But by the start of 2010, these small businesses will be required to pay or pass on to customers a 14 percent hotel tax approved by voters in July. The new tax was part of a bigger tax package to raise revenues to offset an $83 million budget deficit.

As part of an ongoing review of tax rolls, officials in the city's finance department discovered that most bed-and-breakfast establishments had never registered as hotel operators.

And when city officials contacted bed-and-breakfast owners, they learned the owners had been misinformed by city employees who advised them for years that bed-and-breakfast businesses weren't required to pay hotel taxes.

City officials investigated and found that some city employees didn't know what a bed-and-breakfast was, let alone how to classify it for tax purposes. When city officials met with owners last week, they found some of their establishments had been classified as rentals, others as business services. Only one was registered as a hotel operator.

Because of all the confusion, the city waived a plan that could have forced bed-and-breakfasts to pay three years in back taxes.

Now, bed-and-breakfast owners are hoping the Oakland City Council will grant them an exemption from the hotel tax law.

Howard Kirsch, who rents a single room in his Oakland hills home, believes council members will have a sympathetic ear. He said the new tax won't put him out of business, but places him and his associates, who face stiff competition from Berkeley businesses, at a disadvantage.

While some city officials admitted that their employees misinformed the bed-and-breakfast owners, their hands are tied.

"From an equity point of view, we have to treat everyone the same," said Terry Adelman, revenue manager for the city's finance department. "From an administrative standpoint, it doesn't make economic sense to do this."

For all the city's efforts to bring the bed-and-breakfast crowd into compliance, the annual tax revenue payout won't exceed $30,000 - probably less than it costs the city in resources to retrieve it, he explained.

Since 2006, Adelman has shifted the focus of the department's tax auditors toward the bigger fish, and away from the really irksome practice of identifying home businesses making more than $2,500 a year and imposing business taxes on them.

Since that change was made, the city's yield in its tax collection attempts rose from an average of $750 per account to more than $20,000, Adelman said.

Oakland's policymakers would be wise to adopt a similar long-term view in their approach to the city's current budget shortfall and the lean economic times facing government at all levels.

While the current economic troubles might well call for the drastic increases in street parking fees, stepped-up enforcement of tax codes and other measures, they're shortsighted solutions to a long-term revenue problem.

City officials may consider it penny-wise to tax every home business with more than $2,500 in income and hold the half-dozen bed-and-breakfast establishments to the same tax standard as large hotels, but it sure sounds pound-foolish to me.

It's understandable that city officials are trying to simply survive the current economic crisis, but they need to make sure that small businesses and cottage industries are given the same opportunity.

Chip Johnson's column appears in The Chronicle on Tuesday and Friday. E-mail him at chjohnson@sfchronicle.com.

This article appeared on page D - 1 of the San Francisco Chronicle