Watsonville weighs hotel tax-sharing plan to spur economic growth

Watsonville’s economic development is one of the few things all city councilmembers can agree should be a priority. Now, the city is taking a small step toward boosting the local economy as it begins to explore a policy to encourage hotels to invest in the community. 

The hotel incentive policy aims to attract three- and four-star hotels to the area, which would contribute to the city’s economic growth and encourage tourism, said City Manager Tamara Vides during Tuesday’s city council meeting. 

Having more hotels in Watsonville brings in more revenue for the city through a “hotel tax,” also known as transient occupancy tax. The tax is an additional charge on hotel room fees that is then reported and collected by the city quarterly, said Vides. Watsonville currently has a 12% transient occupancy tax on its hotels — a similar rate to the city of Santa Cruz. 

Currently, there are eight hotels within Watsonville city limits, and Vides said city staff estimate they will bring in approximately $1.6 million in hotel tax revenue this year. The money collected from the tax goes into the city’s general fund, she said, and is often used to help pay for infrastructure improvements, community programs and other city services. 

But with rising costs for building and operating hotels, Vides said some hotel developers could face difficulties trying to secure the necessary funding for their projects. One of the options she presented to the city council Tuesday is to establish a transient occupancy tax revenue-sharing agreement that would split the proceeds of the tax between the city and hotels, she said. 

Depending on the quality of a hotel — whether it’s a three- or four-star — the city council can set a baseline of how much of the hotel tax needs to be paid to the city before sharing any of the revenue collected, once a hotel is fully operational.

This type of agreement is meant to close any funding gaps if a developer can’t obtain financing from traditional lenders for a project, Vides said. It’s not meant to last forever, and would expire after a set amount of years determined by the city council. 

Another option that could be included in a potential policy is offering tax rebates to existing hotels to encourage them to renovate their properties, especially older ones, she said. Outdated hotels tend to not have a lot of people booking rooms or are vacant, Vides said, and updating a property could help bring in more people to these businesses. 

Other incentives the city is exploring  include assisting developers with applying to grants or being listed as a co-applicant on a grant request, and also reminding developers that the city has a revolving loan fund — which offers low-interest loans to help fund development projects. 

“If we do not incentivize development or use these tools to do it like that, that revenue will not come in,” Vides said. 

Councilmember Kristal Salcido said all of the potential options were good, and recommended city staff meet with representatives of existing hotels to get feedback to further shape incentive options for businesses. 

“I like the direction that the city is going in, because we used to take such hard-line approaches to these businesses, and they would either have to be able to sink or swim without any help from us,” said Councilmember Jimmy Dutra. 

With the way the economy is heading, Dutra said, providing help to businesses so they can succeed is the way to go. Councilmember Ari Parker and other councilmembers had similar reactions as Salcido and Dutra. 

“I think it’s very creative and appreciated, and maybe we could do some of this in other areas that we want to incentivize businesses, such as family-oriented businesses,” Parker said. 

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