LB Indy Letter To The Editor: Laguna’s biggest financial challenge

By John Thomas
Courtesy of Lagauna Beach Indy – for the original article click here

Considering the Strategic Planning the city is currently doing, the question arises: Is this the year that Laguna Beach confronts and addresses its biggest financial challenge?

A large share of the taxes that residents pay are not used to pay for services or capital improvements that directly benefit residents but are diverted to cover the substantial costs the city incurs due to the high number of visitors to Laguna.

A 2017 report showed that, at that time, revenue the city received that was attributable to tourists was $23 million less than the added costs the city incurred due to those visitors.

Since then, the city budget and visitors have grown, so the shortage is likely much greater today.

City leaders and staff have acknowledged this problem, and despite some early efforts, there has been little progress made by residents and visitors in reducing this large subsidy.

Now is the time to act. The City Council could put a measure on the November 2024 ballot to narrow the gap between revenue and visitor costs. The number of ambitious and costly items currently under discussion by the City Council makes it even more important to reduce the visitor subsidy. The aggregate cost of some of these items could exceed hundreds of millions of dollars. Without correcting the drain on city revenue due to visitor costs, it will be financially challenging for the city to proceed with even the most important projects.

Three of the best possibilities for generating meaningful amounts of revenue for the city are:

An adjustment in the business license fee structure that increases city revenue from the most tourist-focused businesses.
Revising the current hotel tax to be on par with one-third of Orange County hotels.
Expanding pay parking for nonresidents to areas within walking distance of the beaches while allowing residents to continue to park for free in residential neighborhoods.
Alternatives would be to either raise taxes on residents, lower the level of city services provided by the city government or borrow a lot of money.

The solution with the biggest potential revenue impact could be a revised business license fee focused on tourist-focused businesses. Though only a small percentage of visitors stay in Laguna hotels and pay hotel tax, approximately 70% of visitors to Laguna spend on food and beverages in town. This means that Laguna’s tourist-focused restaurants are a key point of contact with visitors, and these businesses are an opportunity to create a collection mechanism for visitor revenue to cover visitor costs. These bars and restaurants could be the stars in this effort, Laguna’s toll booth. A business license fee based on 1% of the gross revenue of these restaurants could currently generate over $4 million per year for the city government, and a very high proportion of this revenue would come from the visitors patronizing these restaurants. With time, a visitor-targeted business license fee could slowly increase from one percent to a maximum of 5% over five years and could eventually cover perhaps 60% of the current imbalance.

The revised fees could be designed to have little or no change for primarily resident-serving businesses. And fees for smaller businesses could be much lower than for the larger tourist-focused businesses. As is, our business license fees are among the lowest in California, so there is substantial room to adjust this fee without being out of line.

A second way to generate revenue from visitors is to expand pay parking for nonresidents to areas throughout the city within walking distance of the beaches while allowing residents to continue to park for free in residential neighborhoods.

The third way could be to update Laguna’s current 12% hotel tax to match the third of the hotel rooms in Orange County that charge 15%. As a top Orange County visitor destination, it seems only fair that Laguna’s total hotel tax should align with other top Orange County tourist destinations.

Combining the redesigned business license fee with an increased hotel tax and expanded paid parking areas could, in time, cover more than 75% of the overall shortage, thereby reducing the subsidy of residents to visitors, leaving more city revenue available to serve residents, and freeing up funds for the many projects on the city council priority list.

This is an election year. Now is the time for the City Council to act to close this huge financial gap and reduce the subsidy of visitors by residents. A solution will likely require a ballot measure. And a plan and ballot measure will take time to develop. Now is the time to get started, and the City Council needs to take action to do that.

John is a long-time Laguna Beach resident, business owner, former chair of the Laguna Beach Audit Review & Measure LL Oversight Committee, board member of the South Laguna Civic Association, and member of the South Laguna Water/Sewer Advisory Committee.

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