Santa Cruz city voters will decide whether homeowners should be charged a tax on second vacant homes on the November ballot. But differing data about how costly such a tax would be, and how much money will be generated, is a sticking point between supporters and opponents—and at the heart of the discussion about the tax at last week’s City Council meeting.
Known in Santa Cruz as the Empty Home Tax initiative, the measure is one of a growing number of taxes popping up around the state—and world—that is looking to charge a fee for those second empty vacation rentals that some say are taking up critical space in a scarce rental market. Cities like San Francisco, Los Angeles—and more locally, Capitola—have all considered a similar tax for this year and next years’ ballot, with a few California cities bringing this issue to voters in November.
The premise of the tax is a simple one: use taxes from homeowners’ empty vacation rentals to fund affordable housing, and hopefully as a consequence encourage more homeowners to find renters for their additional rentals.
At least, it’s simple in theory.
In practice, there are more logistical considerations these measures have to take into account, and it can be hard to nail down exact data to determine the costliness of such a tax, and how much money can be generated. That’s partly due to the novelty of such taxes—Oakland became the first city in California to approve a similar tax in 2018, modeled in part off Vancouver, Canada’s vacancy tax. Data on second homes and vacancies can also be hard to pinpoint, and calculated in different ways, contributing to the ambiguity.
So how much would it cost to implement this tax, how much affordable housing could it generate, and what would its implementation look like?
Battle of the Data
On June 28, city staff presented a report that estimated the start-up cost of the tax will be $607,000, and predicted it will generate $2-4 million in revenue. After start-up, staff estimates the costs to be closer to $420,000 annually.
Those hefty initial expenses include a budget of $65,000 to build a web portal for landlords to certify whether their secondary properties were occupied fewer than 120 days that year. If so, they could be subject to a tax between $3,000 to $6,000, depending on the number of units in the property.
$126,000 is budgeted to support the measure’s Oversight Committee. The Oversight Committee—made up of volunteers, and scheduled to meet a minimum of once a year—keeps tabs on the functioning of the tax program.
Staff also included $100,000 in potential legal fees.
Empty Home Tax Campaign Manager Cyndi Dawson, Councilmember Sandy Brown and other members of the public objected to these high start-up fees at last week’s council meeting.
There’s already a web portal that the City uses to receive reports and payments for the Transient Occupancy Tax and Short Term Rental Fees—in short, the infrastructure is there for the self-reporting system, Dawson tells GT. She believes the costs for the portal should be more like $5,000‐$15,000.
Then there is the expense for supporting the Oversight Committee.
“There was 1,000 hours per year of staff time allocated for one meeting a year,” says Dawson. “$126,000 for one meeting just was, like, a glaring [overestimate].”
As for the legal fees, Brown and Dawson questioned at the meeting why they were included in the first place.
“I’ve been here and voted yes and voted no on many ordinances,” Brown said. “We’ve never been told it costs $100,000 for potential legal risk.”
City staff emphasized these start-up costs were created with input from consultants who have implemented ordinances before, and that should there be litigation, it would cost the city significantly more than the $100,000. Staff also cited the tax’s novelty, making costs and revenue difficult to calculate.
As for how the city calculated the $2-4 million the tax might generate, staff looked at “data from the County of Santa Cruz’s absentee property lists, homeowner exemptions claimed and long-term and short-term rental data.”
The Empty Home Tax campaign uses Census Data to estimate the tax’s revenue. Data shows a vacancy rate of 9.5%, or 2,283 homes, in the city of Santa Cruz for 2020. The estimate includes second homes, homes under construction and ones used seasonally. Over accounting for landlords who qualify for exemptions, if only 500 property owners were to pay the tax, the city would raise about $3 million dollars annually, says Dawson. And even at that low estimate, the ordinance—which funds city costs associated with the tax up to 15%—would fund the city staff’s estimated administration expenses.
Peter Cook, a long-time Santa Cruz real estate agent and member of Santa Cruz Together, which is running an opposition campaign to the measure, says even those numbers are wildly overestimated.
Three of his clients have already come to him saying they will find a way to not pay the tax—but not necessarily by renting to students or other Santa Cruz locals.
“People will probably exaggerate and say that they live there the minimum number of days,” says Cook. “I think some people will sell their properties. And I think some people will probably rent them out oftentimes to family members, and oftentimes with big air quotes around ‘renting it out.’”
Ultimately, the council voted unanimously to bring back an updated report that compared costs to other cities with similar taxes, and re-evaluated staff expenses associated with the committee meetings.
“I’m sorry to hear that you didn’t get more information from some of the other jurisdictions that have adopted [similar measures] about their costs,” Brown said at the meeting. “I think that it would have been really helpful for you and for all of us to see an analysis that was based on, well, what’s real.”
In 2018, Oakland voters passed the city’s own version of a vacancy tax.
There are some key differences in Oakland’s tax compared to the Empty Home Tax, one being that Oakland’s vacancy tax applies to residential and nonresidential properties, and includes undeveloped land and commercial properties.
Since 2020, when the city began collecting money on the measure, the tax is projected to bring in just over $15 million. Most of that money has gone towards Oakland’s Public Works and Human Services departments, to establish a commission on homelessness, a mobile outreach team for homeless residents, homeless cleanup services and housing grants to local shelters.
Meanwhile, the city’s finance and administrative departments are expected to use $2.5 million of the tax’s projected revenue.
The initial start-up costs were closer to $100,000 and according to Rosanna Munoz, Oakland’s acting assistant revenue and tax administrator, those costs were pretty accurate.
Oakland is gearing up to build thousands of new units over the next several years, and this money might make a meaningful dent in construction costs for new units—especially low-income units, says Munoz.
“We continue to be faced with a large and growing homelessness crisis,” said Oakland City Council Member Rebecca Kaplan when Oakland received its most recent fiscal report on the vacancy tax. “And making sure we are doing the most we can with all that we have to remedy it is critical.”