After seeing its negotiations with the business community fizzle out, the Palo Alto City Council pushed back Monday with its plan to place a business tax on the November ballot.
However, in doing so, 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 excludes all small retailers from the tax. Council members also moved to set the rate at $0.11 per square foot, a change from a previous proposal that would have set the rate at $0.06 cents or $0.12 cents, depending on the size of the business.
The council also left the door ajar for last-minute changes based on a possible deal with a coalition of business groups opposed to the tax. Council member Tom DuBois suggested it’s still possible for the council to modify the proposal before the final resolution is adopted on Aug. 8, the last council meeting before the county’s Aug. 12 deadline.
Barring something surprising, the council’s action means Palo Alto voters will have a say in a tax measure that would raise roughly $15 million per year, with the proceeds used to fund public safety, transportation and affordable housing. 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 their ad hoc committee.
The three committee members, Mayor Pat Burt and Councilmembers Tom DuBois and Eric Filseth, argued Monday that the proposed tax would have a modest impact on large businesses, equivalent to about 1% of rental costs. The latest revision, which raised the threshold for exempt businesses from 5,000 square feet to 10,000 square feet, aims to shield almost all small and medium-sized retailers from the new tax.
DuBois noted that with the highest exemption, more than 50% of Palo Alto businesses, and all small businesses, are excluded. Philseth agreed.
“At 5,000 square feet, we exclude most of the city’s restaurants and most of the smaller businesses, but there are also a considerable number of retail businesses serving the community in the 5,000 to 10,000 square foot range,” Philseth 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.”
However, there was no indication that the review would bring the council closer to a compromise with the coalition of business leaders who oppose the new tax, a group that includes the Silicon Valley Leadership Group, the Palo Alto Chamber of Commerce and the NAIOP. Silicon Valley, a group representing commercial developers. Dan Kostenbauder, vice president for tax policy at the Silicon Valley Leadership Group, sent a letter to the council ahead of 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 limits the tax any business would pay to less than $14,000, while San Jose is capped at less than $167,000. However, Palo Alto’s proposed tax would not be capped at all, creating a “significantly higher tax burden.”
One company that opposes the tax is Maxar Technology, a manufacturer of satellites and other space technology and the parent company of Space Systems Loral, which has a manufacturing plant on Fabian Way.
Karen Cox, vice president of government relations and public policy for Maxar Technologies, said the tax would be “particularly burdensome for research and development, industrial and manufacturing facilities, which often require substantial amounts of square footage that is disproportionate to their flow.” revenue or economic impact.
“For example, our company builds large satellites, robotics, and spacecraft systems that require a significant amount of square footage. The same goes for many of Palo Alto’s research facilities. Basing business tax on square footage of operations of the company 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 pointing to Palo Alto as an anomaly for not having a business tax. Alex Comsa, a real estate agent running for a City Council seat, called the council’s tax proposal “very progressive and very generous to business.” He noted that local businesses have faced annual rent increases of 5% or more for the past few decades, a factor that far outweighs the impact of the new tax.
Mayor Pat Burt agreed, suggesting that the notion that a 1% cost increase would drive the decision of whether a business stays in Palo Alto “just doesn’t add up from a practical standpoint.”
He also emphasized the importance of raising money for all three areas targeted by the tax, particularly affordable housing. Currently, the city does not have anywhere near the resources that would be required 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, the redesign of rail crossings so tracks do not intersect with roads. Palo Alto is currently planning grade separations 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 funding will also be crucial, Nadia said. Naik, who served as co-chair of the Expanded Community Advisory Panel, a group that looked at options for grade separation.
“Local funding for grade separation is needed to match Measure B dollars and seek federal funding, and this tax will help us achieve our long-term goal of trying to create a safe environment in the city and obviously separating trains from cars, pedestrians and bicycles,” said Naik, who was speaking as an individual and not on behalf of the group.
Keith Reckdahl noted that a generation ago, council taxes were split evenly between residents and businesses. Today, residents pay the vast majority of taxes. The new business tax would not even come close to restoring parity, he said.
“If businesses are being pushed out of Palo Alto, it’s because of landlord rent increases, not because of this little tax,” said Reckdahl, who sits on the Planning and Transportation Commission but was speaking as an individual.
Tanaka and Cormack continued to oppose the tax, though for different reasons. Cormack was open to the idea of a business tax, but advocated a lower tax rate, around $0.05 per square foot. The measure, he suggested, would have a better chance of passing at a lower rate and, potentially, with less opposition.
Tanaka categorically opposed any attempt at a business tax, arguing that it would harm the local economy. On Monday, he argued that the city already has a big budget and doesn’t need another tax.
“We have to spend within our means,” Tanaka said.