San Jose City Council Rejects American Airlines Jet-Fuel Deal

Feb. 1, 2006
With the city on record opposing a nearly identical deal between Oakland and United Airlines, the council was more concerned about appearing hypocritical.

The San Jose City Council on Tuesday unanimously rejected a jet-fuel deal with American Airlines that could have boosted sales tax revenue by $3 million over the next two years.

It wasn't that San Jose didn't need the money. But with the city on record opposing a nearly identical deal between Oakland and United Airlines, the council was more concerned about appearing hypocritical.

``There are some things you should not do for money,'' said Councilman Chuck Reed.

United's 2003 deal with Oakland established a procurement subsidiary to buy the airline's entire statewide jet fuel supply in the city, taking advantage of a loophole in a 1998 state tax bill.

That allows Oakland to collect all the sales taxes on the fuel that would have gone to other airport cities where United operates, including San Jose. Oakland gives United 65 cents of every sales tax dollar as an ``economic incentive'' and keeps the rest.

Over the last three years the deal has earned Oakland $3 million, said interim budget director Cheryl Taylor.

``It's worked out for us,'' Taylor said. San Jose, San Francisco, Los Angeles and San Mateo County have complained to state officials. San Francisco and San Mateo counties say Oakland's gain has cost them $3 million in tax revenue a year.

But a 2004 bill by Assemblyman Leland Yee, D-San Francisco, to end such deals was vetoed by the governor, and a similar version signed into law last year doesn't take effect until 2008. State tax authorities declined to void the United deal, deferring to the Legislature.

So it was no surprise when American Airlines, one of San Jose's two biggest carriers, asked the city for a similar deal, complaining it faces a competitive disadvantage with United. Despite misgivings, city administrators urged approval, saying San Jose could lose $1 million in tax revenue if American struck the same deal with another city.

``We are recommending this, even though we recognize it is not good public policy,'' said Assistant City Manager Mark Linder.

But Roxanne Miller, the city's legislative representative who has lobbied state officials against such deals, and Gerald Silva, the city auditor, pleaded for rejection, along with officials from San Mateo County.

``We would become the poster child for bad policy,'' Miller said.

Though many council members were initially inclined to approve the deal, in the end, all those present voted against it, with a caveat that city administrators work with American to address its competitive concerns. Council members Madison Nguyen and Linda LeZotte were absent.

``The thought of now reversing our position doesn't sit well with me,'' Mayor Ron Gonzales said. ``Our benefit of a couple million dollars is another city's loss.''

Mitchell Salamon, American's chief tax officer, would not say whether the airline will now pitch the deal to Los Angeles or some other city.

``The arrangement United has with Oakland puts us at a competitive disadvantage,'' Salamon said. ``We remain committed to closing whatever competitive gaps exist.''

But San Jose's decision cheered San Mateo County board of supervisors president Jerry Hill.

``It reaffirmed my faith in government,'' Hill said. ``The dollar isn't king. They looked at it and analyzed it and took the high moral road.''

San Jose Mercury News

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