Santa Rosa proposes tax hikes on lodging, business licenses to address widening deficit

Santa Rosa administrators plan to ask voters in November to hike lodging taxes and revamp the city’s business license tax in a bid to increase revenues to offset a growing operational deficit.

Budget officials propose raising the lodging tax for overnight stays from 9% to 11% and removing a $3,000 cap on business taxes, among other changes, to more accurately reflect the cost of doing business today.

The two taxes have not been updated since the early 1990s and could result in a boon to city coffers if approved. The proposals would require a simple majority to pass.

Together, the measures are expected to generate an additional $14 million in annual revenue to help address a budgetary gap projected to hit $40.5 million in the next five years as labor and operational expenses increase, sales tax income flattens and one-time funding that pays for critical programs evaporates.

Chief Financial Officer Alan Alton told a council subcommittee last week the city needed “to be creative in looking for revenue.”

The budget team has spent the past several months analyzing these and other potential tax measures, polling likely voters and meeting with affected business leaders.

Increasing the city’s existing general sales tax or passing a new sales tax was not on the table, Alton said, adding that staff wanted to first “look at ordinances that we haven’t looked at forever or at all and bring them into the 21st century.”

The proposals will be presented to the full council in July.

Business license tax

The city’s business license tax is charged to about 13,000 retailers, service providers, professional services, rental operators and contractors registered to do business in the city. It hasn’t been substantially updated since it was enacted in 1990, Alton said.

Small businesses that have $25,000 or less in annual gross receipts pay a minimum $25 and the tax is capped at $3,000 for larger businesses that report $1 million or more in gross receipts.

The tax brings in about $4.8 million annually.

Alton said the city’s business tax administrator last year analyzed the existing ordinance and found the city underperforms compared to other similarly sized cities in the state, partly because of the tax cap.

City officials also felt the rates didn’t reflect the current cost of doing business and were inequitable between different sized businesses.

Budget officials propose removing the maximum tax that can be charged and creating a hybrid tax structure that would ensure small businesses see little change in their annual tax bill while larger businesses pay their fair share, Alton said.

Tax rates would increase for all business categories and the tax would be expanded to include businesses that operate fewer than four property rentals, whether it’s a triplex or vacation homes.

Under the hybrid model, businesses whose gross receipts add up to $25,000 or less would continue to pay $25.

Businesses would see an additional charge for every $1,000 above that and rates vary from $1.50 per $1,000 for general retailers to $3.50 per $1,000 for commercial and residential rentals and professional services like accountants and doctor’s offices.

An analysis of registered businesses showed about 450 businesses would likely be impacted by the updates, with most paying between $3,000 and $23,000, while about 20 of the largest businesses operating in the city could pay upward of $100,000.

The proposal would take effect in 2026 to give businesses time to adjust and would boost revenues by about $12 million to $16.8 million, Alton said.

Lodging tax

City Hall officials also propose increasing the so-called transient occupancy tax rate by 2%, pushing the city’s 9% rate, the lowest in the county, to 11%.

The city’s overall rate, including business improvement area assessments collected and distributed to the Santa Rosa Metro Chamber of Commerce and Sonoma County Tourism to help market the area to tourists, would be 16%, the highest locally.

The increase is expected to generate an additional $2 million annually.

Alton said staff discussed the proposal with Santa Rosa Chamber officials who indicated local hotel operators might be wary of increased prices as they seek to attract customers. While weekend stays are high, many hotels face vacancies during the week, he said.

The council subcommittee members agreed additional revenue is needed but raised initial concerns the increases could keep visitors away or make businesses that want to relocate to Santa Rosa look elsewhere.

Mayor Natalie Rogers, who leads the committee, said she would’ve preferred seeing more gradual increases over the years but updates are necessary.

The proposals come on the heels of a surprise council move to back away from new licensing requirements and increased fines on tobacco retailers, with a three-member majority led by Mayor Rogers expressing concern about the added burden for businesses. Revised rules are expected to come back to the council in July.

Committee members said explaining to voters why the tax hikes are necessary would be critical to get support.

The budget team will present the proposals to the City Council during a July 9 study session and the item will return for the council’s consideration on July 23.

The deadline to submit a measure to the county registrar for the November ballot is Aug. 9.

City officials plan to continue public outreach, meeting with business groups and other affected industries and developing educational materials for voters, Alton said.

You can reach Staff Writer Paulina Pineda at 707-521-5268 or paulina.pineda@pressdemocrat.com. On X (Twitter) @paulinapineda22.