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Among the many efforts that the COVID-19 disrupted last year was Palo Alto’s push toward a business tax, a proposition that has been years in the making but that fell apart just as the economy nosedived in the face of the economic shutdown in spring 2020.
Now the virus is on the wane, the economy is flickering back to life and the business tax is back on the council’s agenda. On Tuesday night, the Palo Alto officially resuscitated its business tax effort when City Council’s Finance Committee reaffirmed its desire to pursue the tax and debated what form the 2022 measure should take and what exactly it should fund.
The committee didn’t take any of the tax options off the table, though it did push a few far to the side. The employee headcount tax and the payroll tax — two options that had garnered some support in the past — were deemed to be less than ideal because of the difficulty in administrating these taxes, the committee agreed. The gross receipts tax, which the council unsuccessfully tried to adopt in 2009, similarly appears to have fallen out of favor.
Instead, all three Finance Committee members gravitated toward a tax based on square footage — a mechanism that is already in place in Cupertino and in East Palo Alto, which in 2018 adopted a parcel tax based on commercial square footage. In the coming months, the committee and the full council will consider following suit as they continues to winnow down the city’s options for both the type of tax and the projects that should be funded through business taxes.
Vice Mayor Pat Burt, who supports following East Palo Alto’s lead and taxing companies based on square footage, argued that the tech titans of Silicon Valley have historically gotten away with paying little in taxes compared to other regions. As a result, the problems that their success brought to the region — namely, heavy traffic and a dearth of affordable housing — should be solved in part by taxing large businesses.
Silicon Valley, he argued, was born as a low-cost suburb region to San Francisco.
“Over the decades, as it became one of the most affluent regions in the country, or the world for that matter, we stayed as an exceptionally low business-tax region.”
Council member Eric Filseth similarly suggested that the city should lean on the business community — particularly, the tech sector — to help pay for the cost of tech’s growth.
“The big picture of this remains that the Valley — driven primarily by the tech sector but to some extent by the health care sector as well — generated massive wealth and has not invested enough of it in transportation and housing and, to some extent, social services,” Filseth said. “And that’s a problem.”
Where, he asked, should the money to fund these things come from?
“The only place it can come from is (the) tech sector, which has generated the wealth of the valley,” Filseth said.
With the Tuesday hearing, the committee resumed and, in some ways, restarted the city’s quest toward a tax measure. While the concept is not new, the city’s budget problems have only grown since the council last weighed the tax in spring 2020. The city slashed $40 million off its budget last year and while conditions are looking somewhat sunnier in the coming fiscal year, which begin on July 1, many of the services and positions that the council had previously cut have not been restored.
The budget problem is further compounded by the collapse of the local hotel industry during the shelter-in-place period, which created a sharp decline in the city’s transient-occupancy tax revenues, a key source of infrastructure funding. Palo Alto is also feeling the effects of an October ruling from a Santa Clara Superior Court judge who found that the city’s transfer of funding from its gas utility to its general fund constituted an “illegal tax” and mandated that the city refund $12 million.
Given these recent trends, as well as the council’s decadelong desire to find new ways to pay for affordable housing and transportation improvements, staff and the council committee agreed that it’s time to once again look at adopting a business tax.
“We’ve seen a significant decline since 2019 in our tax revenues,” Kiely Nose, the city’s chief financial officer, said Tuesday. “Given the continued uncertainty and persistent sensitivities of revenues like TOT, it behooves us as an organization to potentially look at other ballot measures.”
The effort is expected to unfold over the coming months, with staff preparing additional analysis and hiring consultants to perform the needed research, polling and stakeholder engagement. Under a timeline that staff presented Tuesday, most of the major decisions about the new tax will be made in the late fall and winter, with the council set to finalize the language for the 2022 ballot in May.
The council and staff are already bracing for some pushback from the business community, which has resisted the city’s prior attempts to institute a tax. City Manager Ed Shikada pointed Tuesday at the inherent tension in the council’s discussion of the new tax, particularly when it’s considered a component in the city’s plan for economic recovery. On the one hand, he noted, the revenues are intended to support municipal services and community priorities and create a more fiscally sustainable structure.
“At the same time the other part of the tension is recognizing that when we’re talking about elements like a business tax — or taxes in general — we need to be mindful of the impact on taxpayers,” Shikada said.
Before the pandemic shut down its effort, Palo Alto was exploring a business tax based on an employee headcount, which would allow it to join a club of Bay Area cities that also includes Mountain View, Redwood City, San Jose, Santa Clara and Sunnyvale. These cities take different approaches, with Santa Clara charging a flat rate per employee and Redwood City increasing the fee based on the number of employees, with larger companies paying a higher rate (this explains why Redwood City, which has roughly half the number of employees as Santa Clara, generates $2.6 million annually from its business tax, while Santa Clara collects $900,000).
But with more people working remotely in the aftermath of the pandemic, the link between employee counts and traffic impacts has weakened. Chair Alison Cormack suggested removing the payroll tax and the gross receipts from consideration, arguing that both of these taxes are difficult to administer. Her colleagues agreed that these two options are not ideal, though they opted to keep them in the mix and allow the full council to weigh in on whether they should still be considered.
In addition to the business tax, the city is considering asking voters to modify the utilities users tax, which generates about $16 million in annual revenues. This could entail directly asking voters to approve the city’s practice of transferring funds from its gas and electric utilities to the general fund, which pays for most city services not related to utilities. Such a measure could “resolve all legal questions about the transfers,” according to a report from the Department of Administrative Services. Under this proposal, the city could ask voters to approve a percentage charge on gas and electric utility bills that could be used for general fund purposes, the report states.
Council members are also exploring the possible use for a utility tax to pursue clean energy initiatives such as electrification — a key component in its plan to reduce greenhouse-gas emissions by 80% by 2030, with 1990 as the baseline. The committee generally agreed that one option for paying for the needed infrastructural improvements is imposing a tax on gas customers.
Other projects that the city is considering funding with tax revenues include affordable housing and grade separation at the city’s rail crossings, a project with a projected cost of hundreds of millions of dollars.
My biggest concern is a business tax won’t be high enough. The tech sector should be taxed at a rate high enough to discourage them from staying in the Bay Area. This will help the jobs housing imbalance.
Finally. Surprise, surprise there’s pushback from the business community where they spend hundreds of millions of dollars lobbying to ensure they can continue to underpay gig and foreign contractors. Remember that DoorDash’s ceo is the 2d highest paid exec after Palantir’s. Remember that Stanford, the Silicon Valley Leadership Group et al have successfully lobbied for decades to keep foreign contractors’ pay so low that the use of contractors is now higher than full-time employees with benefits and stock options. And growing each year.
Since most gig workers aren’t in the office but out driving their own cars, tax gig worker companies twice or three times as much as the square footage rate to reflect reality.
Good that the City Council is finally working on this.
This is getting a trickier concept.
Prepandemic square footage may have made sense. With a cap on no business tax at a certain number of employees, certain employers would go out of their way to keep the number of employees under that cap. The use of contractors, seasonal staff, part time or temporary staff, would have made a gray area on the monthly/annual number of employees.
Now that remote work is likely to continue at least as things like hybrid working take effect, companies are reducing their office space. Some may even just have a lobby, conference room, and receptionist to keep a Palo Alto street address as all employees work remotely.
At present we may be looking at a situation where we want to encourage workers in town for retail and dining customers. We have no idea what life is going to look like in 2022 or the future.
Tricky situation now.
“In addition to the business tax, the city is considering asking voters to modify the utilities users tax, which generates about $16 million in annual revenues. This could entail directly asking voters to approve the city’s practice of transferring funds from its gas and electric utilities to the general fund, which pays for most city services not relating to utilities.”
Just say no to these continued ripoffs from the bunch that can’t administer the solar permitting process and whose solution is to DOUBLE STAFF to make up for poor performers. Hardly a cost-effective idea when the city’s pleading poverty!
So tired of paying for their incompetence, excuses and pricey consultants, esp, after their abysmal performance at the Monday night CC meeting on Ventura.
A significant tax on commercial space will reduce the value of it and make building housing on that land more economically feasible.
The greatest pushback now is likely to come from the large property owners/developers who will claim that that will be unable to lease their office space unless they can provide low cost of operation (i.e., no business tax), unlimited free parking, etc. and everything other service that they don’t have to pay for themselves to their tenants. But, as we can see, a business tax simply levels the playing field across our neighboring cities. Perhaps the property owners/developers are realizing that they may have to compete for business on other terms — like reducing the rents that they charge — price decreases should follow lower demand — and other things that the property owner rather than the City can provide. This is all a part of the process of asking property owners/developers to pay their own way. My only concern is that a square foot basis will put an equal tax on software companies that pack coders into small spaces and retailers and restaurants that have fewer employees but need larger spaces to cater to customers. This needs to be rethought out. Retailers and restaurants provide sales tax revenue to the City, and generally have been struggling throughout the pandemic. Not so for the commercial high tech businesses.
@Evergreen Park, good points! Also there was a presentation by Greg Schmid to CC showing the historic decline in taxes paid by big businesses/big developers as they shift the tax burden to us, the residents.
One solution could be to exempt restaurants and retailers from the tax for at least a few years while they recover and while the city learns how to count employees and contractors and gig workers driving around. They can require the updates quarterly as a condition.
If they have trouble counting gig workers, let there be a premium imposed because taxpayers have to pick up the costs for those underpaid workers just like the US taxpayers have to foot the bill for the health care and housing subsiudy costs for the underpaid workers at WalMart with the costs running to $35,000,000,000 (when last I looked it up).
Palo Alto re-considering yet another tax for one of the richest cities in the state.
Yes indeed, things are getting back to normal around here!
If we increase business tax rates then can we lower homeowner taxes?
If not, this money is going to be inefficiently utilized to fund more bureaucrats and buildings/services that only benefit our corrupt politicians and developers.
Ed Shikada – did you ever find that $34.1 million surplus? Any thoughts on giving it back to the hard working people of Palo Alto?