An Open Letter to City Council on Taxation

There has been much discussion recently about our ability to adequately fund community-based social safety net programs while simultaneously balancing our ever-increasing budget. Indeed, the city's finance manager predicts budget deficits will continue for the foreseeable future with no realistic or sensible plan to recover that shortfall. I believe it is time for our council to look at more imaginative, resourceful and practical ways to fund a full range of these programs within the bounds of sensible spending and before asking residents to add yet another half percent to an already stiff local sales tax.

There currently seems to be a consensus among public policy makers, law enforcement and city officials that a robust and supportive social safety net, anchored by mental and behavioral health services and support, is critical to creating positive outcomes for people in physically or psychologically challenging circumstances in our community. And just as certainly, we seem to agree that community policing and public safety programs can only succeed by increasing access to these services as a central part of an overall strategy. The question that confronts our community is how do we pay for it? I suggest a three-pronged strategy that both restores balance to our city budget while providing additional revenue for much needed social services. I propose (1) an increase in the Transient Occupancy Tax (TOT); (2) a decrease in the number of approved and regulated vacation/Airbnb units and (3) a modest increase in our current real property transfer tax.

The first prong of this integrated strategy would be a 1% increase in the TOT. Local history tells us that a proposal to designate a portion of our TOT revenue to social services is not an original idea. Indeed, a measure to increase the TOT 1% with 30% of that increased revenue to be applied to homeless services was placed before the voters in 2000. And while that measure did not receive the required two thirds majority needed for passage, it did receive approximately 13,000 yes votes to about 11,000 nays. This indicates to me that the idea of TOT revenue being used to supplement community based programs was one that the residents of Santa Cruz (and perhaps even our lodging industry itself) generally favored at least in concept. Our tax is currently levied at a rate of 11% in the City of Santa Cruz. Estimated revenue from the TOT has come down from 11 million dollars just two years ago to about 8 million in the last two years. Assuming that at least some of that reduction was due to pandemic related causes, (2022 revenue estimate is 9.6 million) there is every reason to believe that TOT revenue will eventually rebound and perhaps even equal the 16 to 17 million dollars the fund generated as recently as 2017. Prudence, sound financial planning and good common sense would dictate that we get ahead of the curve and take advantage of that revenue rebound.

I propose that we put a measure on the ballot which would raise the TOT to 12%. This is both reasonable and timely in consideration of the fact that the most recent increase in the TOT (from 10 to 11%) was approved by the voters of Santa Cruz in 2012. Moreover, this increased rate would be in line with regional vacation destination municipalities so as not be place our lodging industry at a competitive disadvantage. The additional revenue would not be entirely designated to the community programs budget. However, it would be eminently reasonable and fiscally responsible to designate 40% of that increased revenue to the fund which could make a real difference is terms of measurable results produced and lives changed for the better within our city. That’s the first prong.

The second prong of this strategy is directly related to the first. As most residents know, the TOT is defined as a tax on any rental unit offered “for hire for 30 days or less.” This tax is levied on traditional units such as those offered in our local hotels and motels as well as on short term rentals which have gone virtually unregulated in recent times and exacerbated by the modern Airbnb boom. But here’s where the synthesis of strategies really begins. Private vacation or Airbnb rentals only bring in about a third of the TOT income per unit compared to hotel/motel units. That right, about 1/3. And although we have several hundred hotel units under construction in our city, we also have hundreds of vacation rental units which, if not regulated and reduced in number, will generate a fraction of the future income of the hotel units when they come on line. The City of Santa Cruz has determined, through both City Council and Planning Commission consideration, that a policy of developing more and higher end hotel units is in the best economic interest of our community. But this policy cannot exist in a vacuum. Either we stay the course and confirm our faith in this policy by reducing the number under-performing vacation rentals, or we give ourselves over entirely to the prospect of runaway private enterprise and unbalanced budgets.

The third prong of this financial strategy is more problematic. Increasing real property transfer tax has always been the third rail of local politics: you touch it, your political career dies. Real property ownership and transfer in Santa Cruz has been viewed as sacrosanct and the protection of those rights has risen to the level of a civil and political duty. And yet, even a fractional increase in transfer tax could provide a much needed boost to our general fund.

As we know, property transfer taxes are derived from the selling price of your home. The California Revenue and Taxation Code states that all the counties in California have to pay the same rate. The current tax rate is $1.10 per $1000 or $0.55 per $500. So, if your home sells for $600,000, the property transfer tax is $660. Our city rate is half that, i.e, $0.55 cents per $1000. Admittedly, our transfer tax is no more or less that neighboring communities such as Monterey, Seaside or Salinas, but that doesn't mean that we can't look to a modest increase during these dire financial times for Santa Cruz.

As a political matter, this three-pronged approach is both problematic and challenging. But the formula for prosperity, balanced budgets and adequate social services requires that every community partner shoulder their fair share of the economic burden if we are to maintain the level of city services that we all enjoy and benefit from. Residents continue to do their share; now is the time for our lodging and real property partners to do theirs.

Respectfully,

Steve Pleich