CARLSBAD — Facing a structural deficit where projected ongoing spending will increase at a faster rate than ongoing revenues, the Carlsbad City Council is looking at budget reduction measures along with avenues to increase earnings.
During the council’s Oct. 24 meeting, city staff presented the potential impact of raising the transient occupancy tax, also known as the hotel tax, paid by visitors staying in Carlsbad hotels and short-term vacation rentals. The city explored the possibility of putting a 1% hotel tax increase proposal on the November 2024 ballot, but the council voted not to pursue it.
The city has transitioned from a phase of growth and development to a phase of maintenance, meaning the city sees less income from developing fees. New programs and services, population growth and inflation have all contributed to the anticipated annual deficit.
Staff originally projected an annual deficit as early as 2026, but recent reductions have pushed the projection back to 2029. An annual deficit does not mean an overall debt, as the city has over $100 million in the general fund reserves.
Last April, city staff presented its revenue study, identifying possible revenue-generating mechanisms, including raising the sales tax, a move supported by a majority of Carlsbad voters, according to the staff report. The report showed a 1% sales tax increase would generate the most new revenue of all the options explored, estimating earnings of approximately $40 million per year.
The report also studied a possible 1% increase to the hotel tax, finding the increase would net between $3 million and $3.5 million a year in additional revenue. Hotel tax revenues comprise about 15% of the city’s general fund, totaling about $34 million for the last fiscal year.
While they did not recommend raising the TOT rate, city staff said the anticipated impact on the lodging industry would be minimal.
“The sector has, by and large, recovered from the pandemic impact, especially in the peak summer season,” said Matt Sanford, the city’s economic development manager.
However, local hoteliers disagreed with the city’s assessment. Fred Tayco, executive director of the San Diego County Lodging Association, said the industry is still in its recovery phase.
Former City Council candidate Tracy Carmichael said putting the tax increase on the ballot would be passing the responsibility of finding new revenues to voters.
“Balance the budget,” Carmichael said. “It’s your job.”
Council members directed city staff to pursue internal cost-cutting measures and not the transient tax increase.
“Nobody wants to be priced out of Carlsbad, whether it’s our residents or our guests,” Councilmember Teresa Acosta said.
