City looks for new taxes, fees

Deirdre Newman

As the recession and state budget crisis lingers, city leaders are

looking to tap new sources of money.

Five main possibilities exist: increasing the business license

tax, increasing the transient occupancy tax, imposing a sanitation

franchise fee, offering a voluntary fire medical subscription fee and

increasing the sales tax.

An increase in the business license tax, transient occupancy tax

and imposing a local sales tax would definitely require approval by

residents at the ballot box. The majority needed to pass -- simple or

super -- depends on the language of the initiative and on if it’s

placed on the ballot as a general tax increase or a special tax

increase.

The council discussed all five during a meeting this week.

Without some new revenue sources, it would be difficult for the

city to maintain programs and services at existing levels, Director

of Finance Marc Puckett said.

But getting some of them approved could be challenging because

they could erode the city’s renowned hospitable attitude toward

business, Mayor Gary Monahan said.

“Costa Mesa has traditionally been, and reinforced it two years

ago [with the rejection of an increase in the transient occupancy

tax], very hesitant to raise its taxes and fees,” Monahan said. “And

are quite proud of it being the best atmosphere for business in the

state of California.”

BUSINESS LICENSE TAX

The business license tax is a general one on businesses allowing

them to conduct business in the city. Since this is a general tax,

the use of revenues from this revenue is unrestricted.

The fee schedule has not changed in more than 18 years, and the

tax is not a major revenue source for the city. During the fiscal

year that ended in June, the revenue earned from this tax was about

$854,000.

To generate a major increase in business license taxes, the city

would have to change to a fee based on a fixed percentage of gross

receipts because, now, the cap is $200, Puckett said.

That would mean that a large department store such as Nordstrom

would pay more than a smaller store because it generates a larger

amount of gross receipts.

Puckett said a reasonable range for increasing the tax is between

0.4% and 0.8%.

Chamber of Commerce President Ed Fawcett said he is open to

various ways of increasing the tax as long as they are not too

oppressive.

“I am open to consider the options as long as they’re not overly

burdensome on businesses and protective of smaller businesses that

are trying to start up and that it doesn’t penalize successful ones

inordinately,” Fawcett said. “Because with their success, they

provide for the city far beyond a business license tax would benefit

the city.”

Monahan, who owns the restaurant Skosh Monahan’s, said he is

optimistic that the city and chamber can work out a solution.

“I do believe there’s definitely room to adjust [the tax],”

Monahan said. “As a business owner, it would cost me a little more,

but we do have the lowest business fee in the state, and we could

raise $1 million to $1.5 million with a legitimate, realistic cap on

the high end and not put anybody out that bad.”

TRANSIENT OCCUPANCY TAX

The transient occupancy tax is also a general one imposed on hotel

occupants. Use of this revenue is not restricted, either.

The city has one of the highest amounts of available hotel rooms

in the county, but its tax is the lowest. The current transient

occupancy tax of 6% has not changed for more than 22 years.

The city levies a separate 2% Business Improvement Assessment for

the Costa Mesa Convention and Visitors Bureau to promote tourism in

the area.

While the amount of tax collection is steadily increasing, it

hasn’t yet returned to its pre-Sept. 11 level.

Based on the assumption that the city will collect about $4

million in transient occupancy taxes during this fiscal year, a 1%

increase would yield about $665,000. A 2% increase would yield about

$1.3 million.

In 2000, voters defeated a transient occupancy tax initiative that

would have increased the tax to 8%.

Dan Pittman, consultant for the bureau, said officials there are

sympathetic to the city’s desire for new revenue but value their

competitive advantage.

Monahan said he is apprehensive about increasing this tax with an

industry still trying to recoup its losses from the terrorist

attacks.

“If we raise it 2%, what are you getting?” Monahan asked. “Maybe

$1 million. But after Sept. 11, the last thing we want to do is to

hit the hotels after they’re still recovering. That would not be in

the best interest of the city.”

Councilman Allan Mansoor, a fiscal watchdog, said he also is leery

about expanding the transient occupancy tax unless it goes toward

infrastructure or public safety.

SANITATION FRANCHISE FEE

The city does not have a sanitation franchise fee, which is

typically non-exclusive, meaning trash haulers can set their own

rates. Use of this revenue is unrestricted and could therefore be

used for any purpose.

Thirty-one of the 34 cities in Orange County have this type of

fee. In discussing the fee with other city officials and with the

sanitary district staff, Puckett said he believed the city could

reasonably generate about $1 million with a sanitation franchise fee

of its own.

Acting City Atty. Tom Wood said he would update the council when

they formally consider this issue whether Proposition 218 requires

voter approval for sanitation franchise fees. The proposition made it

more difficult for local governments to increase revenue through

fees, assessments and taxes.

Councilwoman Libby Cowan said she is interested in pursing the

sanitation franchise fee for a few reasons, such as the opportunity

to get extra money to keep the city clean, especially after the loss

of the state vehicle license fee funds, and to shield the city’s

maintenance fund from cuts.

Monahan said he has never favored this kind of fee and feels no

differently now.

“I have always been against it because it stifles competition and

would in essence raise the trash rates on all the commercial business

rates,” Monahan said. “And if there was a franchise fee on

residential -- they are intertwined and should be put together -- it

would raise trash rates on all residential customers. It’s just

passing a tax on to everybody and I don’t believe it’s a legitimate

tax to pass on to either.”

FIRE-MEDICAL

SUBSCRIPTION FEE

This is a voluntary membership program in which revenues would be

used for improving the quality of emergency medical services. An

annual membership fee would be charged for each household that

participated and would cover all the people who live there.Costa Mesa

is one of only three cities in the county that does not have a

subscription fee, Puckett said.

How much funds are generated from the fee is based on how it is

structured. If approved by the council, the fee would help with

advanced and basic life support services that were added to the

department without any tax increase, Puckett said.

“[They] have become extremely sophisticated in terms of the

equipment needed to run these programs,” Puckett said. “It makes that

a very expensive proposition for cities to continue doing that.”

In other cities, the funds received from this fee have been

restricted to be used only for emergency medical service-related

expenses to justify the program and to increase membership in it,

Puckett added.

Huntington Beach’s subscription program is considered a model,

Puckett said. It charges $60 per household and $30 per year for

low-income households and currently boasts about 27,000 participants.

Deputy Chief Gregg Steward with the Costa Mesa Fire Department

said the department would support the fee if it would prevent a

decrease in services.

“If it comes down to the point of, do we look for ways to recover

some costs so we can keep services the way they are or do we let

people go, then definitely we would be in support of [the fee], and I

hope the citizens would be also to maintain the level of services we

currently have,” Steward said.

Monahan said he doesn’t see a need for a fee that charges for what

he thinks is a natural service for government to provide.

“I’m very proud that our city doesn’t [impose this fee],” Monahan

said. “It’s a legitimate role of government and should be paid for

from our general obligation taxes and should not have a fee attached

to it.”

LOCAL SALES TAX

In 2003, the state approved a bill giving cities the power to levy

a local sales and use tax in multiples of 0.25% with voter approval.

This bill takes effect Jan. 1.

The sales tax is now Costa Mesa’s single largest source of

revenue, although it has seen a downturn due to the recession. In the

fiscal year ending in June, the city received $500,000 less than in

the fiscal year ending in 2001, Puckett said.

The city only gets 1% of the 7.75% sales tax imposed by the state,

Puckett said. The city will receive about $37.5 million in sales tax

during this fiscal year. Imposing a local sales tax of 0.25% would

generate $9.375 million a year.

Since the majority of the city’s sales tax revenues are obtained

from transient shoppers, the advantage of imposing a local sales tax

would be to transfer a large portion of the tax burden away from

residents and onto these shoppers, Puckett said.

Fawcett issued a caveat to the council when considering this tax.

“Tread very carefully there because I wouldn’t want to scare

businesses away from Costa Mesa,” Fawcett said. “Costa Mesa benefits

so greatly from our retail sales base, I would look at that very

cautiously.”

Monahan said voters might not embrace a tax that is so general.

Measure M, the half-cent sales tax, passed in 1990 because it

represented the means to achieve the specific goal of fixing roads,

he said.

I don’t think [the situation] is that dire,” Monahan said. “I

think you would have very much opposition, especially from

[businesses that sell] large-ticket items, which drives our sales tax

revenue. If the tax is higher in Costa Mesa, people will buy their

cars in Huntington Beach.”

MAKING SURE

THEY’RE NEEDED

The earliest the fees that need voter approval could appear on a

ballot is November 2004, City Manager Allan Roeder said. Roeder

suggested the council wait to see what the state places on that

ballot first. In the meantime, he said, city leaders should meet with

the groups that would be affected by these fees to get their feedback

and survey voters to hear their thoughts about the different options

and what the funds generated should be used for.

Any attempt to add a new revenue source would be looked at as a

long-term solution with a high level of analysis of why it is

necessary, Monahan said.

“If we put something on the ballot -- if we’re even willing to go

that far -- we have to show an ongoing need and how it’s legitimate,”

Monahan said.

The council will reconsider the new revenue sources at its Jan. 19

meeting.

* DEIRDRE NEWMAN covers Costa Mesa and may be reached at (949)

574-4221 or by e-mail at deirdre.newman@latimes.com.