Facing what one council member called a long-term “structural deficit” regardless how long the Covid-19 pandemic and related economic fallout continues, Morgan Hill City Hall is once again considering its options for placing a new local tax or fee on the Nov. 3 election ballot.
The discussion about a new local source of revenue has come up at City Council meetings many times in recent years, but city staff and elected officials say recent events have made the need for more funds just to maintain existing public services even more urgent. City officials have often pointed out that Morgan Hill is the only city in Santa Clara County that does not have its own local voter-approved tax or fee.
“We have a long-term structural deficit we need to address that is going to outlast the pandemic,” Council member John McKay said earlier this week. “Our costs to maintain our roads, maintain our police and fire departments—those costs only increase.”
McKay added that the loss last year of the city’s Residential Growth Control System—which generated revenues and allowed the city to control the need for services—as well as a growing “anti-business” sentiment among the community have added to City Hall’s dreadful long-term financial outlook.
The council is scheduled to discuss and possibly vote on a local revenue measure at the July 15 meeting, which starts online at 7pm. To participate in or watch the meeting remotely, visit the city’s web page where the meeting agenda is posted.
The city’s deadline to submit a ballot measure for the Nov. 3 election is Aug. 7.
Under consideration for the July 15 meeting are a utility users tax, local transaction and use tax or a business license tax. All three of these would require varying levels of voter approval, from a simple majority to two-thirds.
Other funding mechanisms that city staff are exploring, which do not require voter approval, are a citywide community facilities district and a special fire district.
The council last discussed these possibilities at the June 17 meeting, where they asked staff to come back with more details and recommendations.
If the council approves a ballot measure or taxing district, McKay said he would want the collection of any new tax or fee to be held off until after the pandemic and related downturn are over.
“We certainly should include the ability to delay implementation (of a new tax or fee) if the pandemic is still going on,” McKay said. “I would find it hard to believe that we would start putting additional taxes or fees on the public when everybody is still suffering from the pandemic. That is not the goal.”
The impact of the coronavirus public health crisis and shelter-in-place orders had immediate impacts on cities and counties throughout California starting in March. Morgan Hill’s two-year budget—approved by the council last month—cut nearly $5 million worth of existing services, chiefly in the recreation and community services departments. The city is projecting a total revenue deficit of about $18 million over the next three years, due to declining sales and hotel tax receipts, loss of recreation and development fees and other traditional funding sources.
“While we were focused on addressing the existing unfunded needs and enhancing existing services, our focus has now shifted to be strategic in maintaining existing services,” reads a city staff report for the July 15 meeting.
McKay added that a burgeoning movement against big new business projects among local voters might prove to stunt the city’s ability to attract large-scale employers that contribute to the tax base.
Staff recommendations
For the July 15 meeting, city staff does not recommend sending a utility users’ tax to the Nov. 3 ballot. This type of tax is “generally not popular amongst voters in Northern California.” A survey commissioned by the city in October 2019 confirmed that Morgan Hill’s voters would not support a utility tax.
City staff recommends a local transactions and use tax (TUT) if the council wants to place any special revenue measure on the upcoming ballot. Under existing state law and tax rates, the city could levy a local tax up to .25 percent on all sales transactions in Morgan Hill. That amount could generate about $2.3 million for the city’s general fund annually, and would increase the local consumer’s total sales tax rate up to 9.25 percent.
A business license tax could take many different forms, generating from $184,000 to $2.5 million annually, according to city staff. The city currently has an “employee/unit-based” business license tax structure that generates about $203,000 annually.
City staff recommend a business license tax measure that would keep this structure in place while adding new taxable categories of business. It would also add a new fee category based on square footage for warehouse, distribution and storage related businesses.
Such a business license model could generate up to $1 million in revenue for the City of Morgan Hill each year, according to city staff.
The only council member who has already expressed opposition to any of these potential ballot measures is Rene Spring. Instead, he said he would support the establishment and taxation of the cannabis industry, which is currently prohibited in Morgan Hill. Such businesses could generate more than $500,000 in taxes for Morgan Hill, according to previous studies commissioned by the city.
“I don’t think the timing is right to look into additional taxes or fees now, with so many families impacted by Covid-19,” Spring said. “I don’t think (the voters) want us to focus on these kinds of measures right now. We need to get people back to work and get things going again.”
