Who Runs San Diego? The Use and Abuse of the Transient Occupancy Tax

By Cory Briggs

TOT – this small word may bring to mind a cute little child, a deep-fried mashed potato, or a dash of your favorite adult beverage. But in San Diego, TOT, an acronym for Transient Occupancy Tax, stands for missed opportunities, fiscal irresponsibility, and a shameful abrogation of civic responsibility to the moneyed interest of hoteliers.

The recent implosion of the convention center expansion and what I hope will be the legal rejection of its elder, uglier stepsister, the Tourism Marketing District (TMD) tax, are primers on how the people who run San Diego seek to use your money to line their pockets with the help of a complicit mayor and city council.

Let’s start with a quick look at the one tax that should be nothing but good news and a blessing for our city coffers. Transient Occupancy Tax is a tax paid mostly by tourists; by definition these are people who are here for a short time, don’t vote, don’t have a voice in how the money they pay is spent, and use fewer city services than residents. In a way, the TOT is an invisible tax. How many times do you ask what the TOT is when booking a hotel for your vacation? For most travelers to big cities, TOT is a foregone conclusion.

This money, collected from non-residents, is meant to flow into the city’s general fund to provide services to city residents: e.g., libraries, parks, fire fighters, lifeguards, street repairs. San Diego’s beautiful coast, proximity to Mexico, and near-perfect year-round climate make us a major tourist destination, and at 10.5% San Diego’s (entirely lawful) TOT is substantially lower than that of many other competing cities.

Even the notoriously tax-averse San Diego voters should like a tax they don’t have to pay but get the benefit of, right? Let’s raise that puppy and get us some more city services or retire some of our debt! (TOT is paid by those relatively few San Diegans who have to stay in a hotel while their homes are being remodeled, fumigated, etc.)

Well, not so fast. As it turns out, nothing is simple in San Diego.

When you are talking about the TOT in California, you also have to talk about Proposition 13. Prop 13 requires that an increase in taxes be put before the voters. If the tax receipts flow into the general fund, then the tax has to pass by a simple majority. If, however, the movers and shakers (read “hoteliers”) want to fund a specific item (e.g., paying for a bigger convention center or to advertise their hotels) then this is a “special” tax that must pass by a 2/3 vote. As you can imagine, it is really hard to get two-thirds of voters to agree on anything. Getting a tax approved by that margin in San Diego is even tougher.

Back in 2004, the hoteliers tried to pass a special-tax increase of the TOT to give themselves a sizable advertising budget that they would control. They came close: 62%. Later that same year, some civic-minded folks fielded Prop J, an increase in the TOT to put money into the general fund. They thought it would be simple given that the previous special increase had garnered much more than the 50%+ needed to pass a general tax.

But the hoteliers were having none of it. Apparently a tax that put money in the general fund, where paying for advertising to put “heads in beds” would have to compete for funding with firefighters and libraries and police officers and parks, was suddenly economically unwise and would have a “chilling effect” on tourism. Just to be clear:a proposal to use other people’s money to keep our parks and libraries open and to hire the people to keep them safe was opposed by the San Diego County Taxpayers Association and the Lodging Industry Association. This opposition defeated Prop J soundly.

Fast forward to 2009: then Mayor Jerry Sanders, the hotel industry, the Chamber of Commerce et al. decided that it was a really keen idea to expand the Convention Center. They guessed that it would cost about $520 million to build and that there was a big market for expanded convention centers, and they warned us that Comic-Con, which may or may not bring a lot of money to San Diego, might move on if we didn’t expand the Convention Center. (The verisimilitude, or glaring lack thereof, of all these assertions will be the topic of a withering take-down in next week’s Who Runs San Diego).

A logical way to fund the expansion would be to increase the TOT. But no one thought for a split second that 2/3 of the voters of San Diego would approve a tax increase to build this whitest of elephants. As Mike McDowell, head of the Lodging Industry Association, a chairman of the board of the San Diego County Taxpayer Association, and a chief architect of the Convention Center expansion, put it: “a two-thirds vote threshold is too risky. Having learned that lesson and going down that road, would you come back and call me stupid?”

So what do you do if you know you can’t convince folks to vote for a tax increase to fund your grand scheme? Our intrepid expansion boosters had a very creative answer. Create a special financing district comprised of just hoteliers. Have the hotel owners vote, instead of the registered voters of San Diego, to assess themselves (read “the tourists who stay at their hotels”) 3 or 2 or 1% based on proximity to the convention center. Use that special tax to repay the loan that the city will take out and, at the end of the day, will have to pay back from the general fund if these hypothetical increased bookings in an already glutted market don’t pan out. Pay no attention to the wizard behind the curtain.

“Gosh,” you say to yourself, “that sure sounds a lot like something we should all get to vote on.” Don’t feel bad, because the city Attorney thought the plan seemed iffy. The law firm that gets paid millions in legal fees to give opinions about the legality of municipal bond issues refused to vouch for such an untested plan. Legal activists,community leaders, regular folks with common sense—all of them said this financing district is bogus. “No, no, it’s not a tax on tourists, it’s a self-assessment we’re imposing on ourselves,” said the hoteliers.

Seven members of the 2012 city council, including self-proclaimed fiscal watchdog Carl DeMaio and soon to be iMayor Todd Gloria, ignored the legal experts and common-sense and approved the financing district. A big lawsuit ensued, and last month the local Court of Appeal put an end to the madness by finding the financing district violated both the state constitution and the city charter because the tax was not approved by the voters, explicitly rejecting the “superficial” claim that it was a “self-assessment.” Six years, more than $10 million, and some serious political credibility down the drain.

But before we leave the scene of this civic train wreck, let’s spend just a moment looking at why these presumably bright and well informed people would spend so much time and money trying to convince us, as the country song goes, not to “believe our lyin’ eyes.”

For the hoteliers, it’s a no-brainer. The Convention Center expansion was a no-lose situation. By their own reckoning, a successful expansion would increase their gross income by $121 million per year. That is a roughly $60 million increase in profits. According to the financing plan they came up with, they would not be liable for a single penny of the $575 million principal or the interest on the debt incurred to build the expansion.

The servicing of the debt would come from the “self-assessment” (read “3/2/1% special tax”) paid by the people who stayed at their hotels (supplemented by at least $5.5 million per year from the City and the Port). If things went as planned, the hoteliers made a LOT of money. If things didn’t go as planned, the city was on the hook and the hoteliers would have zero liability. This is great work, if you can get it.

For the council members, it is very difficult to tell the hoteliers “no.” They are wonderful friends and fearsome enemies; just ask Bob Filner. When bonds and amortizations and tax revenues and TOTs and financing districts are being discussed, most voters tune out. Comic-Con staying = good; Comic-Con going = bad. That’s the extent of the message most voters got.

The benefits of reading the fine print can be, at best, theoretical for a council member’s career–especially when term limits mean, Yahweh willing, that one will be in another position by the time the fiscal chickens come home to roost. Kudos to David Alvarez for reading the fine print, standing up for the taxpayers, and voting against this boondoggle.

Tourism Marketing District

Let’s now look at the 2% TMD “tax” on hotels with at least 30 rooms. The word “tax” is in quotes because the hoteliers tell us it isn’t a “tax.” They claim it’s a “self-assessment,” that it’s coming out of their own pockets. The claim is laughable. The mayor, the city council, and the hoteliers agreed on a “management plan” that allows the “self-assessment” to be added to a guest’s bill as long as it is “separately stated from the amount of rent charged and any applicable taxes”—as if separating it on the bill means that the guest is not paying it.

Because the politicians and the hoteliers decided that the additional 2% “self-assessment” did not have to be paid by the hotel guest, they are taking the position in court that registered voters had no right to vote on the TMD tax and have no right to sue to challenge it, that only hoteliers have “standing” to complain about it. The money is set aside by law for a single purpose—this time to finance advertising and promotional materials that will bring more guests to San Diego’s hotels—and it therefore waddles and quacks like a special tax that requires registered-voter approval.

In some ways the TMD tax is even more egregious than the Convention Center tax. The Convention Center tax was at least to pay for a municipal asset. The TMD tax is being used to pay for advertising to draw guests to San Diego’s hotels. I’m the only one who pays to advertise my business, and I suspect that you’re the only one paying to advertise yours. If the hotels want higher profits from more hotel guests, why don’t they form their own private advertising club with their own private monies? (Could it be they don’t trust their competitors to pay their fair share of the bill, so they want the government’s help in enforcing the collection of the money?)

The Convention Center tax was to be administered by elected officials. If there had been a problem, taxpayers and voters would have had recourse at the ballot box. That’s not the case for the TMD tax. The hoteliers wrote into the law a provision that gives the private non-profit corporation they formed the exclusive right to administer all the money that comes in each year if the City elects to outsource marketing functions to it. (San Diego Mun. Code § 61.2522.) Not surprisingly the City has done just that, and now the San Diego Tourism Marketing District Corporation doles out the TMD tax revenues as its board sees fit.

Of course, the board is comprised exclusively of hoteliers including Terry Brown from the Town and County Resort (Atlas Hotels) and Bill Evans from the Bahia Hotel (Evans Hotels), whose online bookings charge a “tax” instead of a “self-assessment.” Only hoteliers can vote for board members or run for a seat on the board. (San Diego Mun. Code § 61.2521(e).)

What’s worse, the City Council may change the private corporation’s spending plan for the coming year, but it has no legal authority to go after the corporation or its directors if malfeasance is discovered, and no authority to do anything that would impair the flow of money toward a marketing contract that has already been made. ( San Diego Mun. Code § 61.2521(c).)

Apologists argue that the 2% TMD tax frees up TOT revenues that the City would otherwise have to spend on promoting itself. But that is simply not true. You see, the hoteliers are really good at making sure the public doesn’t stop subsidizing hotel advertising. That’s why they inserted—and the city council approved—a provision in the TMD law to require the City to continue spending the same amount of TOT revenues promoting the City in addition to the new TMD tax revenues that the private corporation is spending to promote its hotelier members. (San Diego Mun. Code § 61.2518(a).)

When the TMD tax was renewed in 2012, hoteliers estimated that it would make $26-$40 million in new revenues available for additional marketing and promotion of the City. The hoteliers are currently collecting this 2% tax. Every dollar they collect is a dollar that a tourist is willing to pay to enjoy a hotel stay in America’s Finest City. It is a dollar that the hoteliers do not have to shell out of their pockets to pay to advertise their own hotels, and a dollar that is not available for any general municipal services.

When it came to the Convention Center, San Diego’s hotels were hoping to use the City’s credit to pay for improvements that they were unwilling to finance themselves, despite being the primary beneficiaries of the improvements. Now the public is subsidizing one of the largest expenses that any business faces: advertising.

By the hoteliers’ own calculations, their guests would be willing to pay another 5% to enjoy America’s Finest City (i.e., the TMD tax plus the now-dead 3/2/1% special tax). That amounts to $50-$75 million per year that could be spent on any number of the City’s backlogged infrastructure projects or to provide a host of community services. The hoteliers refuse to share any of that—not even a penny—with the public.

If, as I hope, this funding of the TMD tax goes the way of the Convention Center special tax, the City has the opportunity going forward to use any increase of the TOT to benefit the general fund and thus all San Diegans, not just the moneyed few.

The hoteliers, sports franchises, entertainment conglomerates, developers, and construction-related businesses all have very talented, very adept, and handsomely paid professionals to represent their interests at the negotiating table. The taxpayers? Not so much. As we will see going forward, time and time again, assets that belong to the citizens of San Diego – the coasts, the bays, Balboa Park, the downtown waterfront—are used and abused by those who run San Diego.

Author Note: The views expressed above are my own and do not necessarily reflect the views of my clients.Cory Briggs frequently represent San Diegans for Open Government in litigation against public agencies. Mr. Briggs has represented the plaintiff in lawsuit concerning the convention center tax, the tourism marketing district tax, business improvement district taxes, and other illegal activities by the city’s leaders. Mr. Briggs’ clients have also filed a number of lawsuits in order to ensure transparency in politicians’ electronic communications, and to ensure that the city was not deleting electronic communications prematurely. Mr. Briggs notes that his clients rarely if ever sue to recover money for themselves; almost always the lawsuits seek to change government conduct. For more information please visit the Briggs Law Corporation website at http://www.briggslawcorp.com.

This article first appeared in the San Diego Free Press September 3, 2014.