Despite significant reservations from the local hotel industry, the City Council voted Monday to move ahead with a ballot measure that would give Palo Alto the highest hotel-tax rate in California.
By a 6-3 vote, with council members Karen Holman, Lydia Kou and Greg Tanaka dissenting, the council on Monday night directed staff to draft a measure to raise the transient-occupancy tax rate from 14 percent to 16 percent. If approved by the voters in November, the measure would move Palo Alto past Anaheim, which has a 15 percent rate, and allow it to claim a leadership position that not everyone is coveting.
Much like with the 2014 tax hike, which raised the rate from 12 percent to 14 percent, revenues will earmarked for infrastructure. Specifically, it will help the council fulfill its infrastructure plan, a list of projects that includes a new public-safety building, two rebuilt fire stations, new garages downtown and near California Avenue, a bike bridge over U.S. Highway 101 and the completion of the Charleston-Arastradero corridor.
The council's decision to proceed with the tax-hike measure was driven in large part by the hot construction market, which has driven up construction costs. The infrastructure plan has a funding gap of about $76 million, according to Public Works staff. And with a newly commissioned survey showing that hotel-tax increase has a strong chance of passing, the council majority agreed to go with the change despite opposition from local hoteliers.
The increase of 2 percentage points is expected to bring in about $3.4 million in annual revenues, according to staff's projections. Yet it would also give the city a leadership position that some council members and business groups aren't comfortable with. According to city staff, the median rate in the state is 10 percent. At the high end stand San Francisco, Oakland, Santa Monica and Beverly Hills, each of which has a rate of 14 percent.
In recent weeks, city staff has reached out to local hotel owners to describe the proposal. According to Chief Financial Officer Lalo Perez, they were not a happy.
"They are very concerned about the economics. ... They feel the city should look at it from a corporate basis, not just individual basis," Perez said.
Some said they are starting to see a downturn in the occupancy rate, Perez said, including between Monday and Thursday, which tends to be the peak.
Stephan Dahl, whose family owns The Cardinal Hotel, argued in a letter to the council that the switch from 14 percent to 16 percent would damage the ability of local hotels to compete with those in other cities that have lower transient-occupancy tax burdens.
"If increasingly well informed and price sensitive hotel guests find other areas more affordable, they likely (will) take their retail, dining and entertainment spending to those areas as well," Dahl wrote.
The city's push for higher hotel taxes is also proving to be a tough sell with the broader business community. Leaders of the Chamber of Commerce and the Palo Alto Downtown Business and Professional Association have also indicated their opposition to the council's latest attempt to raise revenues. A letter from the downtown organization argued that the burden of funding a public facility such as a police building should not fall entirely on one industry sector.
"The hotel industry, like retail and restaurants are facing disruptive and challenging market trends," the letter signed by the entire board of the Palo Alto Downtown Business and Professional Association states. "Adding another tax amongst other increases in taxes and fees that may be in the pipeline as well as other operating challenges that downtown businesses face will hurt this particular industry and its ripple effect will hurt others."
But while many in the business community oppose the tax, most residents appear to be on board. A fresh poll from the city's consultant, FM3 Research, showed about 66 percent indicated support for raising the hotel tax -- well above the 50 percent threshold needed for passing a general tax. The high likelihood of passage was enough to sway the council majority, including Councilman Greg Scharff, who made the motion Monday. While some of his colleagues maintained that the city should scale back its infrastructure program rather than increases taxes, Scharff suggested that the city stay on course to complete its 2014 plan.
"Looking at this and going forward, I think it's really hard to go ahead and say, 'We're not going to do these projects,'" Scharff said.
Holman was far less certain. She said she has a hard time with the idea of Palo Alto having the highest hotel-tax rate in the state. The city, she said, should live within its means, even if it means deferring the downtown garage that is being planned for a lot on Hamilton Avenue and Waverley Street.
"We have a big appetite for projects, and for wonderful projects, but I think we also have to be practical," Holman said.
Tanaka, who has consistently opposed moving ahead with a tax increase, once again made the case for sharpening pencils and cutting costs. He also sympathized with the hotel owners and suggested that the city's capacity to raise hotel taxes is not unlimited. Palo Alto, he observed, doesn't have a huge draw like Disneyland. Nor is it in a deserted area with no other hotels within 50 miles. Mountain View and Menlo Park hotels are a bike ride away, he said.
"To me this is rushed, this is not well thought out," Tanaka said. "It might actually hurt us. We can actually get less money."
Kou agreed and argued that it's unfair to focus on hotels as a strategy to pay for infrastructure.
"I really think just targeting one type of business -- hotels -- is just something that's not sustainable," Kou said.
But while one proposed tax measure advanced to the ballot, another one will be deferred. In its first full debate on the topic, the council voted Monday not to proceed with a soda tax measure in November -- an idea that has been generating momentum in City Hall this year.
Most council members indicated that they generally support a tax of 2 cents per ounce on distributors of sugar-flavored beverages. Four council members, Cory Wolbach, Greg Tanaka, Mayor Liz Kniss and Karen Holman, had been preparing to co-sign a memo urging such a tax, Wolbach said.
On Monday, however, most council members agreed that they probably need more time to craft a proper measure. They voted 8-1 to refer the potential soda tax to its Policy and Services Committee, which will refine the proposal and pave the way for placing it on the 2020 ballot.
For supporters of the soda tax, the results from the FM3 survey proved bittersweet. The survey showed between 49 percent and 52 percent of the respondents indicated support for such a tax, with 33 percent saying they would "definitely" vote in its favor. In other words, if the vote were held today, it would be a toss-up.
Councilman Tom DuBois lobbied for moving ahead with the soda tax and to model it after Berkeley's existing ordinance. His proposal fell by a 4-5 vote, with Scharff, Kou and Holman joining him.