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Uploaded: Monday, March 2, 2009, 4:58 PM
Business tax may be on November ballot
New 'gross receipts' tax expected to add $4.4 million to city's annual revenue
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by Gennady Sheyner
Palo Alto Online Staff
Palo Alto's plan to bolster its plummeting revenues with a new business-license tax could face the city's voters as early as November, a new city report states.
The new tax, which would cost businesses between $35 and $20,000 annually, would bring in about $4.4 million in revenues a year and help offset the city's recent losses in sales and hotel taxes. The business-license tax would be based on a company's gross receipts, a formula currently used by San Mateo and Menlo Park and one that generates $2.9 million and $1.3 million in annual revenues for the two cities, respectively.
City officials have been laboring over the last two years to come up with a business-license tax that would bring in revenues without alienating local business owners who are already struggling to stay afloat in the midst of a deepening recession. Palo Alto is the only city in Santa Clara County and one of few in California that doesn't currently charge a business tax.
The change could take place next year. In its report, city staff recommends a July 1, 2010, implementation date, provided voters give the new tax proposal their support on Nov. 3.
Other cities, including Sunnyvale, Mountain View and Santa Clara, base their business taxes on the number of employees or flat fees, a model that allows the cities to keep inventories of local businesses but brings in far less in revenues.
Sunnyvale and Mountain View each generate about $200,000 annually, while Santa Clara brings in about $800,000. But as the city's consultant, MuniServices, stated in its report, the "taxes and fees collected in Santa Clara are for regulatory purposes and not for revenue generating."
But in Palo Alto, city officials hope the new tax would infuse some much-needed money into the city's budget, which is currently projected to have an $8 million shortfall in Fiscal Year 2010.
In January, Administrative Services Department Director Lalo Perez told a room of business owners at a Downtown Palo Alto Business Improvement District meeting that the city would likely use the gross-receipts model to offset the recent downswings in revenues.
"It is evident to us that if the city is trying to generate revenues it would use the gross-receipts methodology," Perez said.
Both he and City Manager James Keene said one of their prime objectives would be to make sure the new fees wouldn't exceed what local businesses can afford. City officials initially wanted to use the proceeds from the tax to fund a new public-safety building. But with revenues dropping at higher-than-expected levels, the city now aims to use the new tax to preserve local programs and services.
Under the current plan, which the City Council's Finance Committee is scheduled to discuss on March 10, retail businesses would pay a 50 cent tax for every $1,000 of gross receipts. A retail business with gross receipts of $75,000 would pay $37.50 annually under this scheme. Manufacturers, wholesalers, construction businesses and home-based businesses would pay the same rate as the retail businesses.
Service-oriented businesses would be charged 75 cents per $1,000 of gross receipts, while businesses offering "professional" service those requiring professional licenses and those falling under state regulation would have to pay $1 per $1,000 of gross receipts.
Meanwhile, businesses that rent commercial properties would be charged the highest tax rate, $1.50 per $1,000 of gross receipts.
Under the proposed scheme, median tax payments would range from $35 to $594, depending on the category of business (with miscellaneous businesses and professional-services businesses representing the low and high ends of the spectrum, respectively). An average payment by a retail business would be $991, for example, while a median payment in this category would be $356, according to the staff report.
The proposal includes a $20,000 a year ceiling, above which no business would pay, regardless of its gross receipts.
But the plan still has to overcome several hurdles, including approvals by the City Council and by voters. Councilman John Barton, had expressed support for a creating a business registry, but said he would not support a business license tax unless it also creates new policies making it easier to do business in Palo Alto.
"There's a reason we talk about the Palo Alto process," Barton told business leaders at the January meeting. "It is, in my opinion, a tax on businesses to do business in Palo Alto. It is a very hard place to do business."
If the City Council doesn't place a business-license-tax measure on the November ballot, the city will have to wait at least until November 2011 before it could bring it back to the voters.
Chamber of Commerce President Paula Sandas said Monday that the chamber has not yet taken a stance on the new proposal. The chamber is scheduled to hear a presentation on the plan from city staff on March 10.
"We're reserving judgment," Sandas said. "We'll be getting an in-depth presentation and we'll discuss it at that point."
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Posted by Mike, a resident of the College Terrace neighborhood, on Mar 2, 2009 at 6:24 pm What a dumb time to raise taxes! And you know businesses will just pass these taxes on to us residents. Instead of more taxes, why can't the city live within its already generous budget and maybe cut back on those $72,000-a-year street sweepers or $60,000 meter maids. Until the city starts spending money reasonably, it should ask ANYONE for another dime.
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Posted by Tim, a resident of the Crescent Park neighborhood, on Mar 2, 2009 at 8:04 pm It always makes me laugh when someone is upset because of a street sweeper or meter maid's salary. These people are PAY BY THE HOUR. They are putting in the time! They do not get a bonus or a stock option.
If you are so "upset", then how about you march your butt down to city hall and put in an application for the next street sweeper or meter maid opening. Ya, that we be the day.
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Posted by Casey, a resident of the Midtown neighborhood, on Mar 2, 2009 at 9:41 pm Let's see, this business license tax is meant to offset losses in sales and hotel taxes. Call me crazy; however, if I was in charge and saw that sales and hotel taxes were slumping, I would look to broaden the economic base, instead of grabbing what's left from those businesses left standing during this recession. Can the city exercise eminent domain over Arbor Real and build a hotel there to boost taxes?
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Posted by Roxy, a resident of the Barron Park neighborhood, on Mar 2, 2009 at 9:59 pm You cant tax your way out of this kind of financial trouble.
Businesses will leave in droves.
Do you only want three story tall condos in this city?
All the Auto dealers are leaving, The Hotels are leaving and I heard that Fry's wants to move, GET YOUR HEAD OUT OF YOUR REAR END..
Come on Palo Alto. Get your brain right.
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Posted by refund, a resident of the Midtown neighborhood, on Mar 3, 2009 at 10:53 am Note to California legislators, first give me back my rightful and constitutionally mandated tax refund.
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Posted by Sarah, a resident of the Midtown neighborhood, on Mar 3, 2009 at 10:59 am I think city workers should learn working efficiently, then they can reduce unnecessary workforce. Usually one person is working with 3 or 4 persons overlooking now.
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Posted by James, a resident of the Esther Clark Park neighborhood, on Mar 3, 2009 at 11:49 am Sarah,
Show me the proof. "usually" is all you have.
How about this city start building up their tax base again instead of pushing businesses out of the city.
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Posted by Karen White, a resident of the Duveneck/St. Francis neighborhood, on Mar 3, 2009 at 12:04 pm We're the only California city besides Citrus Heights that does not have a business license tax! That said, this sure is a bad time to contemplate adding new costs to doing business here. Perhaps it makes sense to start now with a revenue-neutral business registry, at minimal cost, rather than pushing for a new revenue-generating tax, given the current economic climate.
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Posted by common sense, a resident of the Midtown neighborhood, on Mar 3, 2009 at 4:01 pm It's not a good reason to have a Business License Tax just because most other cities do. For example:
- Most other cities DON'T have a transfer tax on property sales, so should Palo Alto get rid of their property transfer tax?
- Most other cities DON'T own their own utilities, and transfer money from the utilities to fund the general budget - should Palo Alto stop doing this? (to the tune of $17 - 20 million/year).
The city has a structural deficit of $8 million projected for FY 2010. The are asking for a business license tax, and are planning on raising the electricity rates by 12% - 21% and transfer more money from the utilities to the city operating budget.
Notice there has been no discussion of what to cut. Has anyone been watching some of the spending over the past few years?
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Posted by resident, a resident of the Meadow Park neighborhood, on Mar 3, 2009 at 8:36 pm Common Sense, I agree with you!
The only thing getting cut is my own personal wealth and budget.
Everyone else, though seems to think they can just take and take money from me: from the state of California not giving me my tax refund and raising sales and income taxes, to the federal government raising income taxes and reducing mortgage interest rate deductions, to the continuously falling stock market, to the continuous fall in real estate prices, to the utility bill increases, and on and on. There's no end to this.
I might as well go broke since, everyone seems to be taking it from me anyway.
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Posted by Real estate broker, a resident of the Old Palo Alto neighborhood, on Mar 5, 2009 at 9:12 pm If this does pass I will move my substantial real estate business (over 1MM per year in gross receipts) to Los Altos.
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Posted by Rick, a resident of the Downtown North neighborhood, on Mar 10, 2009 at 6:36 pm I find it hard to imagine how this city has gotten away with raising taxes on utilities, property transfers, and a number of other areas, without managing to accomplish critical work done like fixing the flood risk along the San Francisquito Creek. I would like to see about 40% of the city management laid off. Keep only essentials like fire, police, library, and a smaller building and planning staff. I bet that these fine employees would not be missed. This number of staff could have run all of America in 1750.
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