Palo Alto's longstanding plan to institute a business-license tax is now one vote away from becoming a reality -- a citywide vote.
The City Council on Monday night voted 7-2 -- with Sid Espinosa and Yiaway Yeh dissenting -- to place a business-license-tax ordinance on the Nov. 3 ballot.
The tax would be based on employee count and would take effect in the second half of 2010. Palo Alto at present is the only city in the area not to have a business-license tax.
Most council members agreed that the new tax -- while unpopular with local businesses -- is a needed remedy for Palo Alto's revenue woes. It is expected to bring about $3 million in annual revenues to the city and would charge professionals and business services a greater rate than it would retailers, manufacturers and hotels.
Under the plan, professionals and business services would pay $95 per employee, with a cap of $30,000. The rate for retail, personal services and hotels would be $34 per employee, with a $20,000 ceiling. Landlords with more than three rental units would pay $25 per unit, up to $30,000.
Councilman Larry Klein said the new tax is a necessary acknowledgment of the deteriorating economy. He also said that if voters approve the new tax and help reduce the city's looming budget gap by $3 million, the city would have to respond by reducing its expenditures by roughly as much.
"This is a contract with our citizens, and also with our employees," Klein said. "Without this being passed it's much harder to sell to our largest constituents and our employees that we're doing all we can."
Though dozens of business owners have previously railed against the plan, only a handful showed up to Monday night's meeting and only one spoke out against the proposal: John Hackmann argued that the new tax would "create a negative and hostile attitude toward the business community."
Councilman Sid Espinosa said he opposed creating the tax at such a difficult economic time. Councilman Yiaway Yeh concurred, though he said he would be in favor of creating a comprehensive registry of city businesses.
Councilman Pat Burt proposed working on a registry and deferring the tax ordinance until 2011, but his proposal was rejected by the majority of the council.
"Someone deemed this tax minimal, but anything that would encourage businesses to not grow or not start in our city at this time is misguided," Espinosa said before the vote was taken.
He also predicted that voters will reject the proposal on Nov. 3.
If the tax is approved by voters, businesses would receive a grace period in the first half of 2010. The city would only collect 50 percent of the established tax rate in the second part of 2010. After that, the city would collect the full rate.
Councilman Greg Schmid said the new tax is a critical tool for expanding the city's revenue base. Almost all cities in California already have such taxes in place.
"It is important that we add a business tax and diversify our tax base as much as possible," Schmid said. "We're facing a time where we need to all participate in helping make the future of our city sound on a fiscal basis."