A $2.50-per-square-foot annual parcel tax on large office developments could raise at least $1.67 million in annual revenue for East Palo Alto, according to city estimates, if voters approve the tax on Nov. 6. To pass, the measure must be approved by two-thirds of the city's voters.
The City Council approved adding Measure HH, the "Commercial Office Space Parcel Tax for Affordable Housing and Job Opportunities," to the ballot on July 31. The measure is in response to residents' concerns that new office developments will lead to higher housing costs and more traffic congestion but they won't add jobs suitable for current residents. Many lower- and middle-income residents are already dealing with housing instability and homelessness because of the red-hot real estate market, a dearth of affordable housing and the pressures created by area giants Facebook and Google.
If passed, the tax revenue could help kick-start innovative programs to address displacement and homelessness. The revenue would be spent on new, low-income housing and programs to train residents for higher-paying jobs in science, technology, engineering, mathematics and the building trades and would strengthen the city's First Source Hiring program.
The ordinance would earmark a minimum of 35 percent of the revenue for new, affordable housing stock. A maximum of 15 percent of the tax proceeds would be used for the city's costs for overhead and administration of the ordinance, according to the measure. The remaining funds could be used for housing, job training or -- at the City Council's discretion -- ordinance overhead or administration. The city would also be accountable for how the money is spent, with staff required to write an annual report to the City Council.
The tax would be levied on owners or lessees of commercial office developments and internet retailing businesses larger than 25,000 square feet. Smaller developments and those not used for commercial office space such as retail shops, agriculture and food services would not be subject to the tax.
The city could reap three times as much revenue as the $1.6 million estimate. It currently has approximately 1.8 million square feet of commercial office space undergoing the entitlement process.
Advocates for seniors, homeless persons and the city's immigrants support the measure. They say companies receive huge federal tax breaks and must pay their fair share to fix the infrastructure and displacement problems their massive expansions are creating. Residents of East Palo Alto should not shoulder the burden alone, they say.
The tax amounts to 21 cents per square foot per month, they wrote in a pro-tax argument filed with the San Mateo County Clerk-Recorder. It was signed by Mayor Ruben Abrica; Fr. Lawrence Goode, pastor of St. Francis of Assisi Church; Rev. Paul Bains, founder of Project WeHOPE; Millicent Grant, president of the East Palo Alto Senior Center; and Isaiah Vi, board member of employment training center JobTrain.
They dismissed developers' arguments that the tax would stifle development that the city badly needs to provide a tax base to fund community services and benefits.
In their argument against the measure, opponents claim the measure is a "stop commercial development tax." Jeffrey Poetsch, president of the Ravenswood Shores Business District, wrote that instead of the parcel tax, additional property taxes from new commercial developments would generate more than $10 million a year if developers build in the city.
J. William Uhrig of New York-based Bay Road Holdings argued in a July letter to the city that the tax and the city's current patchwork of proposed fees could give developers incentive to do nothing with their land. If the fees are too high, the development will not be built.
Columbia Property Trust officials, another developer, said in a July letter to the city that the tax would have a "huge hit" on small- and medium-sized businesses and startups.
"Property owners would pass the tax on to tenants -- all businesses in buildings over the size threshold would be at risk," the developer said.
The proposed tax is also inflexible and unfair to the companies that would pay it, proponents claim.
"A benefit of the proposed parcel tax applied to in-place square footage is certainty of income to the city, but it also is not flexible for landlords and their tenants during either periods of vacancy at the property, or during times when market conditions are less favorable than they are today."
But proponents disagreed.
"The measure does not affect your home. The measure does not affect locally owned small businesses or retail stores. Measure HH will not stop development in the city. East Palo Alto's commercial office rents will still be very competitive relative to neighboring cities," they wrote.
They noted the City Council can amend the tax without future voter approval, so long as the amount of tax doesn't increase or change what the tax revenues will be spent on. The council has the discretion to lower the tax in a substantial economic downturn.
Developers said that no other local jurisdiction is charging or contemplating a per-square-foot tax.
But a 2015 Public Policy Institute of California report evaluating parcel taxes found that, if well designed, a square-footage tax is better than a flat-rate parcel tax because it links the tax proportionally to the public services it funds.
A parcel tax, in general, can fund services residents expect and need. Unlike income and sales taxes, which can be highly variable, land is immobile and in limited supply. Therefore, the income generated from a parcel tax is more stable.
The tax on square footage has one major shortcoming: It can make ownership of large tracts of vacant land uneconomical, particularly if the land has a steep slope and can only be minimally developed or is in a low-value agricultural area. But a lower tax rate on vacant parcels could make up for that discrepancy, the report noted.
Every property has a "tax capacity" -- a tax rate that would threaten to reduce the property's value to zero. A low tax rate is unlikely to exceed the capacity of any parcel. But as the tax rate rises, more properties become vulnerable, the report noted. However, suburban properties are likely to be able to pay higher square-footage taxes and still be profitable, given the high revenue to be generated for developers by property values and leases.
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