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 may or may not be affected by the economic condition of 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.

Due to the uncertainty surrounding the economic effects of the COVID-19 pandemic, property taxes as a whole and by each category are assumed to be flat with the prior year budget except where reasonable estimations can be made. 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), currently pending determination by the State Department of Finance. Such a change, with associated penalties for previous allocations, may reduce the City's receipt of excess ERAF by $0.26 million, reflected in the year-over-year change in secured property taxes. Following the City's traditional of considering excess ERAF to be an endangered revenue source, only 50 percent is budgeted and reasonably expected to be received regardless of any changes in distribution formulas or legislative changes resulting from the State's own budgetary needs.

Property taxes, shown below in Exhibit 1.09, total $27.34 million for fiscal year 2020-21.

FUTURE OF PROPERTY TAXES

Overall, the outlook for property tax is conservative. While property tax receipts are not expected to be impaired to the level that other revenues may be in the face of the economic crisis, the consistently high growth rates experienced over the prior several years are unlikely to continue or resume for some time. Several areas of particular concern may however result in a substantial impairment to future property tax receipts.

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 2020–21, transient occupancy tax revenue is budgeted at $4.72 million, down 54 percent from the fiscal year 2019–20 budget. This category of taxes is the most impacted by the COVID-19 pandemic and the near complete suspension of business and leisure travel starting in March 2020. Given the uncertainty surrounding development of a vaccine and the continued reduction in travel, this category is unlikely to fully recover within fiscal year 2020–21.

While the number of hotel rooms and the average nightly rate had reached historic highs by the middle of fiscal year 2019–20, such levels are unlikely to resume immediately. Fortunately, the Great Recession provides some guidance on the economic impact of hotels and the impact on Menlo Park hotels during the Great Recession showed a slowing of transient occupancy tax revenue followed by a steep increase. The differences between the Great Recession and the current public health driven conditions are incompletely known at this time, and 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. The historical loss of major sales tax generating sources has caused sales tax revenue to move from the second largest tax revenue source to third, falling behind transient occupancy taxes. The previously discussed changes to the transient occupancy taxes may result in sales taxes again becoming the second-largest tax source for the City, though accurate impacts are difficult to quantify at the time of budget preparation due to the delay in remittances to the City. Sales taxes are budgeted at $5.02 million 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.

The impact of the economic crisis and of e-commerce on Menlo Park’s sales tax revenue will continue to be monitored closely, with the 10-year forecast updated accordingly should conditions change.

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 is not a growing source of revenue, as changes in certain industries, notably the telecom and cable industries, are causing erosion in those revenue sources offsetting any growth from other sources.

UUT is projected to be approximately $1.22 million in fiscal year 2020–21, which is modestly lower than final fiscal year 2019–20 estimates as utility use is expected to be reasonably lower from business sources due to reduced activity, but is considered to be largely inelastic for many utility users.

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 have undergone rapid and fundamental change. Social distancing, sanitation requirements, and budgetary constraints have all contributed to the changes which are particularly concentrated in this revenue category.

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 somewhat reduced level, major changes to programming in Library and Community Services substantially reduce the expected revenue in fiscal year 2020-21 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. The cost to provide services may require review in light of the additional COVID-19-related restrictions which may adjust fees charged but which will require time to prepare and validate.