The COVID-19 pandemic revealed a major vulnerability for the city of San Diego’s budget: It is heavily dependent on tourism.
Before the federal government bailed it out, the city was considering major cuts and facing a structural budget deficit, the new mayor said in his state of the city address. Some observers hope the lessons of the pandemic linger and force San Diego to grapple with the risks that come with tying city services to the tourism industry’s fortunes. Now, supporters of that connection who backed an effort to increase the hotel room tax are pushing the city to declare the issue resolved and proceed with expanding the Convention Center.
The only problem is that it’s not clear when or if conventions will come back at the same level.
The city’s budget relies on the hotel room tax, called the Transient Occupancy Tax, which is now bringing in far less cash while hotels, motels and inns sit mostly empty month after month. This has already begun affecting the government’s policy agenda and priorities, some of which could be scaled back or delayed because of the shortfalls.
“San Diego is a big tourist destination, so when a lot of people stayed at hotels, the TOT then brought a lot of revenue as far as the city’s concerned, and not having it blows a big hole in the city’s budget,” said Alan Gin, an economist at the University of San Diego.
The city’s Transient Occupancy Tax is currently 10.5 percent, which during normal times accounted for almost a tenth of the budget. The sales tax factors in big too, Gin said, since visitors and tourists normally would be patronizing restaurants and shops. But the “new normal” has already lasted a year and will likely continue through most of 2021. The situation’s reminiscent of budget deficits last seen during the recession more than a decade ago, which took years to recover from.
City leaders pushed Measure C last year, a proposal to raise the hotel tax to fund a Convention Center expansion, homeless services and road repairs. Now a series of court rulings indicates it may have legally passed despite not quite getting a two-thirds vote. That means the city’s stake in the tourism industry would get larger, to the tune of almost $1 billion, the estimated cost of the expansion. This all comes at a time when the industry’s future has never been less clear. Big, well-attended conventions and conferences may be years away from returning.
“I would distinguish between business and leisure. It appears that people have figured out how to use Zoom and that it’s so effective that conventions will not come back quickly at the same size. Tourism probably will come back faster, but it might not be this year,” said Amihai Glazer, a UC Irvine economist.
San Diego’s Tourism Authority has a similar perspective. “We anticipate domestic leisure travel will return first, and we see strong pent-up demand for spring and summer travel,” said Kerri Kapich, the Tourism Authority’s chief operating officer. But she added that business travel will return more slowly, and “Tourism Economics forecasts that it will take San Diego tourism five years to return to 2019 performance levels.”
The lack of big conventions and tourist seasons ultimately could have wide-ranging impacts on the city’s policy priorities. Funding has already been allocated for updates to the city’s Climate Action Plan and for a newly reworked police oversight commission, but when it comes to implementing policies — maintaining infrastructure like roads and buildings and investing in housing units — that’s another story. Because of the depressed budget, city policymakers and agencies may have to prioritize some projects over others until the economy improves.
“Often in these deficit stories, people ask, ‘What are we going to cut?’ But we have to change our mindset, and we need solutions,” said Kyra Greene, executive director of the Center on Policy Initiatives and a member of the Back to Work SD task force assembled by Mayor Todd Gloria during his campaign last year. There are opportunities to strengthen the city’s revenue situation and to spend better than we have been, she argues.
Alternative arrangements might exist that would involve tethering the city to the expanding tech, biotech and life sciences sector as well, such as by levying property taxes or payroll taxes.
The current situation might improve if the city government’s connection with the tech sector were stronger. “I think there has been a focus on tourism,” said Kevin Carroll, executive director of Tech San Diego, “but it’s my prediction that Todd Gloria’s administration is going to be much more aligned with the tech community than previous ones.” Carroll suggests this could take the form of supporting middle-income housing and related transit projects, which many tech workers would benefit from as the tech economy grows.
“The real question is: to what extent does the city need to reorient its fiscal model into the future? And I don’t think we know yet. The incentive is going to be driven by what’s inside the COVID relief bill,” said John Ahlquist, a UC San Diego political scientist.
If San Diego can get enough aid from Sacramento and Washington, there will be less incentive for a potential realignment toward tech, he said.
San Diego received some $250 million in relief from the federal government last year. The city faces a projected $154 million deficit, but since $350 billion of the new federal COVID-19 package recently passed by Congress will go toward state, local and tribal governments around the country, depending on San Diego’s share, it may be able to fill part of that hole, at least in the short term.
The options to forge a financial connection to the fortunes of the tech industry seem limited, though. Local governments typically don’t impose income- and profit-based taxes on companies in their jurisdictions, but they do levy property and sales taxes aimed at them, Ahlquist said.
But there’s a risk of pushing too hard and having the opposite impact. Many tech and software companies have already figured out how to thrive through the pandemic with people working remotely, so despite San Diego’s highly educated workforce, amenities and slightly lower costs than Los Angeles and the Bay Area, beefed-up taxes could discourage moving or expanding here.
“Trying to put a geographically based burden on those companies in this moment, when they’re already rethinking what they’re going to be doing in terms of physical location and where their workers are going to be, could be very counterproductive,” Ahlquist said. In other words, the attempt could backfire, with businesses moving beyond city limits.
Last year, Seattle’s City Council approved a payroll tax, nicknamed the “head tax,” targeting big businesses and their highest six-figure earners, such as Amazon, which already has a big footprint in the area. It’s too soon to tell what kind of impact that tax will have, Glazer said. If such a tax were possible in San Diego, it could provide short-term benefits to the city government, but he fears it could ultimately have the same negative consequences as increasing property taxes, spurring some tech companies with high-cost workers to move away, dampening the growing tech economy.
In any case, if San Diego develops a stake in the tech sector, the city has to focus on social equity at the same time, Greene said. Partnering with industries should involve raising the floor for low-wage work as well, including food workers, childcare workers and janitors whom the tech workers depend on.
“I think a crisis is not just an opportunity to get back to a normal that wasn’t acceptable to us but to get to something better,” she said.
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