Palo Alto Weekly

News - March 28, 2014

Palo Alto looks to upgrade utility tax

City to ask voters to 'modernize' tax to account for changes in technology

by Gennady Sheyner

Nearly three decades after Palo Alto established a tax on utilities and phone usage, city officials are preparing to "modernize" this tax to account for the rise of the cell phone and the demise of the landline.

The "utility user tax" has been on the books since 1987, when the City Council created it to raise revenues for its lease of the Cubberley Community Center from the Palo Alto Unified School District and to fund repairs to streets and sidewalks. The tax, which is tacked on to local electricity, gas and water bills and to phone bills, comprises about 7 percent of the city's General Fund revenue and totaled about $11 million in 2013.

But while the tax continues to serve the purpose for which it was intended, council members agreed on Monday night that several sections of it are outdated, particularly the one dealing with phones. Over the past year, City Attorney Molly Stump has been drafting an ordinance to address these changes and remove various exemptions that she said are no longer relevant today.

The new ordinance would apply to a wide range of technology, including the traditional phone, cell phones, broadband, fiber optics, Wi-Fi and "voice over Internet protocol" services. It would also remove a provision that limits the tax to calls within California, a clause that Stump characterized in a report as "a relic from the days when interstate and international calls were treated substantially differently from intrastate calls and were much more expensive."

Her report states that most customers already pay these taxes on most telephone-related services (via their telecommunication companies) and won't notice any major changes in their bills. For this reason, she wrote in the report, "the typical telephone user likely will not experience an increase in taxes if these amendments are adopted."

The council plans to send the revision of the utility-user tax to the voters in November, at which time residents will also be asked to raise the city's hotel-tax rate by 2 percent to fund infrastructure improvements.

Unlike with the hotel tax, the changes in the utility-user tax are not intended to raise funds for particular projects. Rather, they're meant to keep revenues from dropping. The council agreed that given the speed with which technology has been changing, the revisions are long overdue.

"When the UUT was initially created, no one was thinking about cellular phones," Councilman Marc Berman said Monday. "The vast majority of folks use those now for telecommunications purposes so it makes sense for us to modernize our UUT, which hasn't been modernized for 27 years."

Stump's report noted that about 40 percent of the California agencies that have a utility-user tax (about 150 in total) have recently modernized their ordinances by voter approval. The most common rate, and the one used in Palo Alto, is 5 percent. Some cities that proceeded with modernization ordinances coupled them with small rate reductions (ranging from 0.2 to 1 percent). Of the 75 modernization measures that have gone to the voters, only five have failed, according to Stump's report.

Palo Alto's existing tax ordinance also includes discounts for some of the nine commercial customers whose utility usage is particularly high: Communications & Power Industries (CPI), Hewlett-Packard, Varian, Stanford Hospitals and Clinics, Space Systems/Loral, Stanford Hines Interests, VMWare, Stanford University and 529 Bryant St. (Equinix). One revision that the council is considering is eliminating this "large-volume discount," which would result in a revenue gain of $550,000.

The council didn't make any final decisions on Monday but directed staff by an 8-0 vote, with Greg Scharff absent, to return in May with the proposed revisions. The goal is to give the large customers whose discount may be coming to an end time to respond to the changes. Councilman Larry Klein, who was involved in putting the tax together in 1987, said the discount was created as part of the city's negotiations to establish the tax. He stressed the need to provide notice to the the nine users.

"I'd hope they say yes. If they don't, maybe we can pass it over their objections, but at least they'd have the opportunity to have their say," Klein said.

While tacitly endorsing most of the changes proposed by Stump, the council also agreed to at least consider the possibility of changing the tax rate for the broader customer base. Though Vice Mayor Liz Kniss adamantly defended the 5 percent rate ("kind of a round number"), she and the rest of the council ultimately supported an amendment from Councilman Pat Burt to keep the question open.

"We haven't done any polling on this," Burt said. "We really don't know where the community stands on this. It would behoove us to give the community an opportunity to weigh in more if they so choose."

Staff Writer Gennady Sheyner can be emailed at gsheyner@paweekly.com.

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