Solving San Diego’s Budget Deficit Problem: Hotel Taxes and the Tourism Industry

Sharanjit Singh, University of California, San Diego

The City of San Diego should increase its Transient Occupancy Tax (TOT) to at least 14% or higher to help curb the current budget deficit. Instead of reinvesting the tax revenue into tourism marketing districts, the income should be directed toward the city’s General Fund to help support under funded city services.

The City of San Diego has a debt looming over its head that will grow unless a cut in spending or acquisition of new capital takes place. The deficit reflects unfunded budgetary needs of city services and public goods. Experienced police officers have fled the city to work for agencies providing Key Facts • Since 2003, San Diego budget reductions better pay; even construction have amounted to a total of $126.9 million. workers are having trouble fix• The City of San Diego currently has a Traning pipe ruptures. The deficit sient Occupancy Tax of 10.5%, whereas San is expected to reach $32 milFrancisco and Los Angeles have a TOT of 14%. lion in 2009 and $85.3 million • San Diego has a hotel room occupancy rate in 2011. Instead of relying upon of 73.30%, a RevPAR (revenue per available one time solutions like diving room) of $95.843. into reserves to balance the • Only 1/6th of the revenue generated by the budget, the city should seek Transient Occupancy Tax actually goes into out more permanent sources the city’s general fund. of income. San Diego has a lucrative tourism industry; the city can afford to levy more taxes on the hotel industry. As San Diego attempts to subsidize the hotel industry, other cities make hoteliers pay for impacts of their developments and essential services.
Talking Points • In 2004, the City of San Diego Fire Department had an unfunded budgetary need of $38 million, and departments in the city as a whole had an unfunded need of $274.2 million. • San Diego does not require heavy tourism advertising paid for by the city; the tourism industry is largely self-driven, as evidenced by the city’s high hotel room occupancy and RevPAR. • The revenue generated by the Transient Occupancy Tax should be redistributed so that at least two-thirds of it goes into the city’s General Fund.

History Increasing the rate of a Transient Occupancy Tax is not uncommon in California. However, to raise the TOT in a city, an amendment to the city charter is required. In San Diego, the proposal must be placed on a ballot measure and muster up the required a two-third vote. In the November 2004 elec-

tion, Proposition J went before San Diego asking the public to back a 2.5% increase in the tax, putting the TOT at 13%. However, with 58.41% of voters saying “no” Proposition J did not get very far. A San Diego Union Tribune writer notes, “People resist the idea of raising taxes or fees, well aware that San Diego is a taxaverse city; voters in 2004 even rejected two measures that would have raised taxes for tourists but not residents.” Analysis According to the San Diego Convention and Visitor’s Bureau the city raked in $150,417,640 during 2007 demonstrating strong positive growth in TOT revenue since 2007. If a subsequent TOT increase performs just like it did in 2007, then we can set up a proportion to estimate how our tax increase will perform. If the 10.5% tax yielded a total of $150,417,640 in 2007, then proportionally a 14% tax in 2007 could have yielded $200,556,853. Only 1/6th of the TOT revenue goes into the city’s general fund. Even at that rate, Proposition J was expected to provide the General Fund with $28 million, sufficiently cushioning city service needs. Audience This proposal focuses on a city tax increase and therefore would be of most use to the City Council of San Diego who first agreed upon the terms of the Transient Occupancy Tax in the city charter. Other than the local government, residents of San Diego, the voters, are the primary beneficiaries and decision makers of the tax. Next Steps San Diego should immediately seek out community benefit agreements with hoteliers, giving the city more incentives to support the industry and its demanding infrastructure. Furthermore, the city should immediately attempt to draft a ballot measure to increase the Transient Occupancy Tax to 14%, but must first educate tax wary San Diegans that the TOT is specifically a hotel tax, and not a tax against residents. ————————————

———————————— Baxamusa, Murtaza. “The Truth about TOT.” Voi deChapter03/Ch03Art05Division01.pdf, 4 March 2008. http://www. Ernst and Young, “2007 U.S. Lodging Report,” cafesandiego/928baxamusa1122007.txt EYGM Limited, 2007. ernst-andyoung/international/s?Industry_ City of San Diego Independent Budget Commit Real_Estate_2007USLodingReport&nsytype= tee. “City of San Diego Structural Budget pdf&ns_url=[ Defcit,” Office of the Independent Budget sets.nsf/International/Industry_Real_ Analyst Report. 14 February 2008. http:// Estate_2007USLodingReport/$file/Industry_ Real_Estate_2007USLodgingReport.pdf] City of San Diego. “San Diego Municipal Code: *A full list of sources is available upon request Article 5, Chapter 3, Sec. 35.0103” http://