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If the soccer ball was stuffed with property tax dollars, some want to score it straight into the goalpost of downtown development.

Tuesday’s actions at City Hall made the downtown goalpost three times bigger. That means more property taxes will flow into redevelopment downtown. Now, will the lifting of the cap on redistributing property tax downtown be good for the city’s desperate general fund? We have analysis by the Centre City Development Corporation (CCDC) and the Independent Budget Analyst that future hotels will generate more than enough Transient Occupancy Taxes (TOT or hotel-room tax) to compensate for any loss of property taxes.

My purpose in penning this commentary is not to support or oppose the lifting of the goalpost cap, but to highlight a key problem in the economic assumptions.

The primary basis for the increased hotel-room tax is that there will be between 3,000 – 4,000 hotel rooms built downtown through the life of the project area (say 2,043). These hotel rooms would generate $281 – $375 million in hotel-room tax. Since downtown has been planned for 10,000 hotel rooms, and with a potential Convention Center, it is fair to say that this is reasonable.

An important thing to note here is that hotel rooms do not increase in proportion to development overall, but on the market absorption capacity for hotels. Moreover, a plan to accommodate 10,000 hotel rooms does not mean that all these rooms get built. In fact, the plan to build these rooms is constant whether or not the cap is lifted.

There are two problems with the analysis.

The first problem is that it assumes that without the cap, none of the additional hotel-room tax would accrue. As if hotel development downtown would stop if the Redevelopment Agency does not lift the cap. It is like saying that the competing soccer team will stop playing when the game begins.

Here is the cost-benefit:

Impact on general fund property tax (loss) = Property tax w/ cap – property tax w/o cap (= $300 million)

Impact on general fund TOT (gain) = TOT w/o cap – TOT w/ cap

The base case is the cost and benefit to the general fund assuming the cap is not lifted. However, both the Independent Budget Analyst and CCDC are relying on the assumption of 3,000 – 4,000 new hotel rooms, without stating the scenario (how many hotel rooms) under no cap increase.

Even if the cap were in place, there would be a significant demand for hotel rooms downtown, of which a new feasibility with infrastructure impact mitigation would need to be conducted. Even if it were reduced, the additional hotel-room tax ranging between $281 – $375 million would not evaporate.

The second problem is that the city accounts citywide revenue sources, without accounting for citywide expenditures. Hotel-room tax is a citywide revenue source, not specific to downtown. Therefore, increased expenditures on new hotels from increased police and fire safety attributed to new development downtown should have been used to balance the analysis.

The hotels will lead to an increase in the civilian population at in downtown by 7,022 persons [1]. An analysis prepared for the Navy Broadway Complex in 2005 showed that the city General Fund expenditures per equivalent dwelling unit are $1,253.24, of which $751.33 is expended on public safety. This would translate into $3.8 million every year in general fund expenses were all these new hotel rooms built. This development would need at least 14 new police officer and 6 firefighters.

No analysis of expenditures. This is like saying that only goals scored by our team count, the goals scored against us does not count. The economic soccer game is fascinating.

[1] Additional Civilian Population:  Equivalent number of residents = [non-Navy employees (4,169)*Employee resident equivalency ratio (0.35)] + [Hotel rooms (3,000)*Occupancy (76%)*Avg. Number of Occupants (1.8)] = 3,511.

Murtaza Baxamusa

Murtaza Baxamusa works for the San Diego Building Trades Family Housing Corp. and volunteered as a special policy adviser for Bob Filner.

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