San Jose officials considering deal with American Airlines

San Jose officials disapproved when Oakland worked out a deal with United Airlines in 2003. The company agreed to buy its entire statewide jet fuel supply in that city in exchange for a break on sales taxes. Oakland then agreed to give United 65 cents of each sales tax dollar as an economic incentive payment and it keeps the rest.

On Tuesday, San Jose officials will consider making a similar deal with American Airlines.

San Jose Economic Development Director Paul Krutko says the city’s making the move because state authorities have decided to let United continue its deal with Oakland for at least the next two years.

That would put American, one of Mineta San Jose International Airport’s two biggest carriers, at a competitive disadvantage. So American has asked San Jose for the same kind of deal United got from Oakland. And it says it will ask other cities if the carrier can’t get it from San Jose.

Krutko, while acknowledging it would "seem to contradict the policy directive of the council to oppose the United/Oakland agreement,” is urging the city council to approve the deal, arguing it will earn the city $3 million in additional sales tax revenue over the next three fiscal years.

Otherwise, he says, American could strike the same deal with another city such as Los Angeles, and then San Jose would lose about $1 million in sales tax revenue over the next three years.

United and Oakland took advantage of a loophole in a 1998 law governing California’s complex method of allocating local tax revenue from jet fuel sales.

After United and Oakland struck their deal, Los Angeles, San Francisco and San Mateo County complained to state authorities.

Assemblyman Leland Yee, D-San Francisco, introduced a bill last year that would ban such deals beginning in January 2008. Gov. Arnold Schwarzenegger has signed that bill and San Jose formally supported it.

The proposed San Jose deal differs from Oakland’s in that it guarantees that San Jose will not see its current tax revenue from American reduced. It also provides for renewal options if the Legislature allows Oakland’s United deal to continue beyond 2007.

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Information from: San Jose Mercury News, http://www.sjmercury.com

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