CITY OF CUPERTINO,
CALIFORNIA
December 5, 2023
Updated
Tax
Revenue
Options
Public Finance | Public Management |
Analytics & Compliance
Presentation Outline
Tax Revenue Options - General Fund 3
Transaction and Use Tax (TUT) 5
Transient Occupancy Tax (TOT) 8
Parcel Tax 11
Business Operations Tax 15
Recommendations & Next Steps 19
2 Tax Revenue Options
General Fund
3 General Fund Revenue Taxes – 4 Basic Considerations
1. Adequacy and Certainty
• Sustainably generates annual needed revenue
• Not subject to significant variation (low volatility)
2. Equity and Fairness
• Fiscal burden appropriately spread
• Proportionate to surrounding communities
• Does not highly skew economic incentives
3. Transparency
• Easy to find information on the revenue/tax structure and understand how it operates
4. Simplicity
• Does not require multiple ballot measures (voter confusion and fatigue) • Not highly burdensome, costly or complicated to administer (by city or payors) 4 Transaction and Use Tax (TUT)
Basics of a TUT
• Functionally similar to state Sales and Use
Tax (SUT) with important difference:
SUT – Point of Sale
Where did sales transaction occur?
TUT – Point of Delivery/Use
Where did Buyer receive goods or put
them to use?
• 2022 – 73% of TUT measures for new or
increased rate approved (30 of 41)
• 2020 - 74% of TUT measures for new or
increased rate approved (65 of 88)
Santa Clara Countywide
Base Rate 9.125%
State Sales Tax 6.25%
Bradley-Burns Local Share 1.00%
Santa Clara County Transit District (1976) 0.50%
Santa Clara County Valley
Transportation Authority (2006) 0.50%
Santa Clara VTA BART O&M
Transactions and Use Tax (2012) 0.125%
Santa Clara County
Retail Transactions and Use Tax (2013) 0.125%
Silicon Valley Transportation
Solutions Tax (2017) 0.50%
Peninsula Corridor JPA
Retail Transactions and Use Tax (2020)* 0.125%
5 *Authorized by special State legislation.
Transaction & Use Tax (TUT)
• Available TUT to City = 0.25%
• Statewide Cap = 9.25% + special leg.
• County Rate = 9.0% + .125% special leg.
• Available TUT to Cupertino = 0.25%
• Total Rate in Cupertino w/ TUT = 9.375%
• Additional Annual Revenue (est.)
• @ 0.25% = $5.4 million annually
• Excludes roughly 90% business-to-
business sales (67% of City’s net state
sales tax from 2 large multi-nationals)
• Realization rate on remaining 33% is
assumed close to 100% due to type of
businesses (plus additional est. revenues
from auto sales)
City/Area Rate*
Santa Clara Countywide 9.125%
Campbell 9.375%
Los Gatos 9.25%
Milpitas 9.375%
San Jose 9.375%
San Mateo Countywide 9.375%
Belmont 9.875%
Brisbane 9.875%
Burlingame 9.625%
Daly City 9.875%
East Palo Alto 9.875%
Pacifica 9.875%
Redwood City 9.875%
San Bruno 9.875%
San Mateo 9.625%
South San Francisco 9.875%
San Francisco 8.625%
Alameda Countywide 10.25%
*Effective rates as of April 2023.
6 Transaction & Use Tax (TUT)
Pros:
Standard Voter Approval Requirement – 50% + 1 voter approval required for TOT. High Approval – recent TUT measures in 2020 and 2022 have high approval rates (74% and 73% respectively) despite COVID-19 pandemic.
Competitiveness/Adequacy – 0.25% TUT rate keeps City generally proportionate to surrounding communities while generating more revenue than TOT or parcel tax. Who Bears Tax Burden – tax burden spread across residents, businesses and visitors (which includes significant daytime workforce – 60,000+ pre-pandemic). “Use it or lose it” – 0.25% TUT currently available to the City could be obligated (“used”) if a regional agency or the county passed a new or increased TUT measure.
Once obligated, City’s only option would be special state legislation. Cons:
o Volatility – sales tax is more elastic than property/parcel tax but less than TOT (generally correlates with overall economic trends).
o Equity – TUT is not applicable to large number of business-to-business sales in which purchaser is located outside the City.
7 Transient Occupancy Tax (TOT)
Basics of a TOT
• Authorized under Revenue and Tax Code s.
7280 (stays of 30 days or less) imposed on
occupant based on room rate
• TOT has been called a “painless” tax – paid by
non-residents – but can impact hotel
occupancy and future growth if
disproportionate to surrounding areas
• 2022 – 77% of TOT measures to increase rate
approved (24 of 31)
• 2020 – 91% of TOT measures to increase rate
approved (21 of 23)
Statewide Facts on TOTs*
• Most cities and counties have a TOT
(over 480 total)
• Rates range from 3.5% to 15.5%
(Palo Alto)
• Statewide mean rate = 10.2%
• On average, TOT provides 7% of
General Fund revenue
*Data as of FY 2021 – CaliforniaCityFinance.com
8 Transient Occupancy Tax (TOT)
• City’s Current TOT = 12.0%
• Additional Annual Revenue (est.)
• @ 13.0% = $625,000
• @ 14.0% = $1.25 million
• @ 15.0% = $1.875 million
• Recent Trends in City’s TOT
• City’s TOT ordinance already updated to
improve collection from short-term rentals
(e.g., Airbnb, VRBO, etc.)
• Trendline for TOT growth is conservative
(1.9% annual growth). Hospitality industry
continues to recover post-pandemic and
seek a “new normal.”
City/Area Rate*
Santa Clara County
Gilroy 9.0%
Mountain View,
San Jose, Saratoga 10.0%
Los Altos, Morgan Hill 11.0%
Campbell, Los Gatos, Sunnyvale 12.0 - 12.5%
Los Altos, Milpitas, Santa Clara 13.5 - 14.0%
Palo Alto 15.5%
San Mateo County
Burlingame, Colma, East Palo
Alto, Foster City, Menlo Park,
Pacifica, Redwood City
12.0%
Daly City 13.0%
Belmont, Brisbane, Millbrae, San
Bruno, San Carlos, San Mateo,
South San Francisco
14.0%
Half Moon Bay 15.0%
San Francisco 14.0%
*Rates as of November 2022.
9 Transient Occupancy Tax (TOT)
Pros:
Standard Voter Approval Requirement – 50% + 1 voter approval required for TOT. High Approval – recent TOT measures in 2020 and 2022 have high approval rates (91% and 77% respectively) despite COVID-19 pandemic.
Who Bears Tax Burden – TOT tax burden borne almost exclusively by non-residents. Cons:
o Competitiveness - City is currently in middle of regional TOT rates @ 12% but adding 3% would place it second only to Palo Alto for the region (and make it one of the highest in state).
o Adequacy - smallest overall revenue generation unless rate significantly higher than surrounding communities (increasing competitiveness concern – see above). o Volatility – TOT is more elastic than either TUT or parcel tax, resulting in higher potential fluctuation in annual revenue.
10 Parcel Tax
Basics of a Parcel Tax
• Non-ad valorem (non-value based) tax levied on
parcels of property
• Methodology: Either a fixed/flat rate per-parcel
or a variable rate depending on the size, use, or
number of units on the parcel
• Can establish different rates for residential &
commercial property but rate must be
applied uniformly
• Can include inflationary index
• Voter approval required: 2/3 vote required (funds
restricted to specified purposes); only majority
approval required if proposed by citizen initiative
Statewide Facts - Parcel Tax
• Since 2010, largest percentage of
approved parcel taxes (41%) are for
education.
• Most common methodology: flat
rate per parcel.
• For cities, between 2010 and 2022,
66% of proposed parcel taxes were
approved by the required 2/3 vote.
11 Parcel Tax
• No current City parcel tax
• City’s clean water/storm protection
assessments are property fees (not taxes).
• Schools – Fremont Union HS $98 parcel tax
was reauthorized in 2020 (expires 2028).
Cupertino Union $250 parcel tax expired in
2022 (reauthorization with increase to $398
rejected in by voters in 2021).
• Parcel tax measures in Santa Clara &
San Mateo counties
• 18 non-school parcel taxes on ballot from
2008 to 2022.
• 83% approved.
• All for special purposes: libraries, roads,
police, water and open space.
• Since 2018, 24 school parcel taxes on ballot
with only 54% approved.
City/Area Rate/yr.
Santa Clara County
Santa Clara - Libraries $34 parcel
Santa Clara – Open Space $24 parcel
San Jose – Libraries $30 parcel
North County - Libraries $76 parcel
Santa Clara Water Dist. $0.006 per sf
El Matador - Roads $350-$750 parcel
San Mateo County
E. Palo Alto – Office Space $2.50 per sf
Portola Valley – Roads $950 parcel
Highlands – Police $65 parcel
San Mateo – Police & Fire $65 parcel
Atherton – Police $750 parcel*
*Not renewed in 2017
12 Parcel Tax
Additional Annual Revenue (est.)
Fixed/Flat Rate per Parcel
Parcel Type # of Parcels** Per Parcel Tax Annual Revs. (est.) Single-Family Residential (SFR)* 14,152 $250 $3,537,900 Multi-Family (three-family & larger) 205 $250 $51,250
Commercial/Office/Ind. 471 $250 $117,750
Total $3,706,900
Variable Rate per Square Foot (SF) of Parcel Size
Parcel Type (annual tax median parcel size) Total Ac.** Per SF Tax Rate Annual Revs. (est.) SFR* – 5,000 sf ($27) 178 $0.021 $163,010
SFR* – 5,000 to 10,000 sf ($155) 1,499 $0.021 $1,370,768 SFR* – 10,000 to 17,500 sf ($247) 310 $0.021 $283,210
SFR – Over 17,500 sf ($613) 407 $0.021 $372,124
Multi-Family ($219) 232 $0.021 $212,224
Commercial/Office/Ind. ($613) 1,500 $0.021 $1,372,140
Total $3,773,476
13 *includes condos, townhomes & duplexes
**excludes vacant parcels and parcels with $0 assessed value; and assumes 10% SFR exemption rate Parcel Tax
Pros:
Low Volatility – parcel tax revenue not impacted by overall economic trends (non-ad valorem) and inflationary index helps revenues keep pace with rising expenses. Flexibility – parcel tax provides some flexibility in designing tax structure to help mitigate equity concerns (see below) using a variable rate. High Approval but for Special Purpose – voter approval rates for city parcel taxes has been strong (83%) but all have been restricted to special not general purposes. Cons:
o 2/3 Voter Approval Required – state law requires 2/3 approval by electorate. o Equity – flat/fixed rate parcel tax often considered very regressive but can be mitigated with variable rate (see above).
o Adequacy/Competitiveness - rate equivalent to recently expired local school district parcel tax ($250/parcel or $0.020 per SF) is significantly higher than most parcel taxes in surrounding communities but generates significantly less revenue than TUT. o Who Bears Tax Burden – parcel tax burden borne exclusively by residents and businesses. 14
Business Operations Tax
Basics of Business Operations Tax
• Tax on businesses for privilege of conducting
business within the City.
• Methodology: Either a fixed/flat rate per
business (often varies by type of business) or
a variable rate based on some measurable
aspect of the business operations, such as:
gross receipts/payroll, number of employees
(headcount), square footage of business, etc.
• Cities have wide discretion in determining
methodology, rates and applicability (cannot
be discriminatory or confiscatory, and
state/federal law exempts certain activities).
• Tax is only on business activities conducted
within the City. Multi-jurisdiction businesses
must be able to apportion.
Statewide Facts – Business
Operations Tax
• More than 95% of cities impose one
or more business operations taxes.
• Average city generates around 3%
of revenue from business
operations taxes.
• Top 20 cities generate between 10%
and 25% of total revenue from one
or more business operations taxes.
• Since 2010, 65 business operations
taxes on ballot with 74% approved
(excludes cannabis) statewide. 92%
approved in Bay Area region.
15 Business Operations Tax
• City’s Existing Business Operations Taxes
• $75 flat rate per business + rate per square
foot of the business (ranging from $0.02/sf
for small businesses to $0.0025/sf for
largest business)
• City also has operations taxes (both flat and
variable) for specific businesses, such as
apartments (per unit), hotels (per room), taxis
(per vehicle), theaters (per seat), etc.
• Annual Amount Generated = $725,000 ($12
per capita)
16 City Annual
Revenue
Per
Capita
Santa Clara County
Mountain View* $6 million $74
Sunnyvale $2.1 million $14
Los Gatos* $1.1 million $34
Santa Clara* $6 million $47
Los Altos $490,000 $16
Palo Alto* $9.6 million $144
Campbell $723,000 $17
San Mateo County
San Carlos $1.2 million $40
San Mateo $6.3 million $62
Foster City $1.6 million $48
* New or updated within last 5 years
Business Operations Tax
17 Employee Count Tax* (est.)
Employee
Range
# of
Businesses
% of
Businesses
in Tier
Estimated
Employee
Count
Base Rate
Per
Business
Per
Employee
Rate
Total Tax
Effective
Tax Rate
Per
Employee
Effective
Tax Rate
Per Avg.
Business
1-9 3,128 89.37% 3,400 $25 $0 $78,200 $23 $25
10-49 300 8.57% 4,000 $100 $15 $90,000 $23 $300
50-99 40 1.14% 2,400 $250 $25 $70,000 $29 $1,750
100-249 25 0.71% 3,300 $250 $50 $171,250 $52 $6,850
250-499 5 0.14% 1,300 $250 $75 $98,750 $76 $19,750
500-999 1 0.03% 600 $250 $100 $60,250 $100 $60,250
1,000-4,999 - 0.00% - $250 $125 - - -
5,000+ 1 0.03% 24,000 $250 $150 $3,600,250 $150 $3,600,250 Totals 3,500 100.0% 39,000 $4,168,700
*Business and employee count data provided by City from 2018 research. Current data likely different post-Covid.
Business Operations Tax
18 Pros:
Standard Voter Approval Requirement – 50% + 1 voter approval required for business license taxes.
High Approval – since 2010, business license tax measures in Bay Area Region have high voter approval rates (94%).
Low Volatility – business operations tax based on employee count (pandemic notwithstanding) provides a stable tax base, subject to unknown longer-term impact on business location decisions (see below)
Cons:
o Who Bears Tax Burden/Equity – tax burden borne exclusively by local businesses but setting varying rates and caps can allocate the tax burden differently across different size businesses.
o Competitiveness/Equity/Adequacy - City currently has a very low business license tax rate compared to surrounding cities as measured on a per capita basis. If an employee count tax is set at top rate in the region ($75 per capita), the annual tax revenue generated is significantly less than the 0.25% TUT and it likely requires shifting tax burden to a few very large businesses. Additionally, there is an unknown potential impact on locational choices of existing and future businesses that could erode the annual tax revenues.
Recommendations &
Next Steps
19 Tax Revenue Options – Recommended Ranking
20 Rank Revenue
Option
Est.
Annual
Revenue
Pros Cons
1 Transaction
& Use Tax
(TUT)
$5.4
million
• 50% + 1 vote required with high
voter approval in recent
elections.
• Generates most revenue with
rate proportionate to
surrounding cities.
• Tax paid by residents,
businesses and
visitors/daytime workforce.
• “Use it or lose it.”
• TUT is more volatile and subject to
annual revenue fluctuation than
parcel tax but not TOT.
• TUT not applicable to large portion
of business-to-business sales in
which purchaser located outside the
City.
2 Transient
Occupancy
Tax (TOT)
$1.9
million
• 50% + 1 vote required with high
voter approval in recent
elections.
• Tax paid by non-
residents/visitors.
• TOT is more volatile and subject to
annual revenue fluctuation than TUT
and parcel tax.
• Smallest overall revenue generation
unless rate significantly higher than
surrounding communities.
Tax Revenue Options – Recommended Ranking (cont.)
21 Rank Revenue
Option
Est.
Annual
Revenue
Pros Cons
3 Parcel Tax $3.7
million
• Parcel tax has lowest volatility
and annual revenues are very
stable.
• High voter approval but for
restricted special purposes
(not general fund).
• 2/3 vote required.
• Tax paid by residents and businesses.
• Flat/fixed parcel tax often considered
regressive tax (but can use variable
rate to improve equity).
• Rate equivalent to expired school
parcel tax generates significantly less
revenue than TUT and is higher than
other parcel taxes in the area.
4 Business
Operations
Tax –
Employee
Count
$4.1
million
• 50% + 1 vote required with
high voter approval over last
decade.
• Employee count tax has low
volatility but could erode
annual revenues if tax impacts
business location decisions.
• Tax paid exclusively by local
businesses, but varying rates/caps
can allocate burden.
• Setting rate at top of region generates
significantly less tax revenue than
TUT, and likely requires shifting tax
burden to a few very large businesses.
November 2024 Ballot Measure – Potential Timeline
Dates Task
January & February Community opinion research conducted.
March & April Staff develops options for revenue measure based on community opinion research and feedback, Council input, and other relevant considerations.
April to August Public information disseminated explaining why and how Council is considering placing a revenue measure on the ballot.
June Council decision on appropriate revenue measure and direction for staff to prepare ballot measure language and required resolutions.
July 16, 2024 Last regularly scheduled meeting of Council for Introduction/First Reading of revenue measure ordinance.*
August 6, 2024 Last regularly scheduled meeting of Council for Second Reading/Adoption of revenue measure ordinance and approval of resolution calling the election.
August 9, 2024 Deadline for City submission of ballot measure to Registrar of Voters.
August 20, 2024 Deadline for City’s submittal of impartial analysis of ballot measure to Registrar of Voters.
November 5, 2024 Election Day.
22 Recommended Action
23 Provide direction to staff regarding exploring the feasibility of one or more potential revenue tax measures—Transaction and Use Tax, Transient Occupancy Tax, Parcel Tax, and/or Business Operations Tax—through opinion research for the November 2024 election.