Mid-Year Budget Update and June Hotel Room Tax Hike

By Zach Friend, Supervisor, Second District

The Board of Supervisors recently received a mid-year budget update. While there were some positive indicators with revenues recovering from the pandemic impacts, some challenges remain. Here is an overview of the budget as it stands mid-year.

Key Trends

Overall, General Fund core revenues have recovered from significant pandemic impacts. The big three revenue streams, Property Tax, Sales Tax and Transient Occupancy Tax (hotel/vacation rental) have all increased.

For example, sales tax is projected to finish this year with at least 7 percent growth, property tax 4 percent growth and transient occupancy tax at 31 percent annual growth. Additionally, a budget surplus at the state should provide additional revenues to the county for various health and human service functions and potentially funding for wildfire mitigation and other needs.

However, nearly $19 million in pandemic related costs appear to not be covered by the federal government and the County contributed $5 million toward the acquisition/operation of Watsonville Community Hospital with the Pajaro Valley Health Care District project as the new the successful bidder for public ownership of the hospital.

Property Tax Revenue

As part of the budget presentation, information was shared regarding property tax revenues and how much stays locally. We often receive questions about property taxes (given the high amounts people pay on local assessed value) and how much of your property tax dollar stays locally.

Due to a Prop. 13 formula, the County of Santa Cruz retains some of the lowest amounts of property taxes of any other County in the state. Only 13 percent of your property tax dollars end up back with County government to fund our local services.

On average, this equates to $463 of property tax dollars per resident. By comparison, Santa Clara County (under the Prop. 13 formula) retains $10,831 of property tax dollars per resident – San Mateo County about $4,500 and Napa County about $4,000. Approximately 50 percent of residents live in the unincorporated county (compared to about 4.5 percent or so in Santa Clara County).

This has significant impacts on how the County provides services. As you can imagine, counties that are able to retain higher amounts under their Prop. 13 formula have more money available for roads and services without needing new funding streams to backfill these needs.

If the Prop. 13 formula were to change in the state at some point in the future, unincorporated residents could see significant improvements to services and infrastructure without increased taxes – by simply having more of your local property tax dollars stay with local County government. As Prop. 13 was approved by voters as a state constitutional amendment, any changes to the formulation and distribution cannot occur at the local level.

Sales Tax

Similar to property tax, the County receives a lower share of sales tax than local cities in our County or other counties in the region. Half of the population lives in the unincorporated county but the County receives less sales tax per capita than local cities.

While it is common that the unincorporated area of a county does not contain the same number of commercial or brick and mortar zones as local cities, our County has less sales activity than peers across the State.

For example, Santa Cruz County receives about $89 of sales tax per-resident while Napa and San Mateo counties receive well over $400 per-resident. Local cities in our county average over $275 per-resident.

Further exaggerating this underfunding is that all online sales taxes are distributed to each taxing entity based on their proportional share of sales tax in their jurisdiction, and not based on where the online shoppers live.

Until there are more comprehensive sales tax reforms, the County will not fully benefit from the online sales from the 50.5 percent of residents who live in the unincorporated area.

Proposed June Funding Measure

Transient Occupancy Tax (TOT) is imposed by most cities and counties on hotels, motels, inns, and similar lodging establishments on persons staying overnight for thirty days or less. Typically, the lodging provider collects the tax from the guests and turns the funds over to the County or City.

The County currently imposes an 11 percent TOT, which was approved by voters as a general tax. Together with local cities, TOT has been levied locally for more than two decades.

The last increase to the TOT was passed by voters in 2012.

At the time, it increased the TOT in the unincorporated area from 9.5 percent to 11 percent, a figure arrived at after discussion with the Santa Cruz County Hospitality and Lodging Association and the Cities of Santa Cruz and Capitola.

Similar outreach was conducted this year to consider an increase in the TOT. If approved by voters, and with an effective date of Jan. 1, 2023, this proposal would increase the County’s TOT rate for hotels, motels, and inns from 11 percent to 12 percent, generating approximately $160,000 in the first year and add $440,000 to the base for FY 2023-24.

Nearly all of the budget for these funds are paid for by those visiting our community from out of the area. For vacation rental properties, this proposal would increase the TOT rate from 11 percent to 14 percent, generating approximately $700,000 in the first year and add $1.9 million to the base for FY 2023-24.

The additional revenue would be treated as part of the General Fund resources used to fund mandated programs and critical services that are not fully funded, such as public safety, parks, and public health operations.

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As always, I appreciate any feedback you may have on this (or any other County issue). I’m maintaining regular updates on social media at www.facebook.com/supervisorfriend and you can always call me at 454-2200.

Editor’s note: The deadline to get a measure on the June 7 ballot is March 11.