Measure L – City of Santa Cruz sales tax increase

Santa Cruz city voters will decide whether to raise the city’s sales tax with Measure L in the March 5 election.

What is Measure L?

Measure L would raise the sales tax in the City of Santa Cruz to 9.75% from 9.25% beginning July 1. It would raise about $8 million annually. Legally, the money could be used for any city purpose. Santa Cruz City Council members added the measure to the ballot. It needs more than 50% of the vote to be adopted.

What would Measure L do?

Measure L would add a 0.5% sales tax to the current 9.25% sales tax on goods purchased in the City of Santa Cruz. Groceries and prescription medicine are exempt from sales tax.

What does a “yes” vote mean?

Measure L would raise the Santa Cruz city sales tax to 9.75%. Measure L as it appears on the March 5 ballot:

“To protect and maintain essential services including homelessness response/prevention, emergency shelters, case management/connection to services; cleaning up/addressing the impacts of encampments; keeping pollution out of local rivers, creeks, and streams; supporting local food programs; preparing for wildfires; maintaining/repairing streets/potholes; and improving/ maintaining neighborhood parks, beaches, and public safety, shall the City of Santa Cruz measure to enact a one-half of one percent sales tax be adopted, raising about $8,000,000 annually for general government use until ended by voters?”

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

What would a “no” vote mean?

A “no” vote on Measure L would keep the Santa Cruz city sales tax at 9.25%. 

Thing to consider about Measure L

  • Arguments for Measure L
  • Arguments against Measure L
  • Measure L and the Santa Cruz city budget
  • Other local sales taxes

City staff and some city council members have said the sales tax is needed to cover mounting costs for homelessness services, disaster response and other city services. 

The city has been paying for homeless services with $14.5 million in state grants, but that money is running out, said Santa Cruz Mayor Fred Keeley. Many homeless services, including the shelter at the National Guard Armory in DeLaveaga Park, are set to lose funding after July 1. 

“One of the key aspects of the sales tax increase is to be able to maintain the very positive gains we’ve been able to make on homelessness,” Keeley said in an interview.

For other city services, money from the American Rescue Plan Act during the first years of the COVID-19 pandemic “has helped to prop us up a little bit,” said Santa Cruz Finance Director Elizabeth Cabell. But, she said, “we need to have some way to ensure ongoing revenue.”

If the city doesn’t find a way to raise more money, leaders may need to cut services, Cabell said. “We really don’t want to get to that point,” she said.

In the official arguments for Measure L in the county voter guide, supporters said money raised by the sales tax:

  • Would pay for homelessness services, pollution control and wildfire prevention.
  • Stays in the City of Santa Cruz and can’t be taken by the state.
  • Is paid by visitors and residents.

The money raised by Measure L would go into the city’s General Fund and could legally be used for any purpose.

No official arguments against Measure L were filed with the Santa Cruz County Clerk. 

Santa Cruz city voters in 2022 rejected Measure F, which was essentially the same proposal to raise Santa Cruz city sales taxes. 

Opponents of Measure F argued that the sales tax is a “regressive tax” that disproportionately affects low-income residents. 

“Although food, medicine, and diapers are exempt, many essential items are not. High-income earners most likely will not notice the increase but low-income residents certainly will,” Measure F opponents wrote in the 2022 county voter guide.

Under existing rules, $9.25 of tax is collected for every $100 spent in the City of Santa Cruz, according to the California Department of Tax and Fee Administration.

That includes:

  • $6 for the state.
  • $1.50 for transportation, county services and Santa Cruz Metro.
  • $1.75 for the City of Santa Cruz General Fund.

Measure L would add 50 cents to the City of Santa Cruz General Fund. 

The proposed 9.75% sales tax would be the highest sales tax percentage permitted under state law, although some cities and counties have received exemptions from the state cap. Several cities in Alameda County have a 10.75% sales tax, according to the California Department of Tax and Fee Administration

The proposed sales tax hike would place the city of Santa Cruz on par with two of the county’s four cities.

  • Scotts Valley: 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: Watsonville voters in 2022 approved a 9.75% sales tax with Measure R, which aimed to plug the city’s deficit.
  • Capitola: Capitola has a 9% sales tax. The rate was last raised in 2013.
  • Unincorporated areas of Santa Cruz County: At the March 5 election, Santa Cruz County voters will consider increasing the sales tax in unincorporated parts of the county to 9.5% from 9%. It would raise an estimated $10 million annually for the city’s General Fund.

The City of Santa Cruz’s primary General Fund, which can be used for any purpose, is expected to be about $140 million in Fiscal Year 2023-2024. 

In Fiscal Year 2022-2023, the primary General Fund spent $8.3 million more than it raised. In Fiscal Year 2023-2024, the fund is expected to end with a much smaller deficit of about $700,000. That improvement is largely due to more tourism and more money from the city’s sales tax and hotel tax. City staff don’t expect those increases to continue.

Even if the city does not plan to pay more for homeless services or disaster response, it needs more revenue to continue its existing services, according to a November 2023 presentation from consultants Baker Tilly. 

Without more revenue or spending cuts, General Fund reserves could be depleted by Fiscal Year 2027, according to the consultants’ report. The report projected a $10.5 million average annual gap between spending and revenue over the next 10 years.

Mounting pension costs present a financial challenge for the city. They are expected to rise until about 2030. But the price of conducting city business is increasing across the board, Cabell said. “It’s wages, benefits, insurance, all of that is increasing,” she said. “So are just the basic supplies. Inflation is hitting everywhere.”

In the past five years, sales tax has raised about $22 million to $28 million annually for the city. Measure L would add an estimated $8 million each year.

Measure L wouldn’t entirely solve the city’s financial problems, said Santa Cruz City Manager Matt Huffaker. But “near term, the sales tax measure is by far the most substantive additional revenue we can explore,” he said.

In January, the Santa Cruz City Council raised Huffaker’s base salary to $314,603 annually before taxes. That’s up from $299,616 last year.