Running a business and staying in a hotel may soon get more expensive in Costa Mesa as city council members eye placing two separate tax increase measures on the November 2026 ballot.
Officials there and in Fullerton are the latest to look at increasing local taxes as officials across Orange County ring alarm bells that municipal spending is outpacing revenue as they struggle to stop widening budget gaps.
[Read: Orange County Cities Scramble to Patch Budget Gaps]
On Tuesday, Costa Mesa City Council members voted 4-2 to explore and research placing a hotel bed tax increase measure as well as a measure to increase the business license tax on next year’s ballot.
Mayor John Stephens said the city has been lagging when it comes to updating the business license tax and the hotel bed tax – also known as the Transient Occupancy Tax.
“If the community wants excellent service, then we need to have commensurate revenue to pay for that,” he said at Tuesday’s meeting.
“It just seems like we’re basically subsidizing very large businesses, which I think is not fair to the Costa Mesa taxpayers regarding the business license tax.”
He said an increase wouldn’t disadvantage hoteliers because they’ll pass it to the consumers, adding that the business license tax has remained unchanged for 40 years.
Councilmembers Mike Buley and Jeff Petis were the dissenting votes.
Buley said that while he agreed with exploring a hotel tax increase measure, an increase to the business license tax would drive out businesses.
“As anyone who’s presently following the current state of the nation, the state of companies moving out of states into other states, it’s usually taxes that are driving them out of there,” he said at the meeting.
“To the extent we’re not exacting the maximum amount out of our current businesses – I think that’s a good thing, when you take that into comparison.”
Councilwoman Andrea Marr, who attended the meeting via Zoom from a hotel in Virginia, left early and did not register a vote.
Tuesday’s vote comes as Fullerton City Council members are also looking at crafting two 0.5% tax measures – one to fund infrastructure improvements like road repairs and another for public safety – as officials face a projected $9.3 million deficit next fiscal year.
[Read: Another Orange County City Considers Tax Increase to Solve Budget Woes]
In Costa Mesa, officials balanced their budget this year without having to dip into their reserves but city officials warn costs are going up and they have lost roughly $3 million in general fund revenues, according to the city’s budget.
Councilman Manuel Chavez said a sales tax increase wouldn’t work and that taxes that target everyday spending impact the poorest families the most.
“(Hotel) tax works because we’re taxing visitors and residents feel more comfortable taxing visitors and looking at the chart that’s given us by city staff, we’re very clearly not at market,” he said at Tuesday’s meeting.
Chavez added it was time to update the business license tax as well but cautioned about scaring businesses away from the city.
The councilman ultimately voted to explore and research placing the tax increase proposals on next year’s ballot.
Meanwhile, city staff said they would communicate with the business community, the local chamber of commerce and the city’s tourism bureau as they look into crafting the measures.
Costa Mesa Chamber of Commerce President and CEO David Haithcock said it makes sense to reevaluate the hotel tax since it hasn’t been updated in over a decade and that the current rate is below regional averages.
“From a Chamber perspective, we always approach tax increases with caution, especially in a business environment where margins and operating costs are already pressured. However, on first pass, re-evaluating the (hotel tax) appears reasonable,” he wrote in a Wednesday email.
“We would want to understand the exact percentage being considered, but the concept of updating the rate to stay regionally competitive is not inherently unreasonable.”
Haithcock said they want more clarification on what a business license tax increase measure looks like before they weigh in.
“Our general stance is that businesses should not be overly burdened, and any update should be modest, competitive, predictable, and structured in a way that avoids harming growth and investment,” he wrote.
Costa Mesa’s Business License Tax
Costa Mesa collects a business licenses tax from entrepreneurs that ranges between $25-$200 depending on the businesses annual gross revenue.
In neighboring Santa Ana, the tax ranges from $80 to $16,314 depending on gross revenue, according to a staff report.
Currently, the city’s business license taxes revenue is $940,000 or roughly 0.5% of the general fund revenue, according to this year’s budget.
The tax has been in place in the city since 1985 without change.
Councilwoman Arlis Reynolds said the tax is almost as old as she is and is older than Chavez.
“Costs of services have gone up quite a bit since 1985 right?” she said at Tuesday’s meeting. “But we haven’t changed the cost to operate a business in the city. I’m blown away by that.”
The proposal comes after the local chamber of commerce last year asked the city for a subsidy of over $123,000 after losing over a quarter of million dollars in income during the COVID-19 global pandemic.
It’s a request that went before the city council in August last year but after Haithcock publicly answered questions about the chamber and its financial state city officials unanimously voted to continue the discussion on granting the subsidy to a future meeting.
[Read: Should Costa Mesa Float The City’s Business Promotion Group to the Tune of $123K?]
Haithcock said that discussion never returned to the city council and the city never gave them the money they requested.
Costa Mesa’s Hotel Tax
Costa Mesa currently collects a 8% bed tax on hotel stays in the city while in neighboring Santa Ana there is a 11% hotel tax and a 10% hotel tax in Newport Beach, according to a city staff report.
The hotel tax revenue makes up 5% of the city’s $186.9 general fund or about $9.8 million – a decrease of close to $300,000 from last year, according to this year’s budget.
“Travel forecasts have declined due to negative global sentiment about U.S. policies, as well as reductions in consumer discretionary spending on experiences,” reads the 2025-26 city budget.
City staff project that every additional 1% increase on the hotel tax could bring in another $1 million for public services.
Hosam Elattar is a Voice of OC reporter and corps member with Report for America, a GroundTruth initiative. Contact him at helattar@voiceofoc.org or on Twitter @ElattarHosam.