The Bay Area has an affordability crisis, with Palo Alto businesses closing their doors or relocating to more affordable markets, as seen in daily news stories and empty storefronts. Yet, the cost of doing business in Palo Alto could get more expensive, since the City Council has been exploring options to place a business tax measure on the November 2020 ballot.
At its meeting on Jan. 27, the City Council directed city staff to develop a detailed tax proposal based on an employee headcount approach, which in essence will be a tax on jobs in Palo Alto. This tax structure would affect all businesses but would disproportionately impact smaller businesses that only operate in Palo Alto. By taxing businesses based on their Palo Alto headcount, larger companies may choose not to hire locally in Palo Alto. Small and medium sized businesses would have an extra financial burden.
Our local businesses will inevitably add this additional tax cost to their prices, so ultimately Palo Alto residents will be adversely affected, too. Small businesses that cannot pass along additional costs might have to close their businesses entirely. And a business tax would impose a costly compliance burden on Palo Alto businesses and significant administrative costs on the city.
A reduction in business vitality across all sectors will have negative effects for everyone, including residents. Instead of exploring options to tax local businesses, the council should support a stable business environment which is crucial to our local economy and a necessary component to ensuring everyone has the opportunity to thrive.
It is an odd time for the City Council to pursue a business tax because the city's finances are in very good condition. Palo Alto's long-range financial forecast that was released at the end of last year indicated city revenues would rise by 7%, or $9.8 million, in the upcoming fiscal year. This dramatic growth is due in part to tax revenue generated by businesses.
The business community is making substantial contributions to the fiscal health of the city. Stephen Levy, director and senior economist of the Center for Continuing Study of the California Economy in Palo Alto, reviewed the fiscal impact study prepared for the city's Comprehensive Plan and found that "Most sales tax revenues come from visitors and businesses, not residents. In 2015 the study reports 48% of sales tax revenue came from visitor spending, 41% from local employees and business spending and 11% from local households." Additionally, Levy wrote, "Although it was not covered in the fiscal study, it is true that the recent growth in infrastructure funding has come from the increase in the transient occupancy tax paid mainly by businesses and visitors." A business tax could jeopardize this significant and consistent source of revenue.
Another concern for Palo Alto taxpayers is the city's poor track record of managing taxpayer funds. The City Council made the case to voters in 2014 and 2018 that it needed to pass hotel taxes to fund critical infrastructure upgrades, including a new downtown parking garage. In February 2019, the City Council ignored its promise to construct the parking garage and decided not to honor its commitment to the voters. The parking garage would have been pivotal for addressing our community's traffic congestion and parking issues. This history raises the question of whether the funds generated by a new business tax would in fact fund these projects.
We have observed this process that began in the City Council in April 2019, where most of the council's focus has been on designing a tax rather than on assessing city needs that would justify a specific level of additional business taxes. The city is generating budget surpluses due to a strong local economy and significant taxes already in place. In this process the City Council has authorized additional spending up to $179,125 to conduct polling and outreach in order to design a business tax system that is most likely to be acceptable to enough voters to pass, yet without identifying the need it is trying to meet. If the council had started with a focus on opportunities to improve the business climate in Palo Alto, there would be a much better chance of gaining the support of the business community and voters as well.
Ultimately, if the City Council moves forward with placing the tax on the ballot, the voters will have the chance to weigh in. This is not the first time the council has pursued a similar jobs tax. In 2009, Palo Alto voters overwhelmingly rejected a similar measure that would have taxed companies based on employee headcounts. The council should take note of that election result and realize that Palo Alto voters do not want to burden the businesses in their city with higher costs that will only be passed along to them.
Instead of rushing to place a business tax on the ballot, the City Council should invest its time in working with diverse stakeholders on alternatives that could strengthen our local economy by supporting and retaining our local businesses. We strongly urge the City Council to forego placing a business tax on the November 2020 ballot. Our community deserves a solution that works for everyone, not just City Hall.
Judy Kleinberg is the president of the Palo Alto Chamber of Commerce and a former mayor of Palo Alto. Dan Kostenbauder is the vice president, tax policy for the Silicon Valley Leadership Group. Brad Ehikian is chairman of the Palo Alto Downtown Business and Professional Association and co-owner of Premier Property Management Inc. Kleinberg can be reached at Judy@paloaltochamber.com; Kostenbauder can be emailed at email@example.com.