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A Fine Mess – The Hotel Tax

Friday, February 8, 2013
posted by B-Daddy

I find myself partially agreeing with Mayor Filner on the subject of San Diego’s hotel tax.  He has stalled on signing the contract that would allow the hoteliers to start using the proceeds to promote tourism and the hotels of San Diego.  In an earlier post, I noted that he wanted to use the revenue for “public safety,” but now he is just saying that he had said the tax is illegal.  If the tax is illegal, it can’t be used for any activity, including public safety.  Meanwhile, the UT article linked above notes that there are lawsuits proceeding against the hotel tax, claiming it violates Proposition 26, passed 2010, which requires a supermajority vote of the people to raise taxes.  Here is what the state constitution says about taxes and votes, from Article XIII C, California Constitution:

Text of Section 1:
Definitions. As used in this article:
(a) “General tax” means any tax imposed for general governmental purposes.
(b) “Local government” means any county, city, city and county, including a charter city or county, any special district, or any other local or regional governmental entity.
(c) “Special district” means an agency of the State, formed pursuant to general law or a special act, for the local performance of governmental or proprietary functions with limited geographic boundaries including, but not limited to, school districts and redevelopment agencies.
(d) “Special tax” means any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund.
(e) As used in this article, “tax” means any levy, charge, or exaction of any kind imposed by a local government, except the following:
(1) A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.
(2) A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.
(3) A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.
(4) A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.
(5) A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law.
(6) A charge imposed as a condition of property development.
(7) Assessments and property-related fees imposed in accordance with the provisions of Article XIII D.
The local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.

Text of Section 2:
Local Government Tax Limitation. Notwithstanding any other provision of this Constitution:
. . .
(d) No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote. A special tax shall not be deemed to have been increased if it is imposed at a rate not higher than the maximum rate so approved.

Sorry for the extended legalese, but I am hard pressed to see how this tax, paid by hotel guests, who do not receive a direct benefit from the tax, can be passed by the hotels themselves.  The city clerk tabulated the votes for the tax, so it appears to have the force of law of the city government behind it.

The hotels could solve this problem themselves, by putting together a local association and agreeing to pay into a fund to promote tourism.  There would be a free rider problem for hotels that wanted the benefits, but didn’t pay in.  Perhaps the Tourism Marketing District could omit links and mention of those hotels names in their promotional materials and web sites.  Using the police power of government to enforce the hotels association dues is out of constitutional bounds.

Meanwhile, what happens to the money piling up if the tax is found to have been unconstitutional?  It would be a nightmare to refund the customers, but if I were a judge in the case, that’s what I would require.  That would also be a mess to clean up, but so would any other plan that would attempt to deal with the fees collected.  The sooner the courts resolve, the better.

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4 Responses to “A Fine Mess – The Hotel Tax”

  1. Jan Goldsmith says:

    Please see our July 7, 2012 Memorandum of Law, which is published on our website. Read it carefully, particularly pages 6 and 9.

    http://docs.sandiego.gov/memooflaw/MS-2012-21.pdf

    Jan Goldsmith

  2. Thor's Assistant Thor's Assistant says:

    Thanks, Jan, for adding to the discussion…and for reading Rostra!

  3. Jan Goldsmith says:

    Thanks, Thor. To add some more…

    The July 27 memo I cite above summarizes the legal issues and specifically references the TMD. We have more reports and legal opinions published.

    The issue before the city council was whether to move forward despite the risks we outline. The hotels point out that other cities competing for tourism dollars have done so and the lawyer hired by the TMD believes strongly that they have structured the TMD to meet the legal standards discussed in our memo.

    The TMD and city decided to move forward, but with some protections for the city. The city is protected through an indemnity provision in the TMD operating agreement (which the mayor has not signed). In addition, the funds collected under the new TMD are frozen — not being spent — until expressly authorized by the city council.

  4. B-Daddy B-Daddy says:

    Jan,
    I would like to add my thanks for your contributions to the discussion. Also, thank you for pointing out that there is some risk in moving forward. Second, as a taxpayer, and one who occasionally frequents the hotels of this city, I believe that the intent of the law is being violated, even if there is some “fine print” that makes this permissible. I never consented through a public vote, to pay this tax. Nor does the tax benefit me. If the hotel tax survives legal scrutiny, I hope that the constitution will be amended to forbid such taxes, because I believe that the public should be given a vote, the clear intention of Proposition 26.

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