Industry watching Petaluma’s tax hike debate

As Petaluma officials explore the possibility of asking voters to approve two tax measures that would increase the cost of hotels stays and real estate transitions, key professionals in those industries are cautiously watching the discussion.

As the taxes are taking shape, professionals and taxpayer advocacy groups are largely taking a wait-and-see approach, though some are forecasting opposition to the measures on the June 2018 ballot. City officials touted the taxes as a way to shift the burden from the majority of residents while still infusing cash into the city’s lagging budget.

At a July 24 meeting, the city council expressed interest in exploring a 2 percent increase in the transient occupancy tax, which is charged for stays in hotels and short term rentals. The city will also look into asking residents to vote for a bump in the real property transfer tax, which is levied on property and homes sold within the city.

Next comes outreach, community education and polling, which will help influence decisions about issues like bundling the two tax increases into a single ballot measure and the amount to increase the transfer tax. More discussions will occur before a formal vote is taken to put any measures on the ballot, which will happen around March, City Manager John Brown said.

Officials say these measures are necessary as the city is staring down a budgetary shortfall in two years. Despite attempts to cut pension costs, which are mostly tied to former city employees, costs are anticipated to increase by $1 million each year for the next 10 years after changes to California Public Employees’ Retirement System at the state level.

In a statement released the week, the Sonoma County Lodging Association declared that the group of innkeepers is “neutral” on the proposed ballot measure. The group would be opposed to any decrease in funds used to promote the region, which it says would impact marketing efforts, negatively impacting tourism and diminishing the city’s own revenue.

According to the budget, the city also collects a 2 percent assessment for the county’s tourism program. The city’s tax revenue can be used for any governmental purpose, and for the past several years, extra funds have been directed to the Petaluma Visitor’s Program.

“Sonoma County Lodging Association agrees that visitor tax revenues are an appropriate way to help fund shared services that visitors use when visiting the area,” the statement read. “SCLA supports a strong and continued destination marketing approach for the community of Petaluma and the County of Sonoma to attract visitors throughout the year.”

A 2 percent increase in Petaluma’s transient occupancy tax would boost it to 12 percent – equal to highest rates charged in Sonoma County. Healdsburg, Windsor and Rohnert Park currently have a 12 percent bed tax, while Santa Rosa’s is the lowest, at 9 percent.

An increase in that tax could generate an additional $650,000 a year on top of the current $2.75 million in revenues, according to city projections. The city will also see an estimated $500,000 increase in revenue when the Marriott at the Riverfront development and the Silk Mill Hotel open, which could boost annual revenues by $1.15 million, according to city projections.

Scott Satterfield, the general manager of The Sheraton, Petaluma’s largest existing hotel, said increasing the tax would impact his business.

“Obviously, we would prefer to be lower in tax rates,” he said. “I think a lot of folks think that it’s easy to tax people who are not voting for the taxes and are coming from out of town. Honestly, it does impact the number of visitors that come to our town.”

The 184-room hotel has an 85 percent average occupancy rate, he said, and he fears additional costs might drive away those looking for group bookings. For the individual hotel guest, the prospect of paying a higher tax rate doesn’t necessarily influence a decision, but for groups, it’s a definite factor, he said.

Also up for consideration is a $1 or $2 increase in the current rate of $2 per $1,000 of value in real property transactions. At its current level, that tax will bring in an estimated $1.15 million this fiscal year. Assuming the average home price is about $635,000 increasing that tax by $1 would add $635 to the average cost of a home sale while netting $600,000 annually for the city. A $2 bump would add $1,270 to the transaction costs while bringing in $1.2 million, according to the city’s projections.

Alan Maicel, a local real estate agent and the president of the Petaluma chapter of the North Bay Association of Realtors, said that although the chapter has no formal stance yet, future opposition is likely.

“We’ll wait to see how it plays out, but I can tell you there will be a big push back from the real estate community,” Maicel said.

Last year, 601 homes were sold in the Petaluma area, both within the city limits and in the unincorporated areas, with an average cost of $729,000. About 500 of those homes were inside the city limits, and would have been impacted by an increase, Maicel said. While an increase won’t be a deal breaker for most, Maicel said it adds extra costs that are likely to make the seller displeased.

“Is that enough to kill a deal when we’re talking $730,000? No. But when was the last time that there was a tax that everyone was happy about?” he said.

Dan Drummond, the executive director of the Sonoma County Taxpayer’s Association, said he’s watching the process closely. He said he recognizes the city’s financial plight, but has initial concerns about ensuring that the money is used responsibly. The taxes would likely be general use, meaning those funds aren’t earmarked for a specific purpose.

“I recognize that the city is in a tough spot and needs to do something,” he said. “My concern of course is that the money it generates is used for purposes it’s intended for.”

He said that the council, or at least some of its current members, played a role in approving employment deals that paved the way for the current crisis.

“You’re trusting money to the same people who made the decisions that got us into this place,” he said. “It’s a conundrum. I don’t have a simple, easy answer ... I want to be optimistic.”

Councilman Gabe Kearney, a local real estate agent, predicted dissent from hotel and real estate groups at the July 24 meeting.

“We need to do education about why we’re doing it and give people clear reasoning,” he said at the meeting.

City officials say they’ve already taken drastic measures to cut costs, including slashing the workforce, minimize pension costs and putting off maintenance projects. If there’s no new revenue, services would be further reduced.

The city is projected to spend $12.96 million on benefits in the current fiscal year – up nearly 4 percent from the previous budget. In the next 30 years, it’s facing as much as $466 million in unmet infrastructure needs, according to a staff report.

Current projections show the imbalance in the budget is estimated to rack up to $37.1 million by fiscal year 2026.