Tourist tax increase aims to add $1.4 million to Santa Cruz city budget

The Santa Cruz City Council meeting on Aug. 8, 2022
The Santa Cruz City Council voted unanimously Tuesday to put on the ballot a new measure that would increase the tax on hotel stays.
(Thomas Sawano / Lookout Santa Cruz)

With the Santa Cruz City Council looking for new revenue after a proposed sales tax increase narrowly failed in June, it voted to increase the city’s tax on hotel stays — which, if it clears its final hurdle before voters on the November ballot, would bring in an estimated $1.4 million in additional revenue.

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On June’s primary ballot, Santa Cruz County residents voted in droves (69% to 31%) to increase the tax rate on stays at commercial lodging facilities — hotels, motels and inns in Aptos, Soquel, San Lorenzo Valley and other unincorporated parts of the county — from 11% to 12%, and the rate levied on smaller-scale vacation rental properties from 11% to 14%. County officials estimate the measure will bring in an additional $2.3 million in funds.

Now, the Santa Cruz City Council aims to follow suit, on Tuesday unanimously approving a measure for the Nov. 8 ballot that would bring the city’s 11% flat transient occupancy tax (TOT) to parity with the new county rates. If passed, the city estimates the increase would net about $1.4 million in addition revenue for its general fund. To put that number into perspective, for the 2022 fiscal year, the city’s TOT brought in $11.05 million in revenue. That total exceeded what the city had projected, given the local tourism economy’s quicker-than-expected recovery from the COVID disruption.

Ahead of Tuesday’s vote, city staff and members of the council’s Ad Hoc Budget and Revenue Committee — consisting of Mayor Sonja Brunner, Vice Mayor Martine Watkins and Councilmember Sandy Brown — met with local hoteliers, Brunner said at the meeting.

“This was investigative, and we spoke with a couple of hoteliers,” Brunner said. “In order to bring this to a vote for the November ballot, I think the real engagement will begin and continue.”

Passing the prospective ballot measure would help the city make up for the defeat of a proposed sales tax increase, by fewer than 50 votes, in the June primary. It would have added $6-8 million to the city’s budget, which is stretched by factors including employee raises to dealing with homelessness and moving ahead on affordable housing.

With the local tourism industry continuing to pick up steam, the city expects to bring in $12.10 million in TOT revenue in fiscal year 2023, not including the additional revenue generated by the proposed rate hike.

While taxpayers usually support increased taxes on visitors, such measures can get a chillier reception within the competitive hospitality, as rates are compared to nearby tourist destinations. As one area increases rates, others are tempted to as well. For instance, across the bay, the TOT rate in Monterey now sits at 12%, up from 10% since July 2021. Officials and hoteliers alike say that if the TOT rate were raised too high, Santa Cruz would run the risk of losing hotel patrons to its neighbors.

What the magic number is, however, is a topic of debate. Retired firefighter and 2010 city council candidate Ron Pomerantz wrote in an email to the council that he thinks the city should be aiming for an increase upward of 2%, not 1%. He pointed out that in terms of costs borne by hotel customers, a single-digit TOT increase would up the cost of a stay by only somewhere in the range of 10s of dollars.

“13, 14% doesn’t seem that outrageous,” Pomerantz told Lookout. “You’ve gotta prove to me that that would be a detriment to people coming to Santa Cruz. And I just don’t believe that a few dollars extra to a room would make people go, ‘Nah, I’m gonna go to Watsonville.’”

Given the political realities of such an increase, however, the outlook on an increase above 1% appears more problematic. Councilmember Brown told Lookout that while she in general supported a rate increase more in the realm of 2-3%, matching the county figure seemed like the right compromise between the interests of hoteliers and what would be likely to pass the council’s muster.

“We can certainly revisit things in a shorter period of time in the future,” Brown said. “But for now it’s seemed that, at this moment, aligning with the county makes sense.”