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Stanford University's graduation season typically brings flush times to the Cardinal Hotel, with guests booking rooms at the downtown Palo Alto hotel months in advance.
Last year, however, the hotel's general manager, Stephanie Wansek, witnessed a strange, new phenomenon: vacancies. This year, it happened again, Wansek told the Weekly.
"Normally, in my 20 years here, we had been sold out every year by March or April," Wansek said.
Other hotel executives also have seen demand cool off, according to Wansek. So when the City Council began to float the idea of raising the city's hotel tax (formally known as the transient-occupancy tax, or TOT) for the third time in 11 years, the move caught their attention. Since then, the group of hotel executives -- which includes members from the Cardinal, Westin, Sheraton, Dinah's Garden Hotel and Zen Hotel -- have been meeting regularly to talk about Measure E, which would raise the transient-occupancy-tax rate from 14 percent to 15.5 percent.
"Everybody around the table said their occupancy is off -- is either flattening or down," Wansek said.
Palo Alto isn't the only city looking to move ahead with a hotel-tax hike in November. Los Altos voters will consider raising their city's TOT rate from 11 percent to 14 percent; in Morgan Hill, voters will weigh in on increasing it from 10 percent to 11 percent.
There is a reason why hiking the hotel tax is such a popular proposition. Voters are far more likely to support tax increases if the costs are borne by out-of-town guests -- a long-held truism that was confirmed by a poll the city of Palo Alto commissioned last spring. Conducted by the firm FM3, the poll indicated more than 60 percent of voters would likely support a higher hotel tax, well above the simple majority required. By contrast, only 40 percent indicated that they would support a parcel tax to pay for the city's infrastructure projects and only 27 percent favored a sales-tax increase. In short, raising the hotel tax is simply the easiest thing for a revenue-hungry city to do.
But while Palo Alto has company in pursuing a hotel-tax increase, the city is also in some ways heading into uncharted territory. If Measure E is approved, Palo Alto would have the highest transient-occupancy-tax rate in California, notwithstanding the council's assertions to the contrary.
The measure landed on the ballot by a 6-3 vote on June 18, with council members Karen Holman, Lydia Kou and Greg Tanaka dissenting. Tanaka categorically opposed moving ahead with the measure and lobbied for scaling down the city's infrastructure ambitions instead. Holman and Kou were also cool to the idea of adopting the highest rate in the state, though they ultimately supported Mayor Liz Kniss' proposal to increase the tax to 15.5 percent.
Even Kniss wasn't too thrilled about the measure, saying it would be "awkward" for Palo Alto to become the state leader in this respect.
"It's kind of a painless thing for the city to do," Kniss said, "which probably isn't the best reason for the city to do it."
Councilman Greg Scharff and Vice Mayor Eric Filseth had no such reservations. Each lobbied for 16 percent, with Scharff pointing to Healdsburg, a city that he said already has a 16 percent rate. Healdsburg's rate is, in fact, 14 percent, though the city also charges a 2 percent assessment for the Healdsburg Tourism Improvement District, which supports the tourism business. Palo Alto has no such assessment, which means local hotels, unlike those in Healdsburg, can't expect to directly benefit from the taxes they collect and remit to the city.
Lack of clarity over what it would fund
Palo Alto's hotel-tax ordinance also would have fewer restrictions than Healdsburg's, which requires the first 10 percent of all hotel-tax proceeds to be put in a special fund for community services and the next 2 percent to be dedicated to affordable housing.
While Palo Alto council members have given their assurances that the funds would be spent on projects in the city's 2014 infrastructure plan, the proposed tax hike has no legal restrictions.
The 2014 list, which constitutes the council's formally adopted priorities, includes a new public-safety building, new garages in downtown and on California Avenue, two rebuilt fire stations, permanent upgrades to the Charleston-Arastradero corridor and a new bike bridge over U.S. Highway 101. Earlier this year, Public Works staff indicated that the plan has a $56 million funding shortfall, triggering renewed discussion of raising taxes.
Scharff and others have asserted that increasing the hotel tax in 2018 is necessary to finish the job that the city began in 2014, when it last raised hotel taxes. The council promised the voters in 2014 that it would construct the projects on the list, Scharff said at the June 4 meeting, the full council's first of three deliberations on the subject this summer. Now, he said, is the time to finish the job.
"Looking at this and going forward, I think it's really hard to go ahead and say, 'We're not going to do it,'" Scharff said.
But if the intent of Measure E is to complete the 2014 infrastructure plan, the actual ballot language doesn't reflect it. Missing is any mention of the two parking garages or the bike bridge over Highway 101, apart from general language about "improving pedestrian and bicyclist safety." Nor does it specifically call out the new public-safety building, which at $96 million is by far the most expensive and urgent project on the list.
Instead, it states that the tax increase would be used for "vital city services such as ensuring modern, stable 911 emergency communications, earthquake-safe fire stations and emergency command center." The ballot language also alludes to proceeds being used for "maintaining city streets and sidewalks" (which have nothing to do with the 2014 plan) and "other city services" (which can mean pretty much anything at all).
Nor does the ballot mention any newer projects -- those that were not considered in 2014 but that have recently been added to the council's wish list. In some cases, these are literally pet projects, such as the the $3.4 million that council members plan to spend to fix up the animal shelter as part of its new partnership with the nonprofit Pets In Need and the $4.9 million that the council pledged to help with the renovation of the Junior Museum and Zoo.
The council also hopes to expand Boulware Park by buying an adjoining parcel owned by AT&T, an idea raised over the course of the candid late-night discussion on June 18 in which Scharff, Filseth and Kou all talked about their desire to buy the parkland.
The lack of clarity in Measure E has peeved Tanaka, who's likened the ballot language to "fear-mongering" and suggested that the city actually spell out the projects the tax would fund.
"Why would we see something totally different in the ballot language than we've been talking about all this time for the TOT?" Tanaka asked at the July 30 meeting.
Would Measure E hurt hotels?
Even if the measure's language remains vague, the council majority is confident that the tax hike will pass. Most council members also believe that it will not hurt local hotels, much less the broader business climate.
On June 4, Scharff dismissed concerns from hotel executives and local business groups -- including the Palo Alto Chamber of Commerce and the Palo Alto Downtown Business and Professional Association, which alluded in a letter to "disruptive and challenging market trends" and asserted adding another tax "will hurt this particular industry and its ripple effect will hurt others."
"They are really the same arguments that were made in 2014, that if we go from a 12 percent to a 14 percent tax, this is going to have an adverse effect," Scharff said. "In fact, it had no effect whatsoever. Hotel rates went up and occupancy rates went up."
The city's statistics only partially support his assertion. To be sure, the city has seen a sharp and consistent growth in revenues since 2014, when it raised its transient-occupancy-tax rate from 12 percent to 14 percent. Since that time, Palo Alto's annual receipts from hotel taxes have roughly doubled from $12.3 million in fiscal year 2014 to a projected $24.5 million in the current year. Room rates over the same period climbed from $209 per night to $265 per night.
At the same time, the occupancy rate at local hotels has fallen from 79.6 percent in 2013 and 79 percent in 2014 to a projected 77.5 percent in 2018, according to a report from the city's Administrative Services Department.
Hotel executives fear this is the harbinger of a cooling economy. Wansek noted that while hotel owners are very concerned about their own businesses, they are also worried that the tax would have a "trickle-down effect" on the rest of the community. Fewer people staying at hotels would mean fewer people visiting local restaurants, shopping at local boutiques and sticking around for happy hour at local bars.
She and other hotel executives also reject the council's assertion that the additional tax on the hotel bill would be negligible. Filseth likened Measure E's costs to the price of a cup of coffee, a comparison that is also included in the official argument in favor of Measure E.
The "cup of coffee" impact comparison, Wansek said, only makes sense when applied to tourists and other short-term visitors. It would apply, she said, if the typical hotel guest were an aunt visiting for the weekend. It's less applicable for giant corporate clients whose travel managers are booking rooms in bulk and who can easily make the switch to a hotels in a city like Mountain View, where the transient-occupancy-tax rate is at 10 percent, or to Menlo Park, where the rate is 12 percent.
And unlike Anaheim, which can dependably rely on an endless supply of families itching to see Mickey and Goofy (and which, for the moment at least, leads the state with a 15 percent hotel-tax rate), Palo Alto is by-and-large a corporate town. The bulk of the visitors, Wansek said, are here on business or to visit Stanford. If the tax rate is too high, they can easily book rooms in a neighboring city, hotel executives say.
"The real risk of having the highest rate in the state is that it's not just a competitive disadvantage for the hotels, it becomes a competitive disadvantage for the city," said Peter Hillan, whose firm, Brannan Public Affairs, is working with the hotel industry to oppose the hotel-tax increase. "You can go to Menlo Park and still have reasonably close access to all things in Palo Alto."
Hotel owners are also concerned about the city's approach to changing the policy. Wansek and others raised concerns about the city leaders' lack of outreach to the hotel industry -- a flaw that officials tried to correct with a last-minute meeting with a group of hotel executives in the spring.
She's not the only one who feels this way. Ricardo Berrospi, general manager of Zen Hotel in south Palo Alto, told the council at its June 4 meeting that he was expecting the city to really "explore" the impacts of the new measure before moving ahead with placing it on the ballot.
"Exploring to me means a little bit more than just trying to see what kinds of questions are more likely to be approved," Berrospi said. "Exploring means to reach out to stakeholders, to reach out to hotels and hear their concerns, to analyze what could be the potential consequences of the measure. I think the council is placing too much focus on just trying to see what the polls (show) can be approved."
Assertions, corrections and alternate ideas
The official argument opposing Measure E also has a few inaccuracies. It erroneously calls Measure E Palo Alto's "third transient-occupancy-tax increase in 10 years" (in fact, before 2014, the last time the city raised its hotel tax was 2007, which is 11 years ago) and states that Menlo Park and Mountain View "have not raised their transient-occupancy tax in the last decade ." (Menlo Park did raise its hotel-rate from 10 percent to 12 percent in 2012, when voters approved Measure K.)
But its main assertion, that the ballot language is driven by carefully conducted polls, is by-and-large true, as City Manager James Keene acknowledged at the council's July 30 meeting. For the council majority, this method makes perfect sense; they want the measure to pass. From the view of Measure E opponents, these methods "violate the trust that residents place in their elected officials to act ethically and in good faith," as the argument states,
Some hoteliers have proposed alternative methods to raise funds for needed projects. John Hutar, general manager of Dinah's Garden Hotel on El Camino Real, suggested that rather than raising the hotel tax yet again, the city should focus its efforts on collecting the revenues it's owned from Airbnb rentals. Based on public listings, Hutar estimated that the city could collect about $5.3 million in transient-occupancy-tax contributions; it currently only collects less than $1 million from the residential rentals.
"There's $4.3 million in play here. ... This is a big business, and it deserves your oversight," Hutar told the council on June 4.
The city estimates that Measure E would add about $2.55 million in annual revenues to the city's coffers. Hillan pointed to the size of the city's infrastructure backlog as well as other financial challenges -- most notably, the growing pension backlog -- and suggested that even if the hotel-tax passes, it is unlikely to make a huge difference on infrastructure.
"Our real question is, 'Where does it end?' They will have to go after the citizens to raise that amount of money at some point," Hillan said. "Will they come back two years later to say they have to raise the rate by another 1.5 percent? Might was well just shutter everybody at that point."
Editor's note: This story had originally listed Hotel Parmani as one of the hotels participating in meetings to oppose Measure E. It is not.
UPDATE: Read the Weekly's editorial on Measure E: Yes on Measure E hotel-tax increase (Sept. 21)
For complete 2018 election information, check out the Palo Alto voters' guide.