Transient Occupancy Tax (TOT) Ballot Measure Discussion and Request for Direction

It is recommended that the City Council discuss and provide direction to staff on the preparation of a ballot measure to put before the voters at the November 2024 General Election amending the City’s Transient Occupancy Tax rate.

On October 3, 2023, the City Council reviewed and updated its list of priorities, adding a new item “Transient Occupancy Tax (TOT) Increase - Explore adding to the Nov. 2024 ballot". This priority was elevated to "high priority" during the Strategic Priorities Workshop in March 2024. With the deadline to add a ballot measure to the November 5, 2024 election fast approaching, the purpose of this agenda item is to outline the possible timeline and actions required for placing a TOT measure on the November 5, 2024, ballot.

Executive Summary

The Transient Occupancy Tax (“TOT”) also known as a “hotel tax” or a “bed tax”, is authorized under State Revenue and Taxation Code section 7280, as an additional source of non-property tax revenue to local government. This tax applies to persons staying 30 days or less in hotels, motels, inns, or similar accommodations, with the tax on the customer’s rent payment for a room rather than the lodging establishment itself. Taxes collected are remitted by all approved lodging operators within the City.

The City of Carmel-by-the-Sea has a current TOT rate of 10% which contributes to the General Fund revenue. The TOT generates approximately $6.5 million annually for the City, and accounts for approximately 22% of its revenue sources.

Since 1998, the City has not raised its TOT above 10%, making it lower than most other cities of similar size in Monterey County (see table below). 

Taxes, Voter Approval, and Legal Parameters

A tax is a monetary imposition by a government on persons or property to generate revenue for governmental purposes. Unlike assessments or fees, a tax does not need to be levied in proportion to a specific benefit to a person or property. California general law cities (such as Carmel-by-the-Sea) receive their authority to tax from state law. State law sets certain limits and procedures and may exempt certain activities from taxes levied by general law cities. 

The passage of Proposition 13 in 1978 created a distinction between “general” and “special” taxes. Proposition 218, in 1996, further defined and established procedures for general taxes.  

General Tax:

•  A general tax is a tax imposed for general governmental purposes, the proceeds of which are deposited into the General Fund.
  • A majority vote of the electorate (those voting on the measure) is required to impose, extend or increase any general tax.
  • Elections for general taxes must coincide with regularly scheduled general election of city council members.  

Special Tax:

•  A special tax is a tax that is collected and earmarked for a specific purpose and deposited either into a separate account or the General Fund.
  •  A two-thirds vote of the electorate is required to impose, extend or increase any special tax.
  • Elections for special taxes may be placed on the ballot of any election, including odd-numbered years.

In summary, a TOT general tax amendment must align with a general municipal election which only occurs in November of even numbered years and requires a majority vote to pass.

A TOT special tax amendment does not need to align with a general election, and can be added to a special election in an odd numbered year. However, it requires a two-thirds majority vote to pass.

Required Actions and Timeline for a TOT Ballot Measure

Time is of the essence in completing the necessary steps to include a tax ballot measure on the November 5, 2024 ballot. The City already consolidates its general municipal election with the Monterey County Elections Department in even numbered years, and the County sets deadlines for certain actions based on the California Election Code.

In adherence to the Monterey County Elections Department’s schedule and the CA Elections Code, the City must adopt a Resolution by July 1^st, calling for a general municipal election on November 5, 2024, and requesting consolidation with the county. These resolutions are scheduled for adoption during the June 4^th Regular City Council Meeting and will be forwarded to the County before the July 1^st deadline.

Per California Elections Code Section 9222, the City Council “may submit to the voters, without a petition therefor, a proposition for the repeal, amendment, or enactment of any ordinance, to be voted upon at any succeeding regular or special city election, and if the proposition submitted receives a majority of the votes cast on it at the election, the ordinance shall be repealed, amended, or enacted accordingly. A proposition may be submitted, or a special election may be called for the purpose of voting on a proposition, by ordinance or resolution. The election shall be held not less than 88 days after the date of the order of election.”

In speaking with the County Elections Department, it was emphasized that if the Council intends to include a ballot measure in this year's election, a resolution calling for it must be adopted by August 9, 2024, 88 days prior to the election. However, considering the County's deadlines for their Board of Supervisors agenda in August, the County advises adopting the resolution no later than the July 9th to ensure timely processing by the County.

Various considerations surround the timing and voting requirements for both general and special taxes. Below are 3 potential timeline options for Council to consider.

Option # 1 - November 5, 2024 Election:

Timeline:

• June 4, 2024 – Adopt a Resolution calling for the election (Mayor, Councilmembers, and ballot measure), and adopt a Resolution requesting consolidation with the County. Note: The resolution calling for the election and requesting consolidation with the County must be adopted by July 1, 2024, according to the County’s deadlines.

• July 9, 2024 – Last opportunity to adopt a Resolution calling for the inclusion of a ballot measure to be submitted to the voters.

• June – October, 2024 – Staff to conduct voter outreach and notify stakeholders (hotel owners). Note: consider staff capacity, and short public outreach timeframe.

• August 10-15, 2024 – Period to file primary arguments for or against measure.

• August 15, 2024 – Deadline for City Attorney to file Impartial Analysis with City Clerk.

• August 14, 2024 – Last day for local jurisdiction to withdraw ballot measure.

• August 16-22, 2024 – Period to file rebuttal arguments.

• November 5, 2024 – Election day.

Advantages of the November 2024 election timeline:

• Increased voter turnout during presidential election years.
• Potential elevation in TOT revenue, if measure passes.
• Cost savings of adding a ballot measure into a pre-scheduled election.

Drawbacks of the November 2024 election timeline:

• Limited timeframe for staff to engage in voter outreach and education.
• Limited timeframe to gather input from stakeholders, such as hotel owners.
• Not enough time to consider hiring a consultant to assist with voter outreach.

Option # 2 – Special Election in 2025 (option is only available for a special tax)

If the Council opts to propose a TOT increase designated for a special purpose, they could consider scheduling a special election in an odd-numbered year instead of incorporating it into this year's election.

Advantages of a Special Election in 2025:

• More time for voter outreach and education.
• More time for soliciting feedback from stakeholders.
• More time to explore hiring a consultant for public outreach or feasibility studies.

Disadvantages of a Special Election in 2025:

• Mandates the tax to be a special tax if in an odd year.

• Requires a higher threshold of voter approval (2/3 of votes) for passage.

• Potentially lower overall voter turnout due to being held in an odd-numbered year.

• Extra costs for the City to conduct a special election during an odd year.

Option #3 – Plan ahead for November 2026 Election:

Timeline:

• Early 2025 (January - March) – Consider various options for a ballot measure, whether it is a special tax or general tax, and whether to explore using a consultant with expertise in conducting voter outreach.

• Mid to late 2025 – Select a consultant, if desired, and begin voter outreach process.

• June 2026 – Call for an election with a ballot measure for November 3, 2026.

• June – October 2026 – Continued public outreach.

• November 3, 2026 – Election day.

Advantages of the November 2026 election timeline:

• Increased voter turnout during a general election year.

• Cost savings of adding a ballot measure into a pre-scheduled election.

• More time to explore hiring a consultant for public outreach or feasibility studies.

• Extended timeframe for comprehensive public outreach and gathering input from stakeholders.

Disadvantages of the November 2026 election timeline:

• Distant prospect, with the election two years away.

• Risk of foregoing potential revenue in the interim.

Recommendation

Staff recommends that Council deliberate and provide guidance on the following matters:

1)    Does the Council intend to propose a ballot measure to increase the City’s TOT from 10% to X%

• If so, specify the amount of the TOT increase (e.g. 2% increase, etc.)

2)    Does Council intend for the increase in TOT to serve a general purpose or a special purpose?

• A general purpose tax requires a majority vote of the electorate (50% + 1 vote), and can only coincide with an election in an even-numbered year.

• A special purpose tax requires a two-thirds majority vote of the electorate and can be conducted as a stand-alone special election during an odd-numbered year.

3)    Does the Council want to consider adopting a Resolution by July 9, 2024, to include a TOT increase ballot measure on the November 5, 2024 election?

• This action can be done in June, pending direction from Council; however, July 9^th is the latest date to adopt this resolution.

• If not, does council wish to pursue another timeline/direction?

On October 3, 2023, City Council reviewed and updated its list of priorities, adding a new item “Transient Occupancy Tax (TOT) Increase - Explore adding to the Nov. 2024 ballot". 

On March 28, 2024, during the Strategic Priorities Workshop, City Council elevated Exploring a TOT increase to "high priority".