Audit: City may have missed out on more than $1 million in tax revenue

The City of San Diego may have missed out on more than $1 million in the last two years because it has failed to maximize its share of tax revenue from large construction projects, according to a recent audit.

The report by City Auditor Eduardo Luna found that the city’s Economic Development Department has not taken full advantage of a program that allows it to keep all the sales and use tax from large research, manufacturing, or construction projects in its jurisdiction, according to the report released last week. As a result, much of the revenue — perhaps more than $1 million — has been distributed to other jurisdictions.

City officials said they tried in the mid- and late-1990s to target large construction projects for the voluntary tax program, but there was little interest so they gave up, the report said. One of the big challenges was that it cost contractors more to change their accounting systems than they would receive in city incentives to participate.

Auditors pointed out that other cities, such as Santa Clara and Sacramento, have successfully persuaded contractors with large projects to change their accounting so they can participate in tax-capturing programs like San Diego’s.

One tactic that has worked well in other cities is to target large publicly-funded construction projects and make participation in the tax program a condition of the contract, the report said.

Auditors recommended the city put internal controls and processes in place to identify large construction projects and approach contractors. Other recommendations included making participation mandatory in some large city construction contracts.

City officials agreed with the auditors’ suggestions, though they added a couple of recommendations of their own. For example, they said the city would need to hire additional staff to make the auditor’s recommended changes, so they would need to do some analysis to make sure the additional revenue would exceed the new costs.

City officials said they would make the changes by October 2018.

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