In a surprise announcement this week, the city of San Diego said it will begin collecting May 1 a higher hotel room tax that will go toward funding a long-sought expansion of its bayfront convention center and homeless services, even though litigation challenging the levy is still ongoing.
The decision to move forward with the voter-approved tax hike marks a key milestone in the more than decade-long struggle to finance a costly convention center project that at one time was expected to run as high as $850 million.
Measure C, the March 2020 ballot measure that called for an increase in the transient occupancy tax to pay for multiple civic initiatives, was approved by a nearly two-thirds margin. However, it has been tied up in court for years over the question of whether it could prevail with only a simple majority vote. While the city got the legal validation it needed last year from a Superior Court judge, the case remains on appeal over several different issues, including the question of whether the measure is in fact a citizen-sponsored initiative that would allow it to be approved without a two-thirds majority.
Implementation of the tax increase also comes years after the convention center project was conceived. Since then, construction costs have increased dramatically. And it remains unclear what kind of project will move forward — and when.
“The City will work with stakeholders to determine how best to proceed to improve the Convention Center to ensure the longevity and success of this essential economic asset,” Rachel Laing, spokesperson for Mayor Todd Gloria, said Friday.
In addition to financing an expanded convention center, the measure includes substantial funding for homeless services and road repairs. At the time the hotel tax measure went before voters, it was estimated that it would generate, over the course of 45 years, close to $7 billion, with $4 billion dedicated to the convention center expansion, $2.1 billion for homeless initiatives, and a much lesser amount — $650 million — for road repairs.
In its news release announcing that the higher tax would go into effect in May, the city said it expects the increase to generate roughly $82 million in the fiscal year starting July 1. And over the first 10 years, it would yield approximately $1.04 billion in additional revenue, with most of it reserved for the convention center and city initiatives to address homelessness, including shelter and programs, as well as permanent ive housing.
Money for street repairs — 10% of the tax revenue — would not kick in until the sixth year.
While making no reference to the still outstanding appellate court case related to Measure C, the news release states, “Following voter approval of Measure C in 2020, implementation was delayed due to legal challenges. The City has prevailed in trial court and is moving forward with increasing the TOT, currently at 10.5%, to be paid by hotel guests, and visitors staying in RV parks and short-term rental properties.”
It was ultimately Gloria’s decision to move ahead with collecting the increased tax despite the pending court case.
“It’s been five years since voters approved Measure C to have tourists pay for top city priorities. It’s time,” Laing said. “We’re setting the funds aside until full resolution of the legal challenge.”
Attorney Michael Colantuono, who represents the coalition of business, labor and tourism leaders backing Measure C, said he shares the city’s confidence in moving forward with the tax collection, given what he believes is a weak appeal by attorney Cory Briggs, who represents the group, California Taxpayers Action Network. Colantuono expects a ruling could come later this year.
“There was never a court order prohibiting the city from collecting the tax,” he said. “The city’s decision (to initially delay collecting the tax) was an exercise in legal conservatism, and the city apparently is viewing it differently now. And we share the city’s confidence. Only something like 37% of civil appeals are successful, and most of the issues Cory has raised are outside the scope of dispute that the Court of Appeals said is still available.”
Briggs, who has argued that local government officials had significant involvement in the drafting of Measure C, such that it would be disqualified as a citizens’ initiative, said he had no comment on the city’s move to begin collecting the increased tax.
The new hotel tax rate will vary, depending on how close hotels are to the downtown convention center. For those properties closest to the center, the rate will be 13.75%. Guests staying in hotels in mid-range locations will pay 12.75%, while those farthest away will be charged a rate of 11.75%. The effective rate for all visitors, though, would be two percentage points higher because of an existing 2% room surcharge that goes specifically for tourism marketing.
While Measure C backers are confident they will prevail over Briggs’ legal challenge, a key question remains as to whether the revenue generated by the hotel tax increase will be enough to finance the convention center project. Construction costs have soared in the past several years, and even more so since the project was approved by the California Coastal Commission in 2013.
Officials with the Port of San Diego, which oversees tidelands properties like the convention facility, and the Convention Center say there have been no changes or updates to the project scope in the past several years.
“As we gather more information about the increased revenues and their impacts on the Convention Center, we expect to enter into a period of collaboration and coordination with the City and the Port of San Diego regarding the timeline for improvements, design, and other specifics,” said Rip Rippetoe, president and CEO of the San Diego Convention Center. “A dedicated revenue stream for the San Diego Convention Center’s expansion, modernization, promotion and operations could enable us to accommodate more events and bring more attendees to the region, which could lead to more jobs and generate even greater economic benefits for San Diego.”
While San Diego’s hotel industry has long been an advocate of a much enlarged convention center, the San Diego County Lodging Association offered something of a tepid response Friday to news that hotel guests’ bills will soon be larger. Less than two months notice is too short, it said.
“The San Diego County Lodging Association was a chief er of Measure C given the requirement that funds would be used to pay for a much-needed Convention Center expansion, citywide infrastructure improvements, and efforts to address homelessness,” said hotelier Robert Gleason, who chairs the Lodging Association. “Unfortunately, the reality is that an increase in TOT does make travel to San Diego more expensive and is happening at a time when we are facing economic instability, travel uncertainty, austerity in government spending, and the prospects of a hotel industry minimum wage proposal. Decisions of this magnitude require ample notice to allow hotel operators to have their questions addressed and provide time for proper procedures to be in place to ensure compliance.”
The revenue designated for addressing homelessness could be deployed much sooner. City of San Diego spokesperson Nicole Darling said the money could be used more immediately to help make up for the city’s budget shortfall in homeless funding and to also maintain existing programs in the fiscal year.
In the meantime, one complicating factor affecting the convention center project is the city’s lack of control over two key waterfront leaseholds that are crucial for expanding the center.
Fifth Avenue Landing (FAL) currently holds the leases, one of which expires in 2027 and another in 2030 with two five-year options. The city and San Diego Convention Center Corp. wrangled with FAL off and on for years to work out an agreement to regain control of the leaseholds.
As the vote on Measure C approached, negotiations with longtime tenants Ray Carpenter and Art Engel, who control the Fifth Avenue Landing property, resumed, and they ultimately agreed to turn over their leasehold in return for a $33 million payment should voters approve the hotel tax hike. But it was conditioned on what was expected to be a November 2019 public vote, which didn’t happen until March of the following year.
Should the city proceed with the convention center expansion, negotiations would likely have to be reopened before the project could move forward. Measure C does allow the hotel tax proceeds to be used, alternatively, for infrastructure improvements and “modernization” of the center.
