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June 16, 2017

Tax-Funded Expansion Of San Diego Convention Center Faces Opposition

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In an effort to fund a $685 million expansion of San Diego’s Convention Center, San Diego Mayor Kevin Faulconer (R) has proposed an increase in the city’s hotel taxes that ranges up to 3 percent, based on a hotel’s proximity to the downtown area. The increase in hotel tax, known as the Transient Occupancy Tax (TOT), will also contribute $20 million to the city’s growing initiatives to reduce homelessness and improve road quality.

On June 12 the City Council voted to deny the mayor’s request for a November 2017 special election on the TOT increase, citing concerns about the estimated $5 million cost of hosting an additional election and a desire to take advantage of the higher turnout of general elections to allow more voters to weigh in on the proposal. As a result, San Diego voters will most likely vote on this proposal in November 2018, with a two-thirds majority needed to approve the tax increase.

Mayor Faulconer has consistently expressed a desire to expand the city’s Convention Center, arguing that the city misses out on millions of dollars in potential business each year. A report by the San Diego Office of the Independent Budget Analyst projected that the expansion would lead to the additional rental of 380,000 hotel nights a year in San Diego, which would generate $4 million to $9 million in additional tax revenue. While this is significantly below the mayor’s own estimate of $15 million, it would nonetheless be a meaningful boost to the industry being taxed to pay for the expansion.

However, critics of these programs such as University of Texas economist Heywood Sanders have argued that new or expanded convention centers are largely redundant of existing infrastructure and have experienced a glut in recent years, which would mean that even the independent analyst’s estimates are overly optimistic. The profits hotels make due to the Convention Center are largely due to San Diego’s Comic-Con and Rock ’n Roll Marathon events, for which San Diego hotels are already typically overbooked. This may indicate that there is little potential for hotels to reap significant benefits from the proposed expansion. Furthermore, it is quite possible that increased taxes could deter construction of hotels in San Diego, worsening the already chronic shortages of hotel rooms near the convention center and imperiling the success of an expanded convention center. This is of particular concern since it is these hotels in downtown San Diego that would face the highest tax increases in the TOT proposal.

A recent survey shows that the hotel tax increase would have 70 percent public support if it were meant to pay for homeless services alone, compared to 54 percent support for the actual proposal, which demonstrates that locals also consider this issue to be a priority. A report by the Regional Task Force on the Homeless in San Diego County indicates that homelessness rose by 5 percent last year, with the number of unsheltered homeless people now significantly above those who can find shelter. These shortages in homeless shelters have led to a 64 percent increase in makeshift shelters in the city, which could potentially damage the tourism and hospitality industries as tourists are deterred by increasing displays of poverty. Road quality improvements are similarly important; according to a report by TRIP, a Washington-based research group, the average motorist in San Diego sustained a loss of $1,858 due to vehicular accidents and damage caused by the quality of San Diego’s road

Furthermore, San Diego voters may have a perverse incentive to vote for the TOT increase, as they can benefit from the additional tax revenue while the direct tax burden is faced largely by travelers to the city. Some critics have expressed concern that hotels may become the victims of several miscellaneous excise taxes should the proposal ultimately be approved, given the popularity of the proposal to dedicate the TOT funding entirely to the homelessness issue, which does not have much direct relevance to the hospitality industry.

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