Tourism Marketing Tax Approved, But Is It Legal?
November 27, 2012 1:37 p.m.
Joe Terzi, President & CEO, San Diego Convention and Visitors' Bureau
Katie Orr, KPBS News Metro Reporter
Jordan Barry, professor, University of San Diego School of Law
Related Story: Tourism Marketing Tax Approved, But Is It Legal?
CAVANAUGH: ...The 2% will go to San Diego's hotel industry for the next 40 years. So hoteliers can promote San Diego as a tourist destination. The vote of the council was 6-1 with one member absent, but concerns remain about the fact that this revenue is out of reach for the city's general needs. Earlier today, I spoke with Joe Terzi, president and CEO of the San Diego Convention and Visitors' Bureau. Welcome to the program.
TERZI: Thank you.
CAVANAUGH: Does the San Diego convention and visitors' bureau get most of its funds from this tax that was approved by the City Council yesterday?
TERZI: Yes, about 75% of our income comes through the TND or tourism marketing district. The other 25% comes from a private source, mostly from dues and membership and co-op advertising.
CAVANAUGH: How much do you expect this tax to generate per year?
TERZI: Well, currently it's generating $30 million. In the new district that number will go up because the district has been broadened a little bit. So the expectations are somewhere around 31-31 million dollars the next year, and if the market continues to progress, that number will continue to grow throughout the years.
CAVANAUGH: Did you speak before the San Diego City Council in favor of the extension?
TERZI: I did. Obviously we're the biggest benefactor. And my history is that I'm a hotelier first, and then I was a founding member of the TMB before I took on ConViz. So I understand it from each side of the equation, and I've been supportive of is it from the program.
MAUREEN CAVANAUGH: What did you tell them about how the pilot program had worked out?
TERZI: Well, sure. People don't recognize that when we started this in 2008, we actually gave the city back $10.5 million that they were spending on tourism promotion. We relieved the city of a $10.5 million burden initially, and that's happened every year since then. So that money went right back into the general fund for the right to collect an assessment that was dedicated purely to promotion. It allowed us to do planning over a period of time versus wondering how much money we were going to have next year or the year after. And the big issue is every one of our major competitors has followed our lead and created their own tourism marketing districts and increased their budgets. LA just finished their tourism marketing district and they added $10 million to their marketing budget that will go directly into consumer advertising, directly talking to the same consumers we're trying to convince to come to San Diego.
PENNER: You already told us that not only did this vote extend the time that the marketing district was going to exist and use funds that are generated from these room taxes, but it also expands the number of hotels that are going to be affected by this. Why did you want to expand the number of hotels and include smaller hotels?
TERZI: Sure. Well, the challenge to any of these assessments have to do with prop 26 which was passed in the state which talks about value and benefit. To make sure that we were meeting the test of prop 26, it was important to extend the benefits to all hotels, even below the 75 room threshold that existed in the previous TMD. So hotels at 30 rooms or more will be assessed at 2%, and those with less than 30 rooms are only assessed a .55%, which recognizes the fact that smaller hotels don't have as much benefit because frankly a lot of the things we do do deal with groups and large meetings that don't really apply to some of the smaller hotels. Most of the general consumer advertising we do promotes San Diego. They benefit by that. They don't benefit by all the efforts we have going on through the TMD.
MAUREEN CAVANAUGH: Don't critics say that proposition 26 demands that a district like this can't vote a tax on itself?
TERZI: Not at all. Prop 26 says that if it is an assessment, you have to be able to clearly demonstrate that the assessment benefits those individuals that are paying into the assessment. So it's not a vote of the people issue. The test is are the funds that are being allocated into the district by the payers, is it benefiting the payers directly? And you have to prove that that is the case, and there's not a significant benefit to anyone other than the payers. So that's why the district was expanded to, make sure that we're able to meet that test to say, yes, there is benefit to all of the hotels in San Diego. Some more than others. And that's why the funding scenario shows that 2% for hotels that are larger and .55% for hotels that are smaller.
CAVANAUGH: Isn't there an expectation objection that the hoteliers are not the ones paying this tax? It's the tourists because they have to pay more?
TERZI: Well, sure. There's arguments on all sides. I'm not a lawyer, nor do I want to get into the legal arguments. Without the tourism marketing district, San Diego would be in a very bad position right now because we would not have the money to go out and compete with those that we compete with every day for these tourists coming into San Diego. It's a very competitive environment, and if the TMD would not exist, we feel strongly that the city would not be able to fund or choose not to fund tourism marketing, and you would see the $330 million created start to dwindle. It's the largest single source of unnin cumbered funds comes from the TOT tax in San Diego.
CAVANAUGH: Is there any oversight?
TERZI: Yeah, absolutely. More oversight than we like. Having said that, we have an obligation to report to the tourist marketing district on expenditures. That gets audited and approved through their financial oversit organization which is an independent accounting firm. Then those funds are approved and supported. Then they go to the city. And the city oversight through their department actually checks and verifies that the expenditures are appropriate based on the budget, and finally use those funds, and then we get that returned by the city.
CAVANAUGH: Do you foresee hoteliers allowing some of this revenue to go toward public safety as proposed by mayor-elect Bob Filner? His argument is tourists have an interest in a safe city too.
TERZI: Sure. I think with all due respect, our new mayor really doesn't understand the issue. I know he has good intentions. But my first response would be the $148 million that is collected through the hotels in the form of TOT taxes fund a significant portion already of police and fire. And so to say that the TMD should be supporting police and fire is somewhat redundant when you think that most of the funds coming out of the TOT taxes already support a significant amount of police and fire services.
CAVANAUGH: We have to leave it there. Joining me now, metro reporter Katie Orr.
CAVANAUGH: And professor Jordan Barry, he specializes in tax law. Welcome to the show.
BARRY: Thanks for having me.
CAVANAUGH: Katie, there has been speculation that this 40 year extension is another perk extended to the hotel industry for its agreement to pay for a portion of the Convention Center expansion. Is that a fair assessment?
ORR: Well, I don't know. It depends on what side you come from. Joe Terzi would not call it a perk. Tourism is a huge business here in San Diego, it's about the third leading industry in the city. And so anything you can do to promote that is, you know, the argument goes a rising tide lifts all boats. If they're doing well, are the city is doing well. Because the city will get on the whole more hotel tax revenue if the overall total goes up. But is there is the fear that these hoteliers are being given a lot of control now over tax money. It's tax money. People come, they might not be San Diego citizens, but they come, pay public tax, stay in these hotels. And the hoteliers have control about 5% of the total taxes around hotel rooms. And they're not elected. These are private businesses that decide how to use this money. That does give them a lot of power.
CAVANAUGH: Break it down for us if you would. The room tax for visitors is going to be between 13-15%. How much does go to the city general fund or the Convention Center expansion and how much for this marketing district?
ORR: If the Convention Center financing plan is deemed to be ultimately legal, that adds another 3-1% based on how far your hotel is from downtown. Downtown Holtzes will see an additional 3% on top of their room tax. That's on top of the tourism tax. There's also another 10%, and that goes to the city's general fund. So the majority of taxes do go to the city's general fund. But the argument against giving these taxes to the hoteliers is that if the city ever decided that at the present timed more money for its general fund, and they have tried to do this in the past and were defeated because the hoteliers campaigned against it, it would be more difficult for the city to ask for an increase in hotel taxes because they're already between 13-15%. And you don't want to make injureR your noncompetitive.
CAVANAUGH: The loan vote came from Marti Emerald who said this plan should be put to a vote of the people. What is the argument here? I asked Joe Terzi about proposition 26. Does your understanding of that, does that require a vote of the general public?
BARRY: Let's step back for a second and talk about why people are so nervous about this plan. If you think about it one way, we have a decision about taxes being made by essentially just private actors. And we don't normally have that, right? We have a vote of the people or elected representatives decide these things. Some people are very nervous about the idea that private companies can set tax rates. And this election that the hoteliers had, it's not even clear exactly how many votes each hotel had. We know the general scheme of how the election worked, but not how the votes were divvied up. So it's a lot of concern about power being allocated in public hands and lack of transition appearance and accountability.
CAVANAUGH: ORR said there would be accountability in terms of this oversight he described to us. But in term was proposition 26 precisely, I know that it does allow certain districts where the people pay in for a specific project. But the argument is that the hoteliers are not paying. It is the people who come to visit San Diego who are paying this tax, and therefore does it open up legal questions?
BARRY: Oh, I think it absolutely does raise some legal questions. I don't think there has been a court ruling on this exact issue just yet. So it's an open question. The hoteliers have a plausible argument that it's our tax, we voted on it, and we saw the requirements. And the people challenging it really have a plausible argument. We're paying for the hotels, and we didn't vote.
ORR: And the city is trying to address that. It's a similar scheme to the Convention Center financing plan. It's essentially the same thing. The hoteliers took a vote to raise their hotel taxes between 1-3%, and that percentage will go towards financing the new Convention Center expansion. The city has filed a validation lawsuit basically on its own to ask a judge to look at this plan and say is this a legal way to do it because of the proposition 26 question. And that's supposed to come down in February some time. If the judge says no, they're back to the drawing board how to fund the Convention Center expansion. And I imagine it could be applied to the TMD as well.
CAVANAUGH: You started off with the big picture, so let me ask you a big picture question. According to Joe Terzi, this idea of allowing the hotel industry to collect and to use a portion of the room tax has been successful in its 5-year pilot program. And he says it's catching on in other cities. So is it possible do you think that we'll see more industry groups here in San Diego vying for control of tax revenue?
BARRY: We certainly might. People like money. And if they can get it from the city, they're going to try and get it, I think. That's understandable. And in some cases it might be a good idea, in other cases it might not.
ORR: Yeah, I think one of the things to look at here, there is no question that tour simple a huge industry in San Diego. And San Diego is generally a desirable location to come and have your conventions. We don't have 3 feet of snow in December. We have mild temperatures pretty much throughout the year. So you could argument that it is a good investment for the city. But you could also make the argument as mayor-elect Filner has that our priorities should not be on pumping up the downtown hotel industry, that we need to focus on some city services, restoring police and fire department services, fixing our pot holes, things along those lines. And it just gets back to the question of who has control of the money. The city, this is money that the city will not be able to access now because it's being used -- potentially access because it's being used to promote tourism in San Diego.
CAVANAUGH: And unless there's a real challenge to this, it's a done deal.
ORR: Right. The City Council approved it yesterday.