Capitola voters in November will consider a sales tax increase to help fund city services. (Stephen Baxter — Santa Cruz Local file)

CAPITOLA >> Capitola voters will decide whether to raise the city’s sales tax to 9.25% from 9% in the Nov. 5 election.

The sales tax measure would bring in an estimated $2.2 million annually from 2025 forward, adding to the more than $8 million that the city’s General Fund receives from sales tax revenue each year. The city’s General Fund is roughly $20 million. 

The tax increase also would stave off a projected $2 million budget shortfall in 2029 and contribute to a project to stabilize Cliff Drive — although the money could be used for any General Fund purpose.

Jump to a section: 

• What is the Capitola sales tax increase?
• What is the Capitola sales tax increase ballot text?
• What does a “yes” vote mean?
• What does a “no” vote mean?
• Who gets Capitola sales tax money?
• Arguments in favor of the Capitola sales tax increase
• Arguments against the Capitola sales tax increase
• How does the Capitola sales tax increase fit in the city budget?

What is the Capitola sales tax increase? 

The measure would bring Capitola’s sales tax rate to 9.25%. Prescription medicine and most groceries are exempt from sales tax. 

The measure would repeal a 0.25% sales tax and replace it with a 0.5% sales tax From January 2024 through December 2034. The new tax would raise about $2.2 million annually. Legally, the money could be used for any city purpose. 

The measure needs more than 50% of the vote to be adopted.

The Capitola City Council on June 27 voted unanimously to add the measure to the ballot. 

What is the Capitola sales tax increase ballot text?

To protect essential city services including public safety and emergency services; repair potholes, maintain streets, sidewalks, bike lanes, beaches, the new wharf, and recreation programs for youth; improve traffic safety; and support local businesses, shall City-of-Capitola replace its quarter-percent sales tax, approved by voters in 2016, with a one-half percent sales tax, generating an estimated $2.2 million annually for general government use, for ten years, with independent audits, and all funds staying local?

The funding priorities listed in the ballot text are not legally binding. The money from the sales tax hike would go into the county’s General Fund and could be used for any city purpose.

What does a “yes” vote mean?

A “yes” vote would approve the tax hike. The Capitola sales tax rate in the city would increase by 0.25%, bringing it to 9.25%, and extend through 2034. All revenue would go into the city’s General Fund and could be spent on anything in the city budget.

What would a “no” vote mean?

A “no” vote  would keep the Capitola city sales tax at 9%. Measure F, the 2016 tax hike that brought it to 9%, is set to expire in 2027. 

Who gets Capitola sales tax money?

Under existing rules, $9 in tax is collected for every $100 spent in Capitola. That includes:

• California sales tax rate of 6.25%.
• Santa Cruz County sales tax of 1.25%. 
• City of Capitola sales tax of 1%. 
• 0.25% city district sales tax from Measure O. 
• 0.25% city district sales tax from Measure F. This share would be replaced by the November 2024 proposed tax hike.

Money from the proposed Capitola sales tax hike could be used for any General Fund purpose, and some of the funds could be spent on projects such as leveraging federal money to stabilize Cliff Drive. It could also help pay for road fixes and the Bay Avenue Corridor Study, according to a June city council presentation.

Some city council members expressed concern at the lack of specific language regarding funding priorities in the measure. Vice Mayor Yvette Brooks said in June that it was important for residents to know that the money would not be attached to anything specific. 

“I just want to make sure it reads clearly,” Brooks said “These items would go into the General Fund. These are not restricted dollars for anything specific.”

Capitola Mayor Kristen Brown asked that city staff look into creating a resolution of intent for the use of the funding from the tax. A resolution of intent “would assure voters that there is something they can refer back to when looking to see if the funding commitments made today are upheld in future years,” Brown wrote.

What are other cities’ sales tax rates? 

Sales taxes in California cities and counties range from 7.25% to 10.75%, according to the California Department of Tax and Fee Administration. 

Current sales tax rates:

• California median: 8.75%.
• Capitola: 9%. The November 2024 sales tax hike would raise it to 9.25%
• Unincorporated areas of Santa Cruz County: 9%. Santa Cruz County voters this March voted for Measure K, raising the sales tax in unincorporated parts of the county to 9.5% from 9.0%. It is expected to raise about $10 million each year. However, the tax hike has not started because of a lawsuit from a San Lorenzo Valley resident. He essentially contends that a tax for unincorporated areas should not have been voted on by all county voters. 
• Scotts Valley: 9.75%. Scotts Valley voters approved a 9.75% sales tax with the adoption of Measure Z in 2020. Scotts Valley city officials attribute the city’s improved financial outlook to revenues from Measure Z.
• Watsonville: 9.75%. Watsonville voters in 2022 approved a 9.75% sales tax with Measure R. It aimed to plug the city’s deficit.
• City of Santa Cruz: 9.75%. Santa Cruz city voters increased the city’s sales tax to 9.75% from 9.25% in the March 5 election. The tax increase is expected to raise an estimated $8 million annually for the city’s General Fund. In June 2022, Santa Cruz city voters narrowly struck down a similar proposed sales tax increase.

Local jurisdictions in California such as cities and counties are allowed to raise the sales tax by a total of 3%, meaning the total sales tax in an area could be 10.25%, though some jurisdictions such as the City of Alameda have been given exemptions to this.

Capitola City Manager Jamie Goldstein said a sales tax hike would help close a city budget deficit projected by 2029. (Marcello Hutchinson-Trujillo — Santa Cruz Local file)

Arguments in favor of the Capitola sales tax increase

The sales tax increase will allow the city to “sustain vital services” such as Capitola Police, streets, parks, beaches, the wharf and infrastructure and recreation programs, according to the official ballot argument in favor of the measure.  

City Staff Capitola city staff estimated that more than two-thirds of the city tax revenue comes from visitors, not residents. 

“This measure is also crucial for securing nearly $8 million in federal funding to stabilize Cliff Drive against coastal erosion,” according to the ballot argument. 

City officials have said the tax increase would generate needed revenue for the city to cover an expected deficit in the next few years and to secure $10 million in federal funding to stabilize Cliff Drive.

The proposed 9.25% sales tax rate would remain the lowest in Santa Cruz County.

Arguments against the Capitola sales tax increase

There were no official arguments against the ballot measure as of Aug. 1.

How does the Capitola sales tax hike fit in the city budget?

The city’s General Fund pays for most city services. In Fiscal Year 2024-2025, the General Fund’s revenue is projected to be about $20 million. 

Capitola City Manager Jamie Goldstein said he expects a $2 million gap in the city budget by 2029. Inflation has helped lower the city’s purchasing power, and increasing pension costs are a factor, he said.

The sales tax measure on the November ballot would bring in an estimated $2.2 million annually from 2025 forward, adding to the $8 million to $9 million that the city’s General Fund receives from sales tax revenue each year.

In Fiscal Years 2022-2023 and 2023-2024, General Fund expenditures have been about $1.5 million higher than revenues. In Fiscal Year 2024-2025, General Fund spending is expected to be about the same as its revenue, but City Manager Jamie Goldstein said in June there would be a $2 million budget shortfall by 2029 under current budget forecasts.

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