Palo Alto pushes forward with hotel-tax increase | March 7, 2014 | Palo Alto Weekly | Palo Alto Online |

Palo Alto Weekly

News - March 7, 2014

Palo Alto pushes forward with hotel-tax increase

City Council agrees to pursue ballot measure to fund infrastructure fixes

by Gennady Sheyner

Palo Alto voters this November will have the chance to raise the city's hotel-tax rate by 2 percent, a move that city officials say would go a long way toward funding upgrades to Palo Alto's age-worn infrastructure.

On Monday night, the City Council unanimously agreed to put on the ballot a measure that, if approved, would produce revenue that could be leveraged to fund various bike projects, at least one new parking garage and replacement of two fire stations that were built more than half a century ago.

Even without the tax measure, which the council supported after extensive debate, the city's infrastructure landscape is already far brighter than it was in 2011, when a specially appointed Infrastructure Blue Ribbon Commission did a full-scale analysis of the city's needs and came up with a set of funding recommendations. These included a bond to pay for a new police building, raising the city's capital expenditures and increasing the sales tax.

Since then, local sales- and hotel-tax revenues have rebounded in a big way, with funding of street repairs more than doubling and the city's once emaciated infrastructure reserve swelling to about $8 million. The council had also determined that the most critical infrastructure project of all — a new public-safety building — can be pursued with existing funds, a factor that allows the city to use the bond-measure revenue for items that may be less urgent but more popular.

Larry Klein, chair of the council's Infrastructure Committee, was one of several council members to point to the differences between 2011 and today.

"The city's financial position is better, we've got a surplus and, in addition, we have Stanford money," Klein said, referring to the $14.9 million the city is set to receive for infrastructure as part of a development agreement that allowed a dramatic expansion of the Stanford University Medical Center.

Though council members all agreed to put the hotel-tax increase on the ballot, they had an extensive debate over whether to pursue a 2 or 3 percent increase to the city's existing rate of 12 percent. Ultimately, the smaller increase prevailed by a single vote, with Klein joining Vice Mayor Liz Kniss and council members Marc Berman, Pat Burt and Karen Holman in supporting it.

The funds, coupled with construction of several new hotels that are expected to come online this year, are expected to bring in $4.6 million in additional annual revenue, which would be leveraged to get $64.4 million for infrastructure projects. Though the exact projects to be funded are yet to be determined, the menu of options includes a bike bridge over U.S. Highway 101, various new bike boulevards, new garages in downtown and possibly on California Avenue and replacement of fire stations near Rinconada and Mitchell parks.

Of the four council members who supported a 3 percent hotel-tax increase, Councilman Greg Scharff offered the most passionate argument. When combined with expected revenue from new hotels, the 3 percent hike could be leveraged to obtain about $75 million in funding. The city, Scharff said, has gone from a situation where making a dent in the infrastructure backlog seemed "virtually impossible" to one where the city can actually take care of almost all of its infrastructure needs. By approving it, the council would be sending the community a strong message that it plans to do just that. He also cited the rising construction costs, as evidenced by the steadily growing budget for the streetscape project on California Avenue, which is set to commence this month.

"We're within grasp of getting this done," Scharff said, referring to the closing of the infrastructure backlog. "If we go down to 2 percent, we put that at risk."

Five of his colleagues disagreed and said they weren't comfortable with making Palo Alto's hotel-tax rate one of the highest in the state. While San Francisco and Oakland have hotel-tax rates of 14 percent, most of Palo Alto's neighbors have lower rates. Mountain View has a rate of 10 percent, while Menlo Park, East Palo Alto and Redwood City all have 12 percent. Burt said going to 15 percent would make the city too much of an outlier. Holman said the move would help perpetuate an image of Palo Alto as a place that's a little too precious and make it seem like the city is bragging about how special it is.

"I don't think this reflects well on the image of Palo Alto," Holman said.

Vice Mayor Liz Kniss agreed and also urged against making the city's rate so far above those of its neighbors.

"There are times when we think we're just so special," Kniss said. "And I think that diminishes who we are and I think in many ways it makes us look almost as if we're somewhat callous in how we go about treating people who are visiting us either as tourists or for business."

Kniss initially supported Councilman Marc Berman's plan to explore raising the city's sales tax by 1/8 cent instead of going forward with the hotel-tax increase. That proposal quickly fizzled when all seven of their colleagues voted against it.

Berman said he agreed with the goal of fixing up the infrastructure and the council's list of priority projects, but advocated more research on the sales tax. The city's polling of the two items showed that the hotel-tax would be far more popular (support level for a measure to raise hotel taxes by 2 percent was as high as 77 percent) than the sales tax (where support ranged between 51 and 57 percent, depending on how the question was framed). The polling, however, was focused on a 1/4-cent increase and indicated that support could rise to above 60 percent if the city pursued a 1/8-cent hike.

Berman argued that because the polls didn't really concentrate on the smaller increase, the city should study this option further. He said the city is "going in the right direction" with its list of projects, but was less certain than his colleagues about whether the hotel tax is the way to go. Council members are all marching toward the same goal line, he said, though he wasn't sure "if we're calling the right play."

After his idea to explore the sales-tax increase was rejected, he proposed revising the recommendation from the Infrastructure Committee from a 3 percent hotel-tax increase to a 2 percent increase.

After the council voted 5 to 4 to support the smaller bump, members unanimously approved moving forward with the ballot measure. The council also directed its Infrastructure Committee to revisit the list of projects and adjust it based on the revenues the city is expected to get from the increase in the hotel-tax rate.


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