After seeing its negotiations with the business community fail, the Palo Alto City Council pressed ahead Monday with its plan to put a business tax on the November ballot.
In doing so, however, the council agreed to revise the tax measure to exempt all businesses with less than 10,000 square feet of space, a change that effectively exempts all small retailers from the tax. Council members also moved to set the rate at $0.11 per square foot, a change from an earlier proposal that would have set the rate at either 0.06 cents or $0.12 cents, depending on the size of the business .
The council also left the door slightly open to last-second changes based on a possible deal with a coalition of business groups that are opposing the tax. Council member Tom DuBois suggested it’s still possible the council could change the proposal before the final resolution is adopted Aug. 8, the last council meeting before the district’s Aug. 12 deadline.
Barring any surprise developments, the council’s action means Palo Alto voters will weigh a tax measure that would raise roughly $15 million a year, with the proceeds to be used to fund public safety, transportation and housing. affordable. The council voted 5-2, with council members Alison Cormack and Greg Tanaka dissenting, to support the revised proposal, which was based on recommendations from its ad hoc committee.
The three committee members, Mayor Pat Burt and council members Tom DuBois and Eric Filseth, all argued Monday that the proposed tax would have a modest impact on large businesses, amounting to about 1% of rental costs. The latest revision, which raised the threshold for exempt businesses from 5,000 square meters to 10,000 square meters, aims to protect almost all small and medium-sized retailers from the new tax.
DuBois noted that with the higher exemption, more than 50% of Palo Alto businesses — and all small businesses — are exempt. Filseth agreed.
“At 5,000 square feet, we exclude most of the restaurants in town and most of the smaller businesses, but there’s also a fair amount of retail businesses serving the community in the 5,000 to 10,000 square foot range,” Filseth said. , citing Hassett Hardware, Palo Alto Bicyclies and Mike’s Bikes as examples. “We thought 10,000 square feet was a more appropriate target for that.”
There was no indication, however, that the review would move the council closer to a compromise with the coalition of business leaders opposing the new tax, a group that includes the Silicon Valley Leadership Group, the Palo Alto Chamber of Commerce and NAIOP. Silicon Valley, a group representing commercial developers. Dan Kostenbauder, vice president for tax policy at the Silicon Valley Leadership Group, submitted a letter to the council before Monday’s discussion arguing that Palo Alto’s tax would be “disproportionately higher than business taxes in neighboring communities.”
He noted in the letter that Sunnyvale caps the tax each business would pay at less than $14,000, while San Jose has a cap of less than $167,000. Palo Alto’s proposed tax, however, would have no cap, which creates a “significantly higher tax burden.”
One company that is opposing the tax is Maxar Technology, a maker of satellites and other space technology and the parent company of Space Systems Loral, which has a manufacturing facility on Fabian Way.
Karen Cox, vice president of government relations and public policy at Maxar Technologies, asserted that the tax would be “particularly burdensome for manufacturing, industrial and research and development facilities, which often require significant amounts of square footage that are disproportionate to their income stream or economic impact”.
“For example, our company builds large satellites, robotics and spacecraft systems that require a significant amount of square footage. The same is true for many of Palo Alto’s research facilities. Basing the business tax on square footage of the company’s operation will penalize these important sectors of the city’s economy and may encourage them to move elsewhere,” Cox wrote.
The vast majority of speakers at Monday’s meeting fully supported the tax effort, with many noting that Palo Alto is an anomaly for not having a business tax. Alex Comsa, a realtor running for a City Council seat, called the council tax proposal “very progressive and very generous to business.” He noted that local businesses have faced annual rent increases of 5% or more over the past few decades, a factor that far outweighs the impact of the new tax.
Mayor Pat Burt agreed and suggested that the notion that a 1% cost increase would drive the decision on whether a company stays in Palo Alto “simply doesn’t follow from a practical standpoint.”
He also emphasized the importance of raising money for the three areas targeted by the tax, especially affordable housing. The city currently does not have nearly the resources it would require to meet state mandates to build below-market-rate housing, which typically relies on government subsidies.
Burt characterized the latest version of the business tax as a “compromise.”
“I think we have a balanced measure and we have a reasonable measure going forward that meets some really important community needs,” Burt said.
Other residents pointed to the need to raise revenue for grade separation, redesigning railroad crossings so the tracks don’t intersect with streets. Palo Alto is currently planning grading at the intersections of Churchill Avenue, East Meadow Drive and Charleston Road – projects that will cost hundreds of millions of dollars. While some of the funding for grade-separation is expected to come from Measure B, a Santa Clara County tax measure that voters approved in 2016, as well as other sources, local funds will also be crucial, said Nadia Naik, who served as co-chair of the Extended Community Advisory Panel, a group that analyzed grading options.
“Local funding for grade separation is needed to match Measure B dollars and follow federal funding, and this levy will help us achieve our long-term goal of creating a safe environment in the city and definitely separate trains from cars, pedestrians and bicycles,” said Naik, who was speaking as an individual and not representing the group.
Keith Reckdahl noted that a generation ago, city taxes were split equally between residents and businesses. Today, residents pay the vast majority of taxes. The new business tax wouldn’t even come close to restoring parity, he said.
“If businesses are driven out of Palo Alto, it’s because of the landlords’ rent increases, not because of this little tax,” said Reckdahl, who serves on the Planning and Transportation Commission but was speaking as an individual.
Tanaka and Cormack remained opposed to the tax, albeit for different reasons. Cormack was open to the idea of a business tax, but argued for a lower tax rate, something around $0.05 per square foot. The measure, she suggested, would have a better chance of passing with a lower rate and, potentially, less opposition.
Tanaka categorically opposed any attempt at a business tax, arguing that it would hurt the local economy. On Monday, he argued that the city already has a large budget and does not need another tax.
“We have to spend within our means,” Tanaka said.