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HomeMy WebLinkAboutStaff Report 294-07C ¢y Manager TO: FROM: HONORABLE CITY COUNCIL CITY MANAGER 13 DEPARTMENT: ADMINISTRATIVE SERVICES DATE: SUBJECT: JULY 9, 2007 CMR: 294:07 RECOMMENDATION FROM FINANCE COMMITTEE TO THE CITY OF PALO ALTO’S TRANSIENT OCCUPANCY TAX INCREASE RECOMMENDATION: The Finance Committee reconmaends that Council: o Authorize the placement of a ballot measure on the November 6, 2007 general election to increase the City’s Transient Occupancy Tax (TOT) from 10 to 12 percent. Staff further recommends that Council: o Adopt the attached resolution approving the ballot question language and directing the City Attorney to prepare an impartial analysis. o Designate up to four council members to author the argmnent in favor of the measure. SUMMARY OF COMMITTEE REVIEW AND RECOMMENDATIONS: .At the June 19, 2007 meeting, the Finance Committee unanimously approved staff’s recommendation that Council authorize a ballot measure for the November 6, 2007 election to increase the Transient Occupancy Tax from 10 to 12 percent. In addition, the Finance Committee directed staff to further research the need to amend Chapter 2.33 of the Municipal Code to clarify its application to intemet bookings. The Cotmnittee’s discussion centered around the potential tax increase and use of Destination Palo Alto as a marketing tool. To support tourism and visitorship the Finance Committee directed staff to develop for its review a comprehensive marketing plan for Destination Palo Alto that includes funding considerations. Staff will return to the Finance Cormnittee with the plan in September or October 2007. Chamber President, Sandra Lo~mquist spoke on behalf of local hoteliers. Ms. Lonnquist discussed concerns regarding the proposed increase in the TOT rate. She stated that companies that bring large groups of people to visit Palo Alto looked for the best rates and those companies would book reservations in nem’by cities rather than pay more to stay in Palo Alto. She asked the Finance Committee to consider what the increase would do to ensure that an increase in the TOT would not decrease the number of beds in Palo Alto. Ms. Lonnquist suggested that a sales tax increase would be more appropriate as it would distribute the responsibility for helping support the community. CMR:294:07 Page 1 of 3 DISCUSSION Collecting TOT from internet bookings has become a growing issue for cities, particularly cities with a large tourist base. Historically, TOT ordinances have applied to bookings made by travel agents and internet bookings made directly with the hotel. In addition, many cities contend that their existing TOT laws, which contain language similar to Palo Alto’s, are broad enough to apply to all hotel bookings conducted ttzrough on-line booking services. Los Angeles and San Diego have already filed lawsuits attempting to collect TOT from online services, and class action status is currently being sought on behalf of all California cities. In the event class certification is denied, it is likely that cities will collaboratively develop an alternative litigation strategy. Given the current developments, staff recommends that no legislative change regarding internet bookings be made at this time. Instead, staff recormnends that Palo Alto continue to monitor the existing class action request and other litigation efforts that develop. NEXT STEPS Should Council move forward with the proposed ballot measm’e, there are a number of procedural requ{rements relating to placing the measure on the ballot. First, the Council must approve the ballot question that will be presented to Palo Alto voters. A proposed resolution is attached as Attachmem B and pursuant to GC 53724(b) such resolution must be adopted by the Council by a two-thirds vote. In addition to increasing the tax rate, the ordinance also clarifies that the tax is a general tax that can be used for any purpose. General taxes can be approved by a majority of the voters, rather than Special taxes which are subject to a two-thirds vote. Second, Council must decide who will draft the ballot argument for the measure. Third, the Council must direct the City Attorney to draft an impartial analysis of the measure. The ballot question may not exceed 75 words, and should be presented in clear and concise fashion so that it is clearly understandable to the electorate. The following language, modeled in large pat after a measure recently approved by Sunnyvale voters, is suggested: Shall the Palo Alto Municipal Code be amended to increase the transient occupancy tax (commonly called "hotel tax") charged to persons who occupy hotel or motel rooms in the City for 30 days or less from 10% to 12% in order to help maintain the City’s abilit3~ to fund basic City services? YES NO The State elections code provides for the filing of arguments for or against each ballot measure. If submitted, one argument "for" and one argument "against" the measure will be printed with the sample ballot. Ballot arguments may be prepared by the City Council, by any member or members authorized by the City Council, or any combination of voters or associations. If the Council desires to submit an argument on the proposed measure, it may so indicate or provide authorization to up to four council members to prepare the argument either for or against the measm’e. Finally, Elections Code Section 9280 provides that the City Attorney may be directed to prepare an impartial analysis of the measure, which is not to exceed 500 words. Direction to prepare such analysis is included in the attached resolution. CMR:294:07 Page 2 of 3 ATTACHMENTS Attactmaent I:CMR 265:07 Attachment 2: Resolution and Ordinance PREPARED BY: WHITE Financial .,Mlalyst, Administrative Services DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: EMILY t~RRISON Assistant City Manager CMR:294:07 Page 3 of 3 ATTACHMENT 1 C ty of Fa o AIto City Manager’s Report TO: ATTENTION: FROM: DATE: SUBJECT: HONORABLE CITY COUNCIL FINANCE COMMITTEE CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES JUNE 19, 2007 CMR: 265:07 REQUEST TO INCREASE THE CITY TRANSIENT OCCUPANCY TAX OF PALO ALTO’S RECOMMENDATION Staff recommends that Council direct staff to authorize a vote of the electorate at the November 6, 2007 election to increase the City’s Transient Occupancy Tax (TOT) from 10 to 12 percent. In addition, staff reconamends that Council consider funding of promotional activities, such as Destination Pa!o Alto, that support tourism. BACKGROUND California Revenue and Taxation Code (7280) authorizes the legislative body of any city or county in the State of California to levy a tax on the privilege of occupying a room, hotel room or other lodging establishment for a period of 30 days or less. This tax is commonly referred to as a "transient occupancy tax" (TOT) or "hotel tax." Palo Alto’s TOT was originally adopted as a general tax by Ordinance No. 2567 in July 1970. The tax is assessed by hoteliers on behalf of the City on transients who stay in Palo Alto for 30 days or less. The tax is imposed on all occupants except officers or employees of a foreign government who are exempt by express provision of federal law or international treaty, as well as state and federal workers on official business. The initial 5 percent TOT was increased to 6 percent in 1976 and was last increased in 1983 to its current rate of 10 percent. In 1986, Chapter 2.33 of the Palo Alto Municipal Code was amended to reflect various administrative changes to the TOT ordinance. Palo Alto’s tax rate of 10 percent is within the median range statewide and slightly above the median rate of 9.75 percent locally. As illustrated in the chart below (see attachment D for full survey of Bay Area cities), most local cities, with the exception of East Palo Alto, have TOT rates of 10 percent. Statewide TOT rates range from 8 percent to a high of 15 percent. CITY TOT RATE San Jose 10 % Mountain View 10% Sunnyvale 9°/; (9.5 effective Jan. 09) Menlo Park 10 % E. Palo Alto 12% Redwood City,10 % tSan Francisco { 14% The number of available rooms in Palo Alto has decreased by 21 percent over the last 5 years. Two hotel closings contributed to the decrease in availability. The Craig Hotel, a 63-room lodging establishment, closed in 2003-04. However, the most significant decrease occurred in 2005-06 when the Hyatt Hotel closed its 350-room Palo Alto location. Palo Alto has 28 lodging establist=nents representing 1,865 available rooms which generated revenues of $6.24 million in 2005-06. Although TOT revenue decreased significantly in recent years, it remains a major source of funding, accounting for more than 5 percent of the City’s total General Fund revenue. Palo Alto’s proximity to the international port city of San Francisco, its vibrant downtown, Stanford Research Park, and its association with world renowned Stanford Hospital and University, make Palo Alto an attractive destination point for business and leisure travel. DISCUSSION The passage of Propositions 13, 62 and 218 made distinctions between ~Tpes of taxes and the voter approvals required to enact them. Tax categories determine when elections are held, how the revenue can be used and what percent of the vote is required for passage. For voting pro-poses, all taxes are categorized as either general or special taxes. Revenue from general taxes may be used for general governmental purposes. Revenue from special taxes is earmarked for a specific purpose. This distinction determines whether a tax must be approved by a majority vote of the electorate (general tax), or a two-thirds vote (special tax). Assuming a TOT tax increase would be used for general government purposes, it must be submitted to the electorate at a regularly scheduled general election at which members of the Council or governing body will be elected, unless, by unanimous vote, the Council finds that there is an emergency that justifies placing the proposed tax before the voters at a special election. The tax will take effect if approved by a 50 percent + 1 simple majority of voters voting in the election. Timetable A general tax ballot measure must be submitted to the County of Santa Clara 88 days before the scheduled regional general election, tf this deadline is not met, the City’s next opportunity to place a measure before the voters will be in November 2009. Staff has outlined the critical procedures and timelines that must be met for the TOT ballot measure to quali~, for the November 2007 general election. Responsibili~’ Finance Committee City Council Required Procedure o Make a recommendation to the full Council regarding adoption of the TOT Ordinance o Pass Finance Committee recommendation to submit TOT tax increase to voters (;/_~ Council vote required). Approve the resolution submitting ballot measure to voters, designate ballot argument authors and authorize the City Attorney to prepare an impartial analysis. Ballot arguments approved. ITimeline June 19, 2007 July 9, 2007 July 9, 2007 August 6, 2007 Upon completion of the required actions, the CitT Clerk will file the resolution with the County of Santa Clara and manage the ballot measure argument process. These actions must be completed no later than the August 6, 2007 Council meeting for the ballot measure to quali~, for the November 6, 2007 general election. Chapter "~ ""~_.oo Administrative Chan~es The use of technology in the hotel industry has expanded to include on-line registration. Internet travel sites such as Expedia, Orbitz, Hotels.corn, Priceline.com and Travelocity are becoming increasingly popular with business and leisure travelers. There are two basic models used for Internet room sales. The first model does not present a collection problem for the City, but the second model can result in underpayment of TOT. The first model simply charges a rate for the hotel and the hotel tax is remitted to the City on that rate. Under the second model, the hotel and the Internet travel company negotiate a discounted rate for the hotel room. The on-line provider then marks up its inventory of rooms to sel! to the public, adds a service charge to the room rate and offers it at the higher price to the customer. It charges and collects taxes from travelers based on the marked-up rate, but only pays taxes to cities based on the lower, negotiated retail rate charged to the customer. The Internet providers argue that the added service charge should not be subject to occupancy taxes because it is not part of the room rate. The Internet companies contend that the service charge reflects the cost associated with operating and marketing their services. Nationwide, municipalities are suing the Internet travel companies alleging substantial underpayment of transient occupancy taxes. Municipalities are responding to this problem through vigilant enforcement as well as clari~qng legislation. Staff recommends that the City’s ordinance be amended to clari~, that the TOT shall be applied to the full hotel rate paid by the actual transient. ragu 3 ot 6 Business Community Outreach In an effort to determine business community response to the proposed increase in the TOT rate, staff contacted twel-~’e of the City’s largest employers. Of the companies that responded, 44 percent indicated that a TOT increase of 2 percent would not adversely affect company business practices. The remaining companies indicated that an increase would make Palo Alto hotels less competitive and could result in their booking reservations at hotels in surrounding communities. Staff has also met with the Chamber of Commerce and made a comnaitment to continue the dialogue process. Summary of Comments: Pro Con "I’m not saying the 2% increase would be critical, but it would certainly go into our calculation. ~’I don’t tl~ink it would make much difference. It’s not that big a deal." "It doesn’t seem like much. It shouldn’t make much of a difference." "There are not enough hotels to begin with. Supply and demand is more the issue. The 2 percent increase is not going to break them, put it that way.’" "We would woro,’ about the hotels in Palo Alto". The increase would make our hotels less competitive and we’d start putting people up in Mountain View". "We as a company are not too happy with it. It increases our budget costs, plus hotel rates themselves are going up. Sur~,eyed other cities and found their rates at 9.5-10 percent with no plans for increasing them. Therefore, we would be likely to put employees and job applicants up in hotels in East Palo Alto, Mountain View, Menlo Park and Los Altos." "Oh, when people visit us, hotel rates are already so high for what we get. We’re nonprofit, so it’s hard to find something affordable. This wouldn’t help." "Would book people at hotels in Mountain View. Get quite a few visitors from the East Coast and from India- who stay for long periods of time. Two percent would make a big difference, particularly when they’re staying at higher priced hotels. Would choose less expensive hotels, with a less expensive TOT, in Mountain View." Tourism Fundin~ Recommendation To support visitor outreach, the City Manager is recommending that Council consider funding efforts that promote tourism in Palo Alto. Destination Pa]o Alto has been established by the City Manager to improve economic growth, by encouraging tourism and visitorship and exploring ways to package and promote marketable attractions in Palo Alto. Through marketing campaigns, these organizations provide an opportunity to simulate the local economy and promote Palo Alto as a destination of choice among prospective business and leisure travelers. Promoting community specific programs and services will give Palo Alto a competitive advantage over surrounding cities, and facilitate tourism by sponsoring events that highlight Palo Aho’s flourishing cultural and historical essence. Managed and funded outreach programs will encourage visitors to explore, experience and return to Palo Alto. RESOURCE IMPACT After modest growth over the past two years, transient occupancy tax revenue surged upward by 12.4 percent in 2005-06. The average citywide occupancy rate consistently exceeded 70 percent in the laker half of 2005-06 for the first time since 2000-01. Average daily room rates rose by 9.7 percent in 2005-06. Per Diem rates in 2005-06 exceeded $130, a level not seen since 2002- 03. First quarter 2006-07 data show both room and occupancy rates rising further. In the first five months of the fiscal year, average citywide occupancy and room rates rose by 4.4 and 4.7 percent, respectively. An increase in the TOT rate of 1 to 2 percent is predicted to increase net General Fund revenues by approximately $624,000 to $1.2 million annually. The proceeds of the TOT as a general tax will be deposited in the City’s General fund and used for general governmental purposes. The past 5 years, 200!-2006, have been the City’s most challenging period of fiscal reform. The regional economic downturn resulted in reductions in the City’s workforce and reductions to the General Fund expense base of approximately $20 million. As the City develops a "sustainable budget" and meets the $3 Million infrastructure challenge set as a policy by the Council, it must consider new revenue sources. Without identi~’ing new revenue sources, further cost savings and service reductions will be necessary. As the City evaluates options, among the opportunities for revenue generation is the potential to increase the TOT. POLICY L/IPLICATIONS The actions described in this report are consistent with existing City policy. ENVIRONMENTAL REVIEW The actions described in this report do not constitute a project for the purposes of the California Environmental Quality Act. PREPARED BY:~ i .~ ..I’ ~.. i,; ..L .~t A.A.4.... ~ ,..~- r" ~’ "_........’"/JOYCE WHITE/ Senior Financial Analyst DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: CARL "~ EATS /~ Director. Admifistrative Services Assistant City Manager ATTACHMENTS A~tachment A: Resolution Calling a General Municipal Election Attactm~ent B: Resolution to Amend Palo Alto Municipal Code Attachment C: Ordinance Amending Chapter 2.33 of Title 2 of the Palo Ako Municipal Code Attaclm~ent D: Survey of Bay Area TOT CMP.: 265:07 Page 6 o~’6 ** NOT YET APPROVED** RESOLUTION NO. RESOLUTION OF THE CITY COUNCIL OF PALO ALTO CALLING A SPECIAL ELECTION FOR NOVEMBER 6, 2007, FOR SUBMITTAL TO THE QUALIFIED ELECTORS OF THE CITY A MEASURE RELATED TO THE CITY’S TRANSIENT OCCUPANY TAX AND ORDERING CONSOLIDATION WHEREAS, pursuant to Section 2.33.020 of Title 2 of the Palo Alto Municipal Code, the City currently levies a Transient Occupancy Tax; and WHEREAS, the City Council desires to amend the Palo Alto Municipal Code to increase the transient occupancy tax (commonly called the "hotel tax") which is charged only on persons who occupy hotel or motel rooms in the City for 30 days or less, from the current 10% to 12% and to make other revisions to the method of calculating the tax in order to help maintain basic City services; and WHEREAS, the City depends on the hotel tax to fund basic City services; WHEREAS, a proposed ordinance attached hereto and incorporated herein by reference as Attachment "A" (the "Ordinance") would implement these proposed revisions to the tax; WHEREAS, by its Resolution No. 8715, the City, Council called a general municipal election for November 6, 2007 ("Election") and; WHEREAS, pursuant to Government Code Section 53724 and Election Code Section 9222, the City Council desires to submit the Ordinance to the voters of the City. NOW THEREFORE, THE CITY COUNCIL OF THE CITY OF PALO ALTO DOES HEREBY RESOLVE, DECLARE, DETERMINE AND ORDER AS FOLLOWS: SECTION 1. Findings. The City Council finds and determines that each of the findings set forth above are true and correct. SECTION 2. General Tax Election. The City Council proposes to impose the general tax set forth in the Ordinance and to present this proposal to the voters on November 6, 2007. SECTION 3. Measure. Pursuant to Elections Code Section 9222, the City Council hereby submits the Ordinance to the voters at the Election and orders the following question to be submitted to the voters at the Election: 070702jb 0130115 ** NOT YET APPROVED** Shall the Palo Alto Municipal Code be amended to increase the transient occupancy tax (commonly called "hotel tax") charged to persons who occupy hotel or motel rooms in the City for 30 days or less from 10% to 12% in order to help maintain the City’s ability to fund basic City services? YES NO This question requires the approval of a majority- of those casting votes. SECTION 4. Adoption of Measure. The measure to be submitted to the voters is attached to this Resolution as Exhibit A and incorporated herein by this reference. SECTION 5. Notice of Election. Notice of the time and place of holding the election is hereby given, and the City Clerk is authorized, instructed and directed to give further or additional notice of the election, in time, form and manner as required by law. SECTION 6. Impartial Analysis. Pursuant to California Elections Code Section 9280, the City Council hereby directs the City Clerk to transmit a copy of the measure to the City Attorney. The City Attorney shall prepare an impartial analysis of the measure, not to exceed 500 words in len~h, showing the effect of the measure on the existing law and the operation of the measure, and transmit such impartial analysis to the City Clerk on or before August 22, 2007. SECTION 7. Consolidation Request. The Council of the City, of Palo Alto requests the governing body of any other political subdivision, or any officers otherwise authorized by law, to partially or completely consolidate such elections and the City Council consents to such consolidation. SECTION 8. Request for CounW Services. Pursuant to Section 10002 of the California Elections Code, the Council of the City of Palo Alto hereby requests the Board of Supervisors of Santa Clara County to permit the Registrar of Voters to render services to the City of Palo Alto relating to the conduct of Palo Alto’s General Municipal and Special Elections which are called to be held on Tuesday, November 6, 2007. The services shall be of the Dye normally performed by the Registrar of Voters in assisting the clerks of municipalities in the conduct of elections including, but not limited to, checking registrations, mailing ballots, hiring election officers and arranging for polling places, receiving absentee voter ballot applications, mailing and receiving absent voter ballots and opening and counting same, providing and distributing election supplies, and furnishing voting machines. SECTION 9. Transmittal of Resolution. The City Clerk is hereby directed to submit forthwith a certified copy of this resolution to the Board of Supervisors, to the Registrar of Voters, and to the County Clerk of the County of Santa Clara. 070702jb 0130115 ** NOT YET APPROVED** SECTION 10. Exemption from CEQA. The City Council finds that this resolution is exempt from the requirements of the California Environmental Quality Act (CEQA). INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST:APPROVED: City Clerk Mayor APPROVED AS TO FORM: Senior Asst. City Attorney City Manager Director of Administrative Services 070702jb 0130115 3 ** NOT YET APPROVED** EXHIBIT A ORDINANCE NO. ORDINANCE AMENDING CHAPTER 2.33 OF TITLE 2 OF THE PALO ALTO MUNICIPAL CODE RELATING TO THE TRANSIENT OCCUPANCY TAX The People of the City of Palo Alto do ordain as follows: SECTION 1. Chapter 2.33 of the Palo Alto Municipal Code is hereby amended by amending Section 2.33.020 as follows: 2.33.020 Tax imposed For the privilege of occupancy in any hotel, each transient is subject to and shall pay a tax in the amount of ten ~ no/~~ ....j twelve (12%) percent of the rent charged by the operator. Said tax constitutes a debt owed by the transient to the City, which is extinguished only by payment to the operator or to the City. The transient shall pay the tax to the operator of the hotel at the time the rent is paid. If the rent is paid in installments, a proportionate share of the tax shall be made with each installment. Any unpaid tax shall be due upon the transient’s ceasing occupancy in the hotel. If for any reason the tax due is not paid to the operator of the hotel, the Supervisor of Revenue collections may require that such tax shall be paid directly to the Supervisor of Revenue Collections. SECTION 2. GENERAL TAX. Proceeds of the tax imposed by this Ordinance shall be deposited in the general fund of the City and shall be available for any legal purpose. SECTION 3. CONSTITUTIONALITY; SEVERABILITY. If any section, subsection, sentence, clause or phrase of this ordinance is for any reason held to be invalid, such decision or decisions shall not affect the validity of the remaining portions of this ordinance. The People hereby declare that they would have passed this ordinance, and each section, subsection, sentence, clause and phrase thereof irrespective of the fact that any one or more sections, subsections, sentences, clauses or phrases be declared invalid. SECTION 4. EFFECTIVE DATE. This ordinance shall be effective immediately upon adoption. However, the increased tax imposed by this ordinance shall be effective only with respect to rent paid to a hotel operator for the portion of an occupancy that occurs on or after January 1, 2008. The tax with respect to any portion of 070702jb 0130115 4 ** NOT YET APPROVED** an occupancy occurring before January 1, 2008 shall be levied at the rate in effect before the adoption of this Ordinance. SECTION 5. EXECUTION. The Mayor is hereby authorized to attest to the adoption of this Ordinance by the voters of the Cib, by signing where indicated below. I hereby certify that the foregoing Ordinance was PASSED, APPROVED and ADOPTED by the people of the City of Palo Alto voting on the 6th day of November, 2007. ATTEST:APPROVED: Cit?, Clerk Mayor 070524jb 0130115