Facing yet another major budget shortfall, San Jose leaders have greenlit a proposal to hike taxes on hotel stays as a means of boosting revenue for city services.
The City Council voted unanimously Tuesday in favor of placing a measure to increase the city’s hotel tax, also known as a transient occupancy tax, on the June 2 primary election ballot. The proposal would raise the tax, levied on hotel guests, from 10% to 12% — a level that still falls below most other major cities. City officials estimate the hike would raise an additional $10 million in tax revenue each year.
Officials said the proposed tax increase stems from a broader effort to find new sources of revenue and stabilize the city’s budget, which has suffered regular deficits in recent years. However, the proposal also faced pushback from business leaders, who warned the tax could make San Jose’s hospitality sector less competitive, as well as from advocates for local arts and culture.
“I think at the core this conversation is about how we protect city services and close a deficit that threatens them,” District 5 Councilmember Peter Ortiz said during the meeting. “We owe it to our residents to do everything we can to avoid layoffs and prevent cuts to the departments people rely on every single day.”
The estimated $10 million in additional revenue raised by the 2% tax increase would go to the city’s general fund. That means it could be spent on a variety of city services — everything from public safety, to homeless encampment management, to park maintenance.
The ballot measure will need a simple majority to pass. If voters approve it, it would then take effect Oct. 1. All ballot measures for the June primary must be filed with the Santa Clara County Registrar of Voters by March 6.
Some San Jose business leaders urged councilmembers to delay the ballot measure — potentially placing it on the November ballot instead — to give more time to consult with hotels and other businesses to understand how they might be affected by the higher tax.
“Increasing the tax without this clarity — and without meaningful industry input — risks placing San Jose’s hotels and visitor-serving businesses at a competitive disadvantage relative to peer cities,” San Jose Chamber of Commerce CEO Leah Toeniskoetter wrote in a letter to the city.
The recent start of a new budget cycle in San Jose has added even more urgency to the hotel tax discussion. As city leaders work out a budget for the coming fiscal year, beginning July 1, San Jose faces a projected deficit of up to $65 million. The shortfall has raised the possibility of significant service cuts and employee layoffs.
“The city is needing to identify a comprehensive approach to the structural deficit challenges it’s facing,” Jean Cohen, executive officer of the South Bay Labor Council, told San José Spotlight. “This (hotel tax increase) is one of many tools that they need to consider to make sure that the city is able to stay open for business.”
In recent years, San Jose has looked into a number of potential methods to boost cash flow, including changes to its sales tax, business tax and local fees. As part of Tuesday’s vote, councilmembers also directed staff to provide an update on their review of the city’s business tax in the coming months.
District 10 Councilmember George Casey expressed concern about any measure that might introduce a heavier tax burden on local businesses.
“Our structural deficit has to do with our jobs and housing imbalance,” Casey said. “The wording used is ‘additional revenue,’ and we can’t get additional revenue unless we raise taxes on folks … that’s a top consideration when companies decide where to locate or where to leave from.”
A city commissioned poll gauging support for the hotel tax proposal among voters found 55% are likely to support the increase. The poll found 32% of respondents opposed the measure and another 12% remained undecided.
San Jose officials have argued the 2% increase likely will not be enough to significantly harm the city’s hotel business. They noted even at 12%, the city’s hotel tax would still remain well below levels imposed in other major cities, including nearby competitors for tourism dollars. For example, San Francisco and Oakland have set their hotel taxes at 14%, according to the memo.
San Jose hotels also face a number of fees that substantially increase their effective tax rate, the memo notes.
Meanwhile, local arts advocates flooded the city with letters urging councilmembers to direct a share of the new revenue to the city’s arts programs. A portion of San Jose’s hotel tax already goes to support things such as cultural grants and public arts, but advocates have argued the long-neglected sector deserves a larger share.
“Art is essential. It creates healing, belonging and economic return,” San Jose performing artist and advocate Jonathan Francisco Borca said during public comment. “If you move this measure forward, I ask that you pair with the clear commitment and investment to the arts and culture as revenue grows.”
Contact Keith Menconi at keith@sanjosespotlight.com or @KeithMenconi on X.
This story originally appeared in San José Spotlight.