The law in California says that if you want to raise taxes to build something like a new Convention Center, you have to get two-thirds of voters to approve it.
Friday, an appellate court ruled that the city of San Diego’s clever idea to raise the hotel-room tax, without actually asking voters to approve it, was not legal. And suddenly, the $520 million Convention Center expansion, the largest construction project on the city’s docket, was thrown out.
The California Supreme Court is the only entity that can resurrect it.
The legal concern was clear a long time ago. The city was trying to raise a tax without doing the hard things that come with raising a tax.
Over the years, a diverse array of groups has argued it was illegal.
It included the Chargers, who wanted to kill the expansion to combine its momentum with their own stadium dreams. The U-T San Diego editorial board and ownership, with their own stadium dreams, also agreed and criticized the effort.
The hotel workers union thought it was illegal, and made some salient points before unions backed off once a labor agreement for construction was finalized.
And then there was, obviously, attorney Cory Briggs and watchdog Mel Shapiro. They actually did the work to prove it was illegal.
Here’s what went wrong for the city.
When You Need a Tax But You Don’t Want to Tax
Former Port Commissioner Steve Cushman and former Mayor Jerry Sanders came up with the plan to expand the Convention Center without a vote. They wanted to raise hotel-room taxes like they had with the Tourism Marketing District, or TMD.
It was murky. A new law, Proposition 26, made it even harder to imagine how they could increase the hotel-room tax without a vote.
A decade ago, the tourism industry backed a hotel-room tax hike that needed a two-thirds public vote and it failed. The lesson, a key Convention Center expansion supporter told VOSD in a 2011 interview, was not to try again:
Why the emphasis on trying to craft it into an exception? Why not just let it go to a vote and don’t even worry about it?
You asked me very early on what I learned from the 2004 election. And that is that 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?
But Cushman and Sanders decided against a uniform fee appearing on all hotel room bills in addition to the 10.5 percent hotel room tax the city charges and the 2 percent the TMD adds. After all, some hotels, like in San Ysidro, probably weren’t getting much business from the Convention Center.
They decided guests staying in hotels downtown should pay 3 percent more. Hotel guests as far as Mission Valley should pay 2 percent. And the rest of them in the city – but not in, say, Coronado –should pay just 1 percent.
To pull this off, the city attorneys assigned to the task got creative. They put all these hotels into a new assessment district. They would all pay, they said, a tax on their property, much like what many homeowners in Mello-Roos districts pay on top of property tax bills. But the tax on the property would actually be determined by the money the hotels collected from guests.
In that interpretation, the hotel owners were the only people who needed to vote on the tax.
The city attorney was forthright from the beginning that this approach was legally questionable. He said the city should just ask voters to increase the hotel-room tax if city leaders wanted to make sure it was legal.
But they didn’t want to do that both because it would have struggled at the ballot and anti-tax politicians like then-City Councilman Carl DeMaio and others needed to be able to argue this was a self-assessment and not a tax.
Can’t be seen raisin’ no tax round here.
The city attorney knew this would draw a lawsuit from someone who would argue that this was a tax and people should vote on it. So rather than let the project proceed, he invited people to sue the city as part of a validation effort.
Shapiro and Briggs obliged.
Who Would Actually Pay?
Expansion boosters had argued that hotel owners would be responsible for paying for the expansion, so it made sense that they should vote for tax.
That really wasn’t what was happening. The tax was a pass-through charge that would have appeared on the bills of hotel customers. So San Diego visitors were paying it. The court recognized that:
“While the city argues that only Landowners [read: hotel owners] should vote on the special tax since they are the taxpayers who will pay the tax, it is far from clear that the incidence of the special tax will actually fall only on Landowners and not on those individuals who pay for hotel rooms and generate the room revenue on which the tax is based.”
For those who don’t think it’s San Diegans’ concern if tourists get taxed, the court noted that twice in 2004 San Diego voters rejected hotel-room tax increases.
But beyond that point, the court said that the tax’s legality didn’t depend on who paid it. Judges said that was a “superficial” argument that wasn’t based on the law.
“Giving Landowners the unilateral right to determine how to apportion the benefits that would flow from a tax whose burdens may well fall on others would be contrary to both the Constitution and ordinary principles of taxation.”
Friday night, we could practically hear the U-T editorial board pounding out an updated vision. They want to blow up the blue-collar harbor and install a sports resort, including, crucially, a new football stadium.
The Chargers themselves are a little more restrained. Sanders, the port and all the Convention Center boosters had rebuffed their vision of an East Village stadium that had a retractable roof and that connected to the Convention Center.
You can bet that they will roll that out again as the city decides whether to appeal the ruling.
The City Council and Mayor Kevin Faulconer will have to decide whether to appeal, and I bet they do.
I was interested in Brant Will’s take. Will, a deputy city attorney, had been a big part of the legal team that came up with the plan. He and I spent a little time going back and forth on Twitter about it.
“I appreciate the court rendering its decision quickly,” he tweeted, “but it would have been nice to expand the Convention Center.”
In 2011, I interviewed Cushman about the plan. I asked how it could possibly be legal to raise a tax without actually getting a vote.
“At some point, a judge will opine,” he said.
Three years later, an appellate court has indeed.
Liam Dillon contributed to this commentary.