Palo Alto Online : Business-license tax debates continue

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Uploaded: Thursday, October 8, 2009, 9:22 AM

Business-license tax debates continue
Opinions differ over whether tax has modest impact or unreasonably burdens businesses

by Royston Sim
Palo Alto Online Staff

While supporters of Palo Alto's proposed business license-tax say it is a necessary and modest tax, opponents believe it would impose a major burden on the city's small-business owners.

This week, the debate over the contentious Measure A, slated for the November ballot, continued. Speaking at a League of Women Voters of Palo Alto "Pros and Cons" presentation Tuesday afternoon to about 25 people, City Councilman Greg Schmid said he was "optimistic" about the tax's passage, which requires a simple majority to pass. The tax would generate an estimated $3 million annually.

"The city is in the midst of a major long-term financial crisis, and we need to deal with that," Schmid said, referring to Palo Alto's $10 million budget deficit. "This is a moderate and modest tax to cover some 2 percent of our total budget."

However, Palo Alto Chamber of Commerce CEO Paula Sandas said the tax, which is based on the number of employees at a company, would benefit big corporations over small businesses. Large firms could simply pay a lump sum and thus end up paying a smaller amount per employee, she said.

"The real argument against the business-license tax at this moment is that the small businesses are the ones who, as a proportion of their own income and their own staffing, pay a larger portion of the tax," Sandas said.

A city staff report indicated small businesses would account for approximately 80 percent of taxes collected, according to Harold "Skip" Justman, creator of the group Small Business Against Taxes.

The tax would require professional or businesses services such as law firms and real-estate companies to pay $95 per employee, with a cap of $30,000. Retail, personal services and hotels would pay $34 per employee, up to $20,000. Landlords with four or more rental units would pay $25 per unit with a $30,000 ceiling.

According to city estimates, a median-sized company would pay between $190 and $239 depending on the business category. The tax allows businesses to count employees based on hours worked, on average number of employees working each month or on cumulative number of employees working throughout the year.

At Tuesday's Measure A presentation at the nonprofit Avenidas in downtown Palo Alto, Ginger Johnson and Irene Sampson from the League of Women Voters presented "pros and cons" of the tax. Attendees asked questions such as who would be affected by the tax and where the tax revenue would go.

Nonprofit organizations, the Palo Alto Medical Foundation, Stanford Medical Center, disabled veterans and minors under 18 are exempted, though the minors would have to file a written statement to gain exemption. In addition, federal law prohibits local governments from taxing banks and insurance companies.

All other businesses conducted in Palo Alto would be subject to the tax, including home-based businesses and self-employed occupations, such as an independent gardener.

Schmid argued that the tax, which would support the city's general fund, would have a modest impact on businesses. The tax would not take effect till Jan. 1, 2011, affording businesses time to recover from a lean economy, he said.

But Justman, an attorney and chair of the Chamber of Commerce's Government Action Committee, said the tax would allow city administrators to audit books of local businesses, which would be burdened by record keeping costs.

"It's very discouraging for small businesses to pay taxes even when they are losing money," Justman said. "Two hundred dollars might seem like a modest sum, but for a business losing money it may as well be $2,000."

Supporters of Measure A cite the need for increased revenue. Schmid said the city already plans to cut services and is negotiating with unions to reduce benefits for city employees.
Furthermore, businesses contribute less to property and sales taxes -- the city's two major sources of tax revenue, Schmid said. The share of property tax paid by businesses is decreasing every year as a consequence of Proposition 13, which lowered property taxes statewide, while professional services do not pay any sales tax, Schmid said.

As such, he said, it would be fair and appropriate to appeal to the business community to participate in reducing the budget deficit.
Justman said the tax would create an expensive bureaucracy -- city staff estimate it would cost $250,000 to implement the tax. The city budget is too big, and the tax would not fix the budget crisis, Justman said.

"It's like throwing a cup of water on a burning house," Justman said.

Palo Alto is one of only two cities in California without a business-license tax.

Schmid said the city's tax rates are comparable to cities such as Belmont, San Mateo, East Palo Alto and Menlo Park, though the latter two employ gross-receipts taxes. Palo Alto city staff had initially proposed a tax based on gross receipts but later changed it after pressure from small-business owners.

The League of Women Voters held a similar session on Measure A Wednesday evening. Next Tuesday, Mayor Peter Drekmeier, who supports the tax, will debate Justman at the Media Center in Palo Alto. That debate is open to the public, and attendees are asked to arrive by 4:15 p.m. at the Media Center TV studio, 900 San Antonio Road, near the intersection of San Antonio and Charleston roads.

The taping will begin at 4:30 p.m. and will be broadcast on community cable TV Channel 27 and online at Smartvoter.org and the Media Center's website.

Comments

Posted by casey, a resident of the Midtown neighborhood, on Oct 8, 2009 at 10:19 am
casey is a member (registered user) of Palo Alto Online

How do businesses contribute less to sales taxes? If there were no businesses, there would be no sales tax. Period.

Seriously, if the City Council was truly interested in increasing sales taxes, it would focus its efforts on building the business base in Palo Alto, instead of forcing its residents to spend their money at Mountain View businesses. I'm more than willing to spend my money in Palo Alto, but until we allow a Costco to set up shop within our city borders, I'll be funding the City of Mountain View instead.