PROPERTY TAXES

As the City’s largest revenue source, property taxes are essential to understanding the fiscal health of the City in current and future years. For Menlo Park and the surrounding area, property taxes have proven quite resilient even through the depths of the Great Recession, a trend which will likely take several years to fully evaluate following the COVID-19 pandemic. This resiliency is attributed to location, land use decisions, significant investment in real estate improvements, and turnover in the housing stock to yield new base year assessed valuations in accordance with State law which caps the base property tax rate at 1 percent of base year assessed valuation adjusted annually for cost of living not to exceed 2 percent (Proposition 13).

Property tax is comprised of several components with secured property tax, the tax on real property and the structures on that real property, making up the single largest component. Secured property tax revenue is driven primarily by increases in assessed valuation. Unsecured property tax represents the tax on appurtenances such as furniture. Supplemental property tax is the result of reassessing the value of real property when there is a change of ownership or new construction is completed after the official lien date. Documentary transfer tax is a tax imposed on documents exchanged in the transfer of interest in real estate and is based on the value of the real estate. The tax collector administrative fee is budgeted as a contra-revenue, displayed as a negative number, which offsets the net receipts to the City for property taxes.

While there is still substantial uncertainty surrounding the ultimate effects of the COVID-19 pandemic, property taxes are expected to increase by a marginal amount in fiscal year 2021-22. The primary change, in secured property tax, is a result of a potential change to the distribution formula used for excess Educational Revenue Augmentation Fund (excess ERAF) and property tax in lieu of Vehicle License Fees, currently pending evaluation with the County of San Mateo and State of California. Changes in the distribution formulas may reduce the total property tax receipts by up to $2.36 million in fiscal year 2021-22. Additionally, the City has maintained a policy of budgeting only 50 percent of excess ERAF in recognition that it is considered an endangered revenue source.

Property taxes, shown below, total $28.05 million for fiscal year 2021-22.

FUTURE OF PROPERTY TAXES

Overall, the outlook for property tax is conservative. The assessed valuation growth under Proposition 13 is expected to fall below the 2 percent cap due to the economic effects of the pandemic. As the pandemic subsides, particularly with the economic effects of the American Rescue Plan Act stimulus package, cost of living adjustments are expected to return to historical levels. It remains to be seen what the effect of increased telework opportunities will have on commercial properties, which could result in a material impairment of assessed valuations if businesses do not return to office work.

TRANSIENT OCCUPANCY TAX

Transient occupancy tax (TOT or hotel tax) is the tax added to hotel guest bills for stays of fewer than 30 days. For fiscal year 2021–22, transient occupancy tax revenue is budgeted at $8.26 million, up 75 percent from the fiscal year 2020–21 budget. This category of taxes was substantially impacted by the COVID-19 pandemic and the near complete suspension of business and leisure travel starting in March 2020. Using the historical analog of the Great Recession, this category of taxes is expected to rebound quickly as the pandemic subsides. It remains to be seen whether successful telework options will reduce the demand for business travel and continue to hold TOT below its historical high. Staff will continue to closely monitor this revenue source as more information becomes available.

SALES TAX

Sales tax revenue has been a revenue in decline for the past decade in terms of share of overall revenue even before the shock of the economic crisis which resulted in temporary or permanent closure of many sales tax sources such as restaurants and retail stores. Sales taxes and TOT have traded positions as the second- and third-largest categories of tax revenues in recent years, and the expected return of TOT again moves sales taxes to the third-largest category. The anticipated reduction in sales taxes in fiscal year 2020-21 did not fully materialize, resulting in higher-than-budgeted actual amounts. Given the expectation that sales taxes will return rapidly in part due to pent-up demand, sales taxes in fiscal year 2021-22 are budgeted at $6.80 million, 8.0 percent above the estimated actuals for fiscal year 2020-21.

Unchanged from previous years, the forecasting process for sales tax is complicated and difficult, due in part to the increasing amount of sales tax received from the County pool. Pooled revenues are expected to continue to be a significant portion of the City’s overall sales tax revenue as e-commerce continues to become a larger part of the economy.

When transactions occur online for sales tax-eligible purchases, the 1 percent share received by cities goes into a County pool for distribution rather than the City where the goods are delivered. For example, if someone shops at the Staples in Menlo Park and purchases a computer, the City receives 1 percent of the sale price in sales tax revenue. If that same person buys that computer via the Staples website, the 1 percent of the sale price, instead, goes to the County pool for distribution to all agencies, as the revenue from online purchases is tracked to the County where the customer is located, rather than to a more precise location due to the lack of detail in the seller’s tax return. The County pool is distributed to each jurisdiction based on its share of total taxable sales. This is an important consideration because a jurisdiction’s share of pooled revenue is directly tied to its proportion of the local 1 percent amount it receives in relation to the other jurisdictions in the County. This effect is likely to be slightly but not fully offset by the increased number of online retailers collecting sales tax following a Supreme Court ruling which went into effect during fiscal year 2019–20 but whose full implications are not yet known.

UTILITY USERS’ TAX

The Utility Users’ Tax (UUT) became effective April 1, 2007, imposing the voter-approved maximum 3.5 percent tax on gas, electrical and water usage and the maximum 2.5 percent tax on cable, telephone and wireless services. On July 19, 2007, the City Council approved a temporary reduction in the tax rate on all utilities to 1 percent, which became effective October 1, 2007, and has been reauthorized each year for the maximum period of a temporary reduction of 12 months. Additionally, there is a cap of $12,000 on the combined annual amount that a user can pay for electric, gas and water. As the historical graph demonstrates, Exhibit 1.12, UUT has grown slowly except in recent years. The effect of the pandemic has yet to be fully analyzed, though continued relatively slow growth is expected as businesses return to office work and community members spend less time at home. UUT is projected to be approximately $1.74 million in fiscal year 2021–22, a modest increase from prior years given the uncertainty of the mix of utilities in a post-pandemic world.

CHARGES FOR SERVICE

This category includes revenue collections from fees charged for services provided by City operations. Due to the effects of the COVID-19 pandemic, many of the services traditionally provided by the City underwent rapid and fundamental change. As the City begins to provide a wider range of services to the public, this category expects to see growth but the magnitude is largely dependent on the future mix of services offered.

Historically, the Library and Community Services Department and Community Development Department were the main drivers of charges for service. While development-related charges are expected to continue at a pace similar to prior years, major changes to programming in Library and Community Services substantially reduce the expected revenue in fiscal year 2021-22 as compared to prior years. These fees are guided by the City's cost recovery policy, which specifies a subsidy level for various categories of activities. As the City prepares for reactivation of services to the public, the fees charged for services will also be reviewed, with a target date of early in fiscal year 2021-22.