San Diego had one of the lowest hotel-room taxes around for major destinations.
In 2004, San Diego voters twice rejected increasing that tax on tourists even after wildfires laid bare the city’s fire-protection problems.
Now tourists will be asked to pay for much of the half-billion dollars needed to expand the city’s Convention Center, city leaders revealed last week. Increased hotel-room taxes will take care of $28 million to $30 million annually, or about three-quarters of what’s required to finance the expansion.
This time, city leaders hope voters won’t have to weigh in.
Steve Cushman, the longtime local power broker Mayor Jerry Sanders tapped to make the Convention Center deal, is walking the tax-hike tightrope, one made thinner by a freshly passed state initiative.
Cushman won’t call the financing plan a tax increase, but acknowledges tax rates will be higher. He thinks Proposition 26, passed by California voters in November, complicates the expansion’s approval without a vote, but figures some other city will fight that battle in court first.
The financing plan will increase the city’s comparatively low taxes on tourists to the point that they’re no longer comparatively low. If it’s successful, visitors will pay 15.5 percent to the city on their hotel room bills if they stay in a large hotel downtown. The expansion, combined with a similar recent increase, would effectively boost the rate from 10.5 percent just a few years ago.
While the voters have twice rejected increases to what’s formally known as the transient-occupancy tax, or TOT, a tax on tourists would still be one possible way to bring revenue into a city that’s financially struggling.
An increase for the Convention Center expansion would effectively box out other attempts to increase hotel-room taxes to pay for general city services, said Murtaza Baxamusa, an analyst who has authored reports arguing for higher tax rates.
“This will impair our ability to raise revenues for generations,” he said.
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Red, yellow and white demarcate different neighborhoods on a simple map of San Diego.
The colors represent the different tax rates city hotels effectively will charge their guests to pay for the Convention Center expansion. Hotels closer to the downtown Convention Center will bill 3 percent extra, hotels in Mission Bay and Mission Valley 2 percent and everywhere else 1 percent.
Lani Lutar, president of the San Diego County Taxpayers Association, put it simply.
“It’s a tax increase,” she said.
But it can’t be if Cushman’s going to avoid going to the voters. He argues that it’s a fee that the hotels themselves are deciding to pay in order to grow their businesses. They know what tax rates the tourism market will bear and will have to weigh increased prices against the new demand that’s projected to come from adding major 10,000-person conventions and keeping growing ones, such as Comic-Con.
San Diego’s regular hotel-room tax rate remains below the average of 15 other major cities it compares itself against. The city expects to collect $142.8 million in hotel-room taxes next year. Just more than half of that money – $74.8 million — would go directly to the city’s day-to-day operating budget, the budget’s third largest revenue source.
But once you add the Convention Center expansion bill and a 2 percent charge already in place for hotel tourism and marketing, the tax rate jumps to 15.5 percent at a downtown hotel. All together, that’s higher than the average rate for other major cities.
If hoteliers think they can afford it, that’s good enough for City Councilman Kevin Faulconer, who represents downtown.
Faulconer, an opponent to last November’s local ballot measure to increase the sales tax, said San Diegans would approve a Convention Center expansion if they had to vote on it. Pitting a general hotel-room tax increase against the Convention Center expansion is a false choice, he said. The Convention Center expansion, he said, will create needed jobs, increase tourism and funnel money back to the city’s day-to-day operating budget.
“I think people are not interested in sending more money to City Hall until it fixes its problems,” Faulconer said. “On the Convention Center, I believe people support expanding the pie and creating more dollars for city services by generating more money from those who come here, contribute to the economy and leave.”
For now, city leaders hope an expansion won’t have to go to the voters.
Cushman told the City Council he’s considering downtown redevelopment dollars; a surcharge on taxi cabs and downtown restaurants and bars; and a contribution from the Unified Port of San Diego to make up the remaining funding. Cushman was vague about dollar amounts for everything other than indicating he’s asked the port for 5 percent of the total cost.
But Cushman continued to acknowledge that Proposition 26 could require the hotel-room plan to go before voters. He believes the levy would fall into one of the proposition’s exemptions, but hoped another city would go to court first. Los Angeles, Cushman said, recently created a tourism and marketing district and that could be challenged under the same rules.
“By the time we need it, we’ll know,” he said.
If a public vote isn’t necessary, the city’s hoteliers would decide on the hotel-room tax part of the expansion plan. In this vote, downtown hoteliers would have more power than others. Bigger hotels will have more votes than smaller ones. And downtown hotels will get more votes because their guests will be paying more. This system effectively makes downtown hoteliers the decision-makers as their collective votes almost certainly would outweigh everyone else’s.
Cushman said he hadn’t yet calculated how many votes each hotel would receive. But he didn’t think it was a major issue. Hoteliers support expanding the Convention Center, he said, and if it becomes clear the hotel industry would turn against it, nothing would happen.
“It’s not going to come down to a vote,” he said.
City Council, and various state regulatory agencies, would need to give final approval for the expansion. Backers hope to break ground by the end of next year.
Clarification: This story originally said the city collects $73 million in hotel-room taxes. The city actually collects about twice that amount, but about one half goes into the city’s general budget and the other half goes to tourism marketing. The post has been updated with that detail and more up-to-date figures.
Please contact Liam Dillon directly at liam.dillon@voiceofsandiego.org or 619.550.5663 and follow him on Twitter: twitter.com/dillonliam.