Hotel-tax bump a tough sell with Palo Alto Chamber

City hopes new measure would help upgrade aged infrastructure

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best way to raise the money needed to pay for a host of projects: a new public-safety building, the rebuilding of two outdated fire stations, new garages in downtown and on California Avenue and the city's many bike improvements in the pipeline.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."

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Like this comment
Posted by Neilson Buchanan
a resident of Downtown North
on Jun 5, 2014 at 8:17 am

Like many concerned citizens, I had a personal conflict with this meeting and am burning out....can only focus on 2-3 city issues at one time. Everyone, especially us bystanders, would be more informed, if the Council

1. Encourages the general public to attend. This means 2-3 weeks notice.
2. Pays more attention to the speaker profiles at all meetings: Who are speakers with self-serving economic interests? Which speakers are citizens of Palo Alto (ie, potential voter)? This void creates potential for more Maybells. I suggest that all speakers be required to state their names, home address(city of residency, not street address) and business address(optional) before they address the Council, Planning Commission, etc.

Everyone should feel welcome to address our city government.

Like this comment
Posted by citizen
a resident of Another Palo Alto neighborhood
on Jun 5, 2014 at 9:10 am

I agree, it's tough do be more involved unless the City makes a more interactive way to do so online. If it did so, it could poll people for free and find out if it's a good idea to pay for an election.

The hotel owners make a compelling argument. Maybe you're talking $4-5 a night, but if I'm comparing prices on the internet, $30 including other taxes for the week extra puts you at the bottom of the page.

We don't have a business tax at all - why not a 0.2% business tax? one that sunsets? Why not add a small amount to development fees?

One note to Weekly:
"nearly decade-long effort" . Effort implies work. I think you were looking for the words "sporadic" and "half-hearted", and in the wake of being tone-deaf all year to the citizens, also "bumbling".

Like this comment
Posted by Wayne Martin
a resident of Fairmeadow
on Jun 5, 2014 at 9:31 am

> We don't have a business tax at all - why not a 0.2% business tax?

The Council put a business tax on the ballot a couple of years ago. This proposed tax was not a simple percentage of revenue (which is really difficult to obtain from companies in startup mode that are not generating revenue), but was effectively a “head count” tax:
Web Link)

The measure was defeated by the voters.

If memory serves, the Council did not target the funds for infrastructure—they simply wanted the authority to tax businesses. The recent $10M bump in salaries, which City Manager Keene seemed very keen to be approved by Council would have been funded, in part, by this business tax.

With downtown now mostly in the hands of property developers, and companies that do not hire Palo Altans, for the most part, it might pay to look at modeling our finances so that we can see exactly how much business is costing us, and how much we are spending on them. The idea that they are piggy banks to be tapped, at will, is not a good idea, in my opinion.

Like this comment
Posted by Sheri
a resident of Midtown
on Jun 5, 2014 at 10:56 am

"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." Did I miss something? Aren't the customers paying the tax, not the hotel owners?

Like this comment
Posted by Wayne Martin
a resident of Fairmeadow
on Jun 5, 2014 at 11:30 am

> Did I miss something? Aren't the customers paying the
> tax, not the hotel owners?

Yes and no. At one level the customer is paying all the bills. But at a somewhat deeper level, as the peripheral costs go up, customers might find themselves less likely to return, and less likely to tip as much.

Sooner, or later, there is a cost to everything. It's unlikely the 250 Hamilton understands that.

Like this comment
Posted by Neilson Buchanan
a resident of Downtown North
on Jun 5, 2014 at 3:20 pm

Regarding Citizen comment above,

Palo Alto wins awards for being one of the most connected government in the US, but modern communication technology is absent from the meeting if Council, Open Palo Alto, Commissions,etc. Board packets, Council Chamber visuals, etc, etc are simply primitive and uninviting.

I know it is hard for government to adopt meeting effective, citizen engaging, and remote technologies, but surely there are best practices somewhere among the 1000s of city governments in the US. I have volunteered to promote citizen engagement and I urge someone with tech savvy to volunteer, too. OK, young tech gurus at Google, Survey Monkey, Cisco, etal....come to the rescue of your city government.

Like this comment
Posted by Joe
a resident of Barron Park
on Jun 5, 2014 at 3:48 pm

Gennady, I think there's an error in the story, or at least a problem with the amounts attributed to COPs. The article says: 'The city plans to leverage the funds from the hotel-tax increase to obtain roughly $30 million through "certificates of participation" ...'

Reading the City's Staff Report (available here: Web Link - see page 3), the City plans to raise a total of $64.5 through Certificates of Participation (COPs). According to the report, the COPs will be divided into at least two tranches. While it's true that the first tranche will be $30.8 million due to 16.7% increase in the TOT, there will also be a SECOND tranche of $33.6 million from anticipated new hotel revenue (see Attachment B in the report).

This is really important, because more than half of the $125.8 million the City needs to fund infrastructure projects will rely on the TOT increase, which will be done through Certificates of Participation. This is huge risk to the City's finances, and dangerous for the financial stability of City's general fund.

There are also two other interesting points in the staff report. First, the "modernization" of the TOT may include "online intermediaries or brokers (including Airbnb)" which something that hasn't been widely discussed. Second, folks in south Palo Alto should know that the replacement of Fire Station 4 on Middlefield and Meadow is no longer on the TOT project wishlist. (It still remains on the infrastructure list - to be covered by "Future Revenue Sources TBD".)

Like this comment
Posted by Wayne Martin
a resident of Fairmeadow
on Jun 6, 2014 at 8:59 am

> Palo Alto wins awards for being one of the most
> connected government in the US, but modern
> communication technology is absent from the
> meeting if Council, Open Palo Alto, Commissions, etc.
> Board packets,

Not certain what awards the City wins for being “connected”, but the poster is correct about the complete lack of “state-of-the-art” communications via the Internet which reduces the residents ability to communicate with the City of Palo Alto.

For more than a decade, I have been promoting this sort of communication via letters to the editor in local papers, letters to the Council, and personal contacts, when possible. I have sent literally hundreds of letters (actually emails) to both the City Council, and the School Board, suggesting the use of tools like Instant Messenger, Video Conferencing, the ability to upload short videos to the City’s web-site which could be entered into the public record, just as letters or emails, and shown during public communications periods—just as if the submitter of the video were present at the meeting.

I have never received a response from anyone of the two governing boards suggesting that it is time to move in the directions being promoted by myself (and others). Dana Tom did suggest that the PAUSD should look into facilitating “Remote Office Hours” by allowing parents, and residents, to schedule short meetings over Skype (or other VideoChat tools), so that people need not drive through Silicon Valley traffic to meet with school officials. This suggestion seems to have died “in committee”, unfortunately.

I also have tirelessly promoted that as many of the City’s records be placed on-line, like the FPPC financial reporting documents, and other public records that are not subject to non-disclosure restrictions. There has never been any response to these suggestions.

It is very clear that the current cast of players at City Hall, and 25 Churchill, are comfortable with the status quo. The City Manager claimed that he wanted to make Palo Alto a "digital city"--but he has done virtually nothing meaningful towards that end. I suspect that it will take a completely new cast of characters, and another decade before these sorts of ideas become commonly used at City Hall, and the PAUSD.

Like this comment
Posted by ChrisC
a resident of College Terrace
on Jun 6, 2014 at 10:43 am

ChrisC is a registered user.

The hotels will probably stay full even with a higher hotel tax. Many people cannot afford the hotels/motels here already and go to Sunnyvale or Redwood City even when they have business in Palo Alto. Then they spend their money in the other cities. So then there is less tax money coming in to Palo Alto from those expenditures.

Like this comment
Posted by transportation
a resident of University South
on Jun 6, 2014 at 11:01 am

Businesses want better transportation in this city for their customers and employees, but they don't want to pay for it. Do they want residents to subsidize their businesses? I'm sorry, everyone has to pay their fair share to live or work here.

Like this comment
Posted by Old Palo Alto Resident
a resident of Old Palo Alto
on Jun 6, 2014 at 11:46 am

When you can't manage a budget, raise taxes and stick it to hotel owners. When will it stop? Recently it was written that P.A. would have a surplus because of increased revenues. So City Manager wants new hires. Farm out street sweeping to an outside source, get rid of 7 employees and decrease the service to every other week to save 650K. But wait, we'll retrain these employees so they can stay on the payroll...huh? How is that going to save 650K?

Like this comment
Posted by Annette
a resident of College Terrace
on Jun 6, 2014 at 11:54 am

@Neail Buchanan - I attended the mtg at the CoC. Both speakers were introduced and it was made clear that Barbara Gross works at the Garden Court. She also identfied herself as a resident of Palo Alto. I don't think Klein specified that he is a resident but that's obviously known since he is on the CC. He did remind all in attendance that he is a tax lawyer.

I think this article is a fair representation of what transpired at the meeting. Council clearly expects this to pass; Klein said they do not have a Plan B should it not pass.

Like this comment
Posted by Jason
a resident of Ventura
on Jun 6, 2014 at 2:08 pm

I was also at the meeting. To be fair, Klein didn't say the ToT was the best way, the bond would be the best way, but requires 2/3 majority. The ToT is the only choice they know will pass. There is a big difference.
This tax increase is not a permanent fix. The funds are not guaranteed to go toward the projects proposed as they go in to the general fund. The city might get a couple projects completed out of it, but why not at least lock in the money so that it is guaranteed to go toward projects. Also, once these projects are complete, then what? Why not make the funds go toward the next set of prioritized infrastructure projects? Klein did say there are $500 mil worth that are past due.
Also, the consequences of this tax are not short term. Currently, hotels are enjoying high rates and occupancy. The issue is during the next down turn. There always is a next down turn. The majority of travel in the area is corporate travel. This travel is mandated and controlled by the finance departments of the companies. They look at total spend of travel. Everything from airlines and hotels to transportation and food and beverage. Hotels can charge more because demand is up outside of just the big corporate accounts. That goes away during downturns. The increase in the tax will be eroded by decreased or flat rates for these negotiated accounts. There are already companies who choose not to stay in Palo Alto and take their business elsewhere due to costs. A well known local business only has VIP's stay in town, a majority stays in Fremont. Other accounts go to Mountain View and Sunnyvale. If the Palo Alto tax is higher than surrounding areas, when we want these accounts back it will make things more difficult. The larger, branded hotels will be OK. It's the smaller, independent hotels that will feel the affects of this during the next downturn. You want more housing along El Camino? Vote for the tax increase. During the next downfall many hotels went bankrupt and had to sell. Many scraped by. Making these hotels and motels less competitive will only make things worse next time. Take advantage of them when the going is good and then kick them when they're down.
I'm not arguing the projects aren't important. I don't think anyone is really arguing that. The argument is that this isn't the best way to do it, it doesn't guarantee the projects will be complete, the tax in unfair, and when the going gets tough it may put smaller properties out of business.

Like this comment
Posted by JerryL
a resident of Adobe-Meadow
on Jun 6, 2014 at 2:55 pm

I agree totally with Jason (above).
It is so obviously a squeezing of the 'Golden Goose' that it is infuriating.
I thought it was wrong when we made that 'one time' move above 10% but now
we see that, in the mind of Council, it was just a foot in the door. Once the
10% psychological barrier was breached, sky's the limit.

I am a long time resident of Palo Alto but I myself have to pay these annoying
and seemingly unfair (soak the visitor) taxes when I host friends or family members and put them up in one of our close-to-home hotels. It is bad enough that they are charging 'Palo Alto prices' but it really adds insult to injury to be paying 14% on top of it.

Like this comment
Posted by Palo Alto landlord
a resident of Midtown
on Jun 6, 2014 at 3:49 pm

I live out of town but subscribe to the online Daily News express. It is interesting that today's sequence of articles just happened to layout as follows:

--With Caltrain in mind, Palo Alto seeks larger sales-tax hike

--Hotel-tax bump a tough sell with Palo Alto Chamber

It seems to me, having lived in NY, Chicago and other high tourist areas like Florida, that their hotel tax structure helps pay for a lot of the services that are available when visiting those cities. By no means am I saying that the hotels tax can pay for everything but I do think that the Palo Alto area including Stanford Hospital / University and other Silicon Valley companies is a destination that entails paying what it costs to visit those areas. I think the Chamber of Congress does a disfavor in thinking only the residents should foot the bill. If you need to go to Stanford for a seminar, sure you could stay in Redwood City or Sunnyvale hotels, but I don't think people are choosing those cities' hotels because of their hotel taxes. I recommend seriously considering the hotel tax bump especially since there would be a constant rotation of people paying that tax and not the same individuals all the time.

Like this comment
Posted by Annette
a resident of College Terrace
on Jun 6, 2014 at 4:22 pm

@Neilson B - apologies for not writing your name correctly in my earlier post.

@Jason - thanks for the good summary. The lack of a guarantee that the funds raised by this tax increase would be spent on infrastructure projects was - is - clearly a concern of many. It will be interesting to see how the Measure is written; I will not be in the least surprised to see language that both secures votes by suggesting that the money raised will be used for infrastructure projects but also cleverly doesn't bind the city to spend it that way.

Like this comment
Posted by Wayne Martin
a resident of Fairmeadow
on Jun 6, 2014 at 5:21 pm

> but I do think that the Palo Alto area including Stanford Hospital /
> University and other Silicon Valley companies is a destination that
> entails paying what it costs to visit those areas

And what makes you think that people visiting these areas in Palo Alto actually generate a demand on services that they are already not paying for via sales tax and other fee-for-services that they consume?

Palo Alto is too small to allow for comparision with other much, much, larger cities--it is a small square, five miles on a side. By the way, within this square sits Stanford University, that enjoys a $7B property tax exemption. If Stanford were paying its "fair share", then Palo Alto would be seeing about $7M a year more in direct AB8 allocations from property taxes collected.

BTW--Palo Alto receives about 30%-40% of its General Fund revenue from local sales tax--of which outsiders/non-residents/visitors are significant contributors. This money could be used for infrastructure--but it has been targeted for salaries and benefits for decades now.

There was a time that highwatymen would stop travelers to rob them--demanding "stand and deliver". Today, we do it in a more sophisticated way--calling it a ToT.

Like this comment
Posted by observer
a resident of Another Palo Alto neighborhood
on Jun 7, 2014 at 4:56 pm

@Wayne Martin, Really?

> Not certain what awards the City wins for being "connected"

If you want to understand what motivates City Hall, you need to understand their desire for external recognition. Here is a partial list:

Palo Alto receives honor for putting technology toward good governance, Calif Forward, by Cheryl Getuiza, 11/13/2013

Palo Alto named most tech-savvy town in America - here's why, SV Biz Journal, by Sarah Drake, 11/7/2013

Innovation Councils Connect Governments with Entrepreneurs: Palo Alto, Calif.'s new Innovation Council mirrors the culture of the region, inviting entrepreneurial, innovation-based creative spirit to inform city decisions, Gov Tech, by Jessica Renee Napier, March 21, 2013

Partnering for Success: How the City of Palo Alto Engages its Tech Community, Public CEO, by Dr. Jonathan Reichental, April 2, 2014

On the nationally-recognized CODE FOR AMERICA website, Jonathan Reichental, City of Palo Alto is asked to expound on questions such as "With your experience in community engagement, can you tell us what methods of outreach and platforms work well for you?"
May 27, 2014, by Garrett Jacobs
Web Link

And in case you think the city is too busy to notice all this national press attention, here is a link that shows otherwise --
Web Link

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

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