San Jose’s hotel tax revenue won’t recover until 2025

San Jose’s hotel tax revenue for 2021 is inching up from last summer’s levels, signaling a return to life. But monthly profits are still a third of what the city saw prior to the pandemic, according to city data.

“(The hotel tax) has been one of the city’s hardest hit revenues from the pandemic,” San Jose Budget Director Jim Shannon told San José Spotlight.

Prior to the months-long shelter in place orders that shuttered the hospitality sector, the city collected $51.4 million in hotel tax in the 2018-2019 fiscal year. That plummeted last year to an estimated $12.5 million, Shannon said.

Transient occupancy tax (TOT), or hotel tax, is a 10% fee imposed on visitors staying at hotels or motels in the city. Forty percent of the revenue goes to the general fund. The remainder goes into a fund that subsidizes the city’s Convention and Visitors Bureau, operations of Team San Jose and the Office of Cultural Affairs.

After Santa Clara County became one of the first in the nation to issue a shelter order in March 2020, hotels and convention centers shut down en masse. Conferences, sporting events and other large gatherings were also cancelled or dramatically curtailed.

According to Economic and Planning Systems, hotel occupancy rates in the downtown Hotel Business Improvement District fell to 7.8% in April last year, a drastic reduction from 74% occupancy rates two months prior. In February 2021, occupancy rates reached 18.4%.

San Jose’s hotel tax, consequentially, plummeted from $5.3 million in January 2020 to $577,000 in June. The city collected about $386,000 last December, the lowest revenue level in 2020.

“This has had a devastating effect on our operating budget,” said Kerry Adams Hapner, director of cultural affairs and deputy director of economic development. The Office of Cultural Affairs receives 15% of hotel tax revenues and is the primary source of local arts funding.

The city saw a slight increase in January, collecting almost $1.5 million in hotel tax revenue, but that number went down to $594,000 the following month. Monthly revenues between March and May hovered around the $1.1 million mark.

As California reopened and lifted most COVID-19 restrictions last week, San Jose anticipates "relatively strong TOT growth" in the upcoming months, Shannon said. The city estimates that hotel tax revenue could double the collection level last year, from $12.5 million to $25 million.

Still, that's only half the revenue in pre-pandemic times.

"While we are hopeful for a speedier recovery in this sector, our most recent five-year forecast... does not have TOT revenues returning to pre-pandemic levels until 2025-2026," Shannon said.

The dramatic dip caused by the pandemic is another hit to an already decelerating growth rate in San Jose's hotel tax revenue, according to the city.

In the 2014-15 budget cycle, San Jose reported a 24.1% growth rate in hotel tax revenue. While revenue continued to climb prior to the pandemic, the growth rate reduced to 5.1% in 2019.

Anticipating a slow recovery of hotel tax revenue, the San Jose City Council voted last week to allocate additional funding of $2.5 million from its American Rescue Plan funds to offset a potential negative balance. It also added $2 million from the rescue plan and shifted $1 million within the hotel tax fund to cultural arts grants, Shannon said.

Over the course of the pandemic, the city's art program gave 167 grants to local artists and organizations with $2.5 million in one-time COVID-19 relief funds, Hapner said. The art program will continue to rely on federal American Rescue Plan funds and other one-time use reserves the next fiscal year.

In the meantime, the Office of Cultural Affairs is ready to bring back its popular events, kicking off with today's Make Music Day 2021. CityDance San Jose, Music in the Park and Jazz Summerfest are also coming back.

"All of these activities are critical to not only our social cohesion and cross-cultural understanding, but our community and economic recovery so that we can build back better post-pandemic," Hapner said. "The arts are open and mean business."

Contact Tran Nguyen at [email protected] or follow @nguyenntrann on Twitter.