San Jose city leaders are moving ahead with a June ballot measure to raise hotel taxes, seeking to generate millions of dollars for critical services amid budgetary woes.
With the city already forced to cut previously approved services and institute a hiring freeze to rebalance this year’s budget, next year promises to be even more challenging, as San Jose faces an estimated potential shortfall of $55 million to $65 million, due in part to the sluggish economy and stagnating revenue.
After gauging voter interest in a variety of tax or bond measures, San Jose will pursue a 2% increase in transient occupancy taxes, which city staff says could generate approximately $10 million in annual revenue without reducing the competitiveness of its lodging industry.
“This is part of a broader strategy to strengthen the city’s fiscal foundation and protect essential services to our community,” Assistant City Manager Lee Wilcox said. “San Jose has long operated under a structural mismatch. We provide big city services, but with a tax base that falls well below our peer cities.”
While budgetary issues are not new to San Jose — it resolved more than $800 million in shortfalls over the past two decades — the city has balanced its budget by cutting city services and reducing its workforce. According to a city auditor report, San Jose has the lowest number of full-time employees per capita among the state’s largest cities.
“That approach, while necessary, has stretched many departments then and left us vulnerable to growing demands,” Wilcox said.
The City Council acknowledged a few years ago that San Jose needed to bolster its budget and tasked City Hall with evaluating other revenue sources.
A lack of voter support has limited some of those options. During the 2024 election cycle, the City Council declined to pursue a parcel tax to help fund city parks, which face an infrastructure backlog of more than $500 million. At that time, city officials acknowledged that residents already felt financially squeezed, and a plethora of taxes or bonds from other entities appearing on the ballot could further erode support for a parcel tax.
The city has argued that increasing transient occupancy taxes from 10% to 12% would provide a stronger opportunity to raise revenue this year because tourists would bear the cost burden.
The first iteration of the tax was passed in 1982 at 6%. Voters approved two subsequent 2% raises later that decade.
The current 10% structure serves two purposes: a 6% specific tax for the convention center, tourism marketing and the arts community and a 4% general tax for the city’s general fund.
Under the ballot proposal, only the general fund tax would increase, allowing the city to pass the measure with a simple majority. A poll conducted by Fairbank, Maslin, Maullin, Metz & Associates, Inc. found that 55% of likely voters would support an increase, with another 12% undecided. Poll participants were told the city would use the funds for services such as public safety, addressing homeless encampments affecting parks, neighborhoods and waterways and removing trash, illegal dumping and graffiti and maintaining playgrounds, recreational facilities, park restrooms and trails.
While arts organizations have petitioned the city to invest more of the lodging tax in tourism and the creative community, Wilcox said that not only would that raise the threshold to pass to two-thirds, but previous polling also did not indicate that it would pass.
The city also argued that a hotel tax increase will have a limited impact on hoteliers. San Jose’s base hotel tax is on the low end of the scale when compared to the state’s largest cities and other Bay Area municipalities.
Altogether, when factoring in other taxes or fees passed onto customers, city officials estimated that San Jose’s current overall hotel tax rate is between 14.5% and 15.1%. The effective tax rate for cities like San Diego, Anaheim, Los Angeles, Oakland and San Francisco ranged between 15.75% to 17.5%. If the June measure passes, San Jose’s effective hotel tax rate, which could go into effect in October, would increase to between 16.5% and 17.1%.
“This proposal keeps us competitive, while allowing visitors to help fund services to keep our city safe, clean and welcoming for all,” Wilcox said.
Hotel and business owners, however, raised concerns about the proposal, arguing that smaller hotels operate on smaller margins and that the benefits of the taxes were disproportionately skewed.
“When compression is weak or geographically concentrated downtown, smaller hotels are left with declining margins and increasing fixed expenses,” Shyam Panchal wrote to the City Council on behalf of the Clarion Inn Silicon Valley. “The risk is not theoretical: the likely outcome is that small hotels will face accelerating financial strain, and some will be pushed toward distress, sale, or closure.”
The San Jose Chamber of Commerce also asked the city to delay its decision.
“We ask that the City consider placing this measure on the November ballot and direct staff to provide a more thorough analysis of how additional (transient occupancy tax) revenues could be strategically invested in tourism, convention activity, the experience economy, and San Jose’s arts and cultural ecosystem,” Chamber President and CEO Leah Toeniskoetter wrote to the city. “Increasing the tax without this clarity — and without meaningful industry input — risks placing San Jose’s hotels and visitor-serving businesses at a competitive disadvantage relative to peer cities.”
While he voted in favor of placing the tax increase on the ballot, District 6 Councilmember Michael Mulcahy acknowledged the importance of arts and culture in shaping the city’s experience economy and said more tax funds should be directed toward those organizations.
“This past week, we all just witnessed how a well-marketed, funded and coordinated series of events in our city can drive pride, prosperity and broad community engagement,” Mulcahy said. “Therein, lies the power of the experience economy.”
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