeowners and renters who augment income via AirBnB are smiling right now. The market will decide PA's *total* hotel tax take, not the council, and not voters, other than in the short term.

Like this comment
Posted by Alphonso
a resident of Los Altos Hills
on Feb 12, 2014 at 8:20 pm

Alphonso is a registered user.

It's bad policy to tax visitors - the ones that have no vote - taxation without representation.

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Posted by Wayne Martin
a resident of Fairmeadow
on Feb 13, 2014 at 11:16 am

The City seems to be proposing a 25% increase in its TOT (Transient Occupancy Tax). So—what does this mean in reality?

Lately the City has been seeing about $10M a year in revenue from travelers for the privilege of spending the night in a hotel, or motel, in Palo Alto. A 25% increase in revenue will come to about $25M a decade. Assuming static economic conditions, then depending on the financing charges, the police station could be paid off in 30-40 years.

It’s hard to believe that the TOT will not be seen as an infinite spigot of OPM (Other People’s Money)—such that the TOT will be raised time-and-again, in the future.

What are the implications in terms of revenue streams? Well, if the TOT were raised 30%, then the City would see $30M a decade, and at 40%--$40M a decade. Given that the City Manager believes that visitors to Palo Alto are so “loaded” that they won’t consider the total cost of their hotel bills when planning trips—then it really is naïve to believe that the TOT won’t be tapped time-and-again as a source of funds for who knows what. And keep in mind with all of the development targeted for the downtown area (at least)—that there is every reason to believe that the TOT “take” won’t increase significantly as other hotels are built in Palo Alto.

We also have to remember that these funds are not likely to be targeted for payment of any bonds that are issued to pay for the buildings construction. These funds will go into the General Fund, where they could be used for paying the always increasing salaries/benefits of the City’s employees. Certainly the Council could craft an ordinance to create a “lock box” for these funds, but there doesn’t seem to be much evidence of their ever having done that in the past. For instance, the Utility has passed hundreds of millions of dollars into the General Fund since it was created—and it’s hard to find any evidence of this money being used for “infrastructure”, via some sort of restriction on the use of funds that originate in the Utility. Same with the UUT (Utility Users Tax)—those funds go directly into the General Fund.

Using historical data, and projecting forward—the Utility will likely transfer almost $600M from 2011 thru 2025 into the General Fund. It’s really hard to understand why the City can not use that money to pay for all of the infrastructure that is currently needing refurbishment, or rebuilding—such as this mostly unneeded Police Station.

Sadly, there is no one on the City Council that seems to be looking at all of the revenue streams available to the City now—and is looking to exact money from residents, and non-residents, that need not be taken.

Like this comment
Posted by Garden Gnome
a resident of Crescent Park
on Feb 13, 2014 at 11:29 am

So basically Palo Alto is proposing that travelers to our fair city stay in neighboring towns in order to save on hotel costs.

Always a great idea, touting the competition.

Looking forward to the article a few years down the line about Palo Alto motels and hotels closing due to lower than expected occupancy rates.

Like this comment
Posted by Peter Carpenter
a resident of Atherton
on Feb 13, 2014 at 11:31 am

Peter Carpenter is a registered user.

"Sadly, there is no one on the City Council that seems to be looking at all of the revenue streams available to the City now"

Sadly there is no one on the City Council that seems to be looking at all of the EXPENSE streams available to the City now.

Like this comment
Posted by jerryl
a resident of Adobe-Meadow
on Feb 13, 2014 at 12:11 pm

Has nobody on Council ever read or heard of "The Goose That Laid the Golden Eggs"?

Squeeze away.......

Like this comment
Posted by Aria
a resident of Downtown North
on Feb 13, 2014 at 12:12 pm

Completely agree with Alphonso.
You should reserve these tactics for emergency situations.

Like this comment
Posted by Joe
a resident of Barron Park
on Feb 13, 2014 at 1:10 pm

I'm sorry, but I think everybody's missing the big picture. Even if you agree that a 25% increase in the transient occupancy tax (matching the highest rate in the state) is tenable and a "good thing" for Palo Alto you have to hate this deal.

What the article doesn't say is that the new TOT revenue would be used to finance a COP. Ironically, a COP isn't the new police station as such, but a Certificate of Participation. Again, the article doesn't go into the details, but A COP is a way for the city issue debt based on future revenue. It is not a bond and wouldn't require more than majority approval because the list of financed projects would be "suggested" instead of explicitly enumerated.

If approved, the city would place all TOT money in the general fund. The city would issue a COP, with the general fund and TOT stream as security. The investors would own the newly constructed facilities (i.e. police and fire stations) and the city would make lease payments. At the end of the lease, the city would take ownership of the facilities.

With a "sunny day" financial forecast, things could work out fine. Lot's of cities in California use COPs to avoid the limits imposed by Proposition 13. A simple majority makes this an easy sell to voters. But we've seen that TOT revenue is cyclical. Things are great now. Besides the general cyclic economy, a big variable is what will happen when the 49'rs stadium opens. Will there be a lot more slack hotel capacity? A large amount of new hotel capacity obviously won't be built here for the stadium. So, if the revenue forecasts don't hold up, the general fund will have to back-fill the COP payments for several decades. Ask Richmond and Orange County how well that worked.

Like this comment
Posted by Tecsi
a resident of Los Altos Hills
on Feb 13, 2014 at 1:17 pm

Tecsi is a registered user.

AirBnB hosts should pay the same tax as hotels to keep a level playing field.

Like Amazon, who hoodwinked states for years that it should not have to collect sales taxes, AirBnB will try to argue the same thing.

Like this comment
Posted by Agreeable
a resident of Old Palo Alto
on Feb 13, 2014 at 3:31 pm

Tecsi and Alphonso hit the nail on the head!

Like this comment
Posted by JS
a resident of Another Palo Alto neighborhood
on Feb 13, 2014 at 4:36 pm

One aspect of this that gets my ire is the City wanting to initiate another project (i.e. Police Station) when their track record in successfully building projects is miserable (i.e. Mitchell Park Community Center/Library - MPCC). The MPCC project is over three years late (so far), work has stopped cold and a lawsuit is in the works. The Public Works Dept. touts the project's success by stating that the project costs are still under the original engineer's estimate - talk about one bloated and unrealistic original engineer's estimate if the project can endure a three year delay and still be under budget! There isn't even any consensus on how/why the MPCC project is fouled up and who is responsible - if no one knows this, how will whatever it is that fouled up this project get remedied so that history doesn't repeat itself and the City's next project endeavor? The City has paid a professional construction manager to represent the City on MPCC - and paid them a huge amount of money - and still finds itself in a quagmire. I sure am glad the current thought does not include using Palo Alto citizen's money to fund another project boondoggle.

A second aspect of this is the lack of infrastructure planning by the leaders of this community for the past 25-30 years. Police stations in Palo Alto have historically lasted approximately 30-40 years (before outgrowing the building/site). The police station was located on Bryant Street prior to its current location. The City has been in its current location since about 1965. Discussions and studies about the need for a new police station started in the 1990's (about 30 years after original City Hall construction). In spite of a recognized need for a new Police Station for the past 25 years, our City's leaders have taken no action to put any money aside for either site procurement or for a new police station facility. Police stations are not the kind of projects that citizenry want to agree to fund (citizenry will vote for school renovations under certain conditions).

Like this comment
Posted by musical
a resident of Palo Verde
on Feb 13, 2014 at 10:27 pm

The higher the tax, the more loopholes are sought. Does the taxable amount include extras like parking, room service, internet access, movies, maid service, or anything else that can be broken out from the basic room charge? Does the TOT apply to government employees on government business? Is there an imputed TOT on free nights earned through frequent flier miles or other preferred guest programs? What if I rent a hotel room for 31 days? And let 31 other people use the room?

Yes, a 3% increase is a 25% increase, which is 125% of the current rate(!).

Like this comment
Posted by Annette
a resident of College Terrace
on Feb 14, 2014 at 6:29 am

Voters will have a say on this. It is always easier to cast an approving vote when the proposed tax will be paid by someone else but that might not be the smartest action in this instance. The last sentence in Joe's posting should give everyone pause.

I'm beginning to think that part of this city's problem is that the decision makers are wealthy people who are essentially insulated from the impact of their decisions.

Like this comment
Posted by Wayne Martin
a resident of Fairmeadow
on Feb 14, 2014 at 10:40 am

A little more about COPs, mentioned above.

COPs (Certificates of Participation) are bonds that can be sold legally by City governments in California without an authorization of the voters. Traditional bonds are generally retired by a new tax, or an increase in a tax—which requires voter approval. Government entities are often involved in various activities—like operating a ball park, or a golf course—which are not essential activities of government, and have revenue streams that are linked directly to the users of these facilities. Under those conditions, governments can pledge some of the revenue stream, or some other government-owned asset, as security for the bond(s)—allowing the governing bodies to by-pass the voters when selling certain bonds.
So—the City Council could sell COPs to finance a new police station by:

1) Creating a new tax

2) Pledging a portion of another stable revenue stream—like 25% of the current TOT, or some of the Utility transfer to the General Fund, or some of the UUT that currently is bringing in over $11M a year.

It’s doubtful that any of these alternatives to creating a new tax have been even considered by the City.

Like this comment
Posted by CrescentParkAnon.
a resident of Crescent Park
on Feb 15, 2014 at 12:03 pm

I'm just curious, why or what gives the city the right to tax hotels under a different schedule than any other good or service? Why not just the normal 8.75%, or whatever it is now, of the billable charge? Do apartments or home rentals get charged this amount too? What is the reason for this?

Like this comment
Posted by Peter Carpenter
a resident of Atherton
on Feb 15, 2014 at 1:57 pm

Peter Carpenter is a registered user.

"What is the reason for this?"

1 - greed

2 - hotels don't vote

3 - The Willie Sutton Rule - that is where the money is.

Like this comment
Posted by Craig Laughton
a resident of College Terrace
on Feb 15, 2014 at 2:29 pm

In the end, hotel taxes are a way for city councils to fund boutique projects, like welfare housing and anaerobic digestion of human sewage sludge, all the while whining that bond measures are necessary for essential infrastructure projects.

The only way to end this nonsense is to defeat any forthcoming bond measures (e.g. the Mitchell Park library, from the past and police station, in the future). At that point, perhaps city councils, including Palo Alto, will be forced to make infrastructure and neighborhood protection a top priority. Boutique projects should have the lowest priority.

Sorry, but further commenting on this topic has been closed.

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