News

After court defeat, Palo Alto eyes hike to utility tax

City also prepares to poll residents on new business tax

Andres Sanchez, head of maintenance at the Cardinal Hotel, fixes a lamp on the second floor of the hotel hallway on Oct. 3, 2019. Photo by Magali Gauthier.

After facing a costly court defeat over its historic practice of transferring money from its gas operation to pay for basic city services, Palo Alto is preparing to ask utility customers for help in filling the financial gap.

The City Council is currently exploring an increase in the city's utility users tax, which is included on utility bills and which currently stands at 5% of electric, gas and water use. If the proposal advances, it would likely be on the November 2022 ballot, along with a business tax.

The intent of the utility tax increase is twofold. One purpose is to fill the hole in the general fund that was left behind when the Santa Clara County Superior Court upheld resident Miriam Green's challenge of what city officials refer to as the "general fund equity transfer" — the city's practice of transferring funds from municipal utilities to pay for basic city services such as police, fire, community services and libraries. Another objective is to help Palo Alto pay for new utility programs that would help the city meet its ambitious goal of slashing carbon emissions by 80% by 2030.

In the coming months, the city plans to conduct polls and further revise the tax proposal, which members of the council's Finance Committee tentatively supported on Tuesday night. As part of its discussion, the committee directed city staff to create models of a gas tax rate that would fill the hole left behind by Green's litigation, which led to a court order requiring the city to issue $12 million in refunds to gas customers.

The city is challenging the court ruling, with the council voting in a closed session on Monday to file an appeal. At the same time, members are looking ahead at new ways to both charge utility customers and assist them with adopting programs that promote sustainability.

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On Tuesday, the Finance Committee agreed a gas tax is the best option on the table. By asking voters to explicitly approve a utility tax increase, the city would be able to address the court's finding that transfers from the gas operation to the general fund constitute an "illegal tax." And given that reduction in natural gas use is a major goal of the city's sustainability effort, committee members concluded that when it comes to taxes, the gas utility should be treated differently from the city's electric operation.

"There's a pretty strong climate argument associated with the gas side that is not (associated) with the electricity side," council member Eric Filseth said during Tuesday's discussion of new taxes.

His two committee colleagues, committee Chair Alison Cormack and Vice Mayor Pat Burt, both concurred, though they did not take any positions on whether the focus of the tax should be sustainability or restoration of the various city services that the council chose to cut over the past two years because of plummeting tax revenues. A forthcoming survey, which will focus on both the business tax and the utility tax, is expected to help the council resolve that dilemma.

"I think it's very important in the poll that we ask about the climate part — that we get some barometer: Are people willing to chip in a little bit, or are people maybe willing to chip in more than a little bit?" Cormack said.

Burt was also reluctant to exclude the electric utility from a potential tax increase and suggested that the council's decision on the matter should be informed by polling.

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According to staff analysis, a 1% increase in the utility users tax for electricity, gas and water customers would bring in about $2 million in annual revenues. Raising the current rate from 5% to 15% would thus bring in about $20 million in new annual revenues.

In addition to advancing the proposal to raise the utility tax, the committee reaffirmed its desire to place a proposed business tax on the November 2022 ballot.

The business tax, which remains the council's main priority for the 2022 ballot, would be based on square footage and exempt small businesses under the current proposal. Committee members did not reach a consensus, however, on whether the exemptions should be based on the building size or business type. Filseth argued that if the city bases its exemptions on size, it would automatically exclude small retailers and restaurants — the types of businesses that the council wants to protect. Burt, who favored basing exemptions on businesses type, noted that using size as the threshold would lead the city to exclude financial institutions and venture capitalists from the new tax.

"Those are the folks that have incredibly high earnings in our community and very low community taxes," Burt said.

University Avenue in downtown Palo Alto. Embarcadero Media file photo by Veronica Weber.

Committee members also struggled to reach a consensus over how much money the new tax should raise, with Burt favoring a range of between $20 million and $50 million and Cormack leaning toward a lower range, somewhere between $10 million and $30 million. In making his case, Burt pointed to San Francisco and East Palo Alto, which had seen an increase in office developments even despite each city's adoption of a business tax. East Palo Alto, which adopted a tax based on square footage in 2018, was warned by developers before the election that the tax would cause economic activity to dry up. Instead, the city had seen an "avalanche of office proposals come forward" since the tax, he said.

"Even exceeding the upper end of the range we're considering, it's really not going to have an economic impact on our business climate," Burt said.

Cormack disagreed and said she would not support a floor of $20 million or a ceiling of $50 million for the business tax. After some debate, the committee settled on a range between $10 million and $40 million in annual revenues, which would help fund transportation improvements, affordable housing and infrastructure.

"I find it hard to imagine that you can say that a $50 million tax would have no impact on our economic situation," she said.

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After court defeat, Palo Alto eyes hike to utility tax

City also prepares to poll residents on new business tax

by / Palo Alto Weekly

Uploaded: Wed, Sep 22, 2021, 2:12 pm

After facing a costly court defeat over its historic practice of transferring money from its gas operation to pay for basic city services, Palo Alto is preparing to ask utility customers for help in filling the financial gap.

The City Council is currently exploring an increase in the city's utility users tax, which is included on utility bills and which currently stands at 5% of electric, gas and water use. If the proposal advances, it would likely be on the November 2022 ballot, along with a business tax.

The intent of the utility tax increase is twofold. One purpose is to fill the hole in the general fund that was left behind when the Santa Clara County Superior Court upheld resident Miriam Green's challenge of what city officials refer to as the "general fund equity transfer" — the city's practice of transferring funds from municipal utilities to pay for basic city services such as police, fire, community services and libraries. Another objective is to help Palo Alto pay for new utility programs that would help the city meet its ambitious goal of slashing carbon emissions by 80% by 2030.

In the coming months, the city plans to conduct polls and further revise the tax proposal, which members of the council's Finance Committee tentatively supported on Tuesday night. As part of its discussion, the committee directed city staff to create models of a gas tax rate that would fill the hole left behind by Green's litigation, which led to a court order requiring the city to issue $12 million in refunds to gas customers.

The city is challenging the court ruling, with the council voting in a closed session on Monday to file an appeal. At the same time, members are looking ahead at new ways to both charge utility customers and assist them with adopting programs that promote sustainability.

On Tuesday, the Finance Committee agreed a gas tax is the best option on the table. By asking voters to explicitly approve a utility tax increase, the city would be able to address the court's finding that transfers from the gas operation to the general fund constitute an "illegal tax." And given that reduction in natural gas use is a major goal of the city's sustainability effort, committee members concluded that when it comes to taxes, the gas utility should be treated differently from the city's electric operation.

"There's a pretty strong climate argument associated with the gas side that is not (associated) with the electricity side," council member Eric Filseth said during Tuesday's discussion of new taxes.

His two committee colleagues, committee Chair Alison Cormack and Vice Mayor Pat Burt, both concurred, though they did not take any positions on whether the focus of the tax should be sustainability or restoration of the various city services that the council chose to cut over the past two years because of plummeting tax revenues. A forthcoming survey, which will focus on both the business tax and the utility tax, is expected to help the council resolve that dilemma.

"I think it's very important in the poll that we ask about the climate part — that we get some barometer: Are people willing to chip in a little bit, or are people maybe willing to chip in more than a little bit?" Cormack said.

Burt was also reluctant to exclude the electric utility from a potential tax increase and suggested that the council's decision on the matter should be informed by polling.

According to staff analysis, a 1% increase in the utility users tax for electricity, gas and water customers would bring in about $2 million in annual revenues. Raising the current rate from 5% to 15% would thus bring in about $20 million in new annual revenues.

In addition to advancing the proposal to raise the utility tax, the committee reaffirmed its desire to place a proposed business tax on the November 2022 ballot.

The business tax, which remains the council's main priority for the 2022 ballot, would be based on square footage and exempt small businesses under the current proposal. Committee members did not reach a consensus, however, on whether the exemptions should be based on the building size or business type. Filseth argued that if the city bases its exemptions on size, it would automatically exclude small retailers and restaurants — the types of businesses that the council wants to protect. Burt, who favored basing exemptions on businesses type, noted that using size as the threshold would lead the city to exclude financial institutions and venture capitalists from the new tax.

"Those are the folks that have incredibly high earnings in our community and very low community taxes," Burt said.

Committee members also struggled to reach a consensus over how much money the new tax should raise, with Burt favoring a range of between $20 million and $50 million and Cormack leaning toward a lower range, somewhere between $10 million and $30 million. In making his case, Burt pointed to San Francisco and East Palo Alto, which had seen an increase in office developments even despite each city's adoption of a business tax. East Palo Alto, which adopted a tax based on square footage in 2018, was warned by developers before the election that the tax would cause economic activity to dry up. Instead, the city had seen an "avalanche of office proposals come forward" since the tax, he said.

"Even exceeding the upper end of the range we're considering, it's really not going to have an economic impact on our business climate," Burt said.

Cormack disagreed and said she would not support a floor of $20 million or a ceiling of $50 million for the business tax. After some debate, the committee settled on a range between $10 million and $40 million in annual revenues, which would help fund transportation improvements, affordable housing and infrastructure.

"I find it hard to imagine that you can say that a $50 million tax would have no impact on our economic situation," she said.

Comments

Citizen
Registered user
College Terrace
on Sep 22, 2021 at 3:11 pm
Citizen , College Terrace
Registered user
on Sep 22, 2021 at 3:11 pm

Absolutely not - no new taxes.

Cut back City - clearly the City can't live within its means and has to surreptitiously tax us via fake utility charges. As for businesses? No new taxes - just to find the city's overspending.


Online Name
Registered user
Embarcadero Oaks/Leland
on Sep 22, 2021 at 6:08 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Sep 22, 2021 at 6:08 pm

Greed, greed. SO very tired of being milked as a cash cow by a city that can't even be bothered to notify us of power outages. Let the CITY cut back its ridiculous expenditures instead of continuing to charge us for every little thing. Do you realize they're hiring a consultant to reformat the city handbook? WHY do we have a huge highly paid communications staff? Is not one of them capable of reformatting documents?

Also, do you realize that protesting utility rate hikes is a multi-step process and they ignore all results where fewer than 11,000 people have objected to the rate hikes?? Outrageous.

Where are our refunds?? Are we getting interest? Why are we paying the city's legal costs of fighting giving us our due?


KOhlson
Registered user
Old Palo Alto
on Sep 22, 2021 at 7:32 pm
KOhlson, Old Palo Alto
Registered user
on Sep 22, 2021 at 7:32 pm

The optics of imposing a tax increase to pay off a court case about overcharging is, well, not good.


Local
Registered user
Stanford
on Sep 23, 2021 at 5:44 am
Local, Stanford
Registered user
on Sep 23, 2021 at 5:44 am

A business tax is best - the incidence of this (who ultimately pays) is on the owners of business property since their rents/values are lowered. I think the owners of business property in Palo Alto have done extremely well over the last few years, so happy for them to share some of these gains with the city. Property developers will squawk - nobody likes paying taxes - but those buildings are never going empty, so this tax will be paid in full and have little impact on anything.

The perfect tax - lots of revenue, little distortion - is the business tax.


Bystander
Registered user
Another Palo Alto neighborhood
on Sep 23, 2021 at 8:55 am
Bystander, Another Palo Alto neighborhood
Registered user
on Sep 23, 2021 at 8:55 am

This reminds me of the time in drought when we were all told to reduce water usage and then those of us who did were given a drought surcharge that made up the difference utilities were losing.

We just can't win against our utilities. They think we have bottomless pockets.


Leland J.
Registered user
Professorville
on Sep 23, 2021 at 9:19 am
Leland J. , Professorville
Registered user
on Sep 23, 2021 at 9:19 am

Wait for it, because you know it's coming:

"Tax Larry Page!" "Tax Stanford!" "Tax Castilleja!" "Tax anyone but me!!"


Online Name
Registered user
Embarcadero Oaks/Leland
on Sep 23, 2021 at 10:06 am
Online Name, Embarcadero Oaks/Leland
Registered user
on Sep 23, 2021 at 10:06 am

"Cormack disagreed and said she would not support a floor of $20 million or a ceiling of $50 million for the business tax."

Where's Ms Cormack been during all the years PA residents and taxpayers were bilked out of $20,000,000 each and every year resulting in this lawsuit??
It's ok to "overcharge" us but heaven forbid businesses pay their fair share.


Calius
Registered user
Barron Park
on Sep 23, 2021 at 10:43 am
Calius , Barron Park
Registered user
on Sep 23, 2021 at 10:43 am

Instead of taxes, why doesn't the City turn off night lights in buildings it uses, in complexes where there are no people working at night, etc? In some places where a few people are working at night, use motion activated light switches to turn on lights as needed. By so doing, they can save on their power bill. I have asked Public Works about doing just that and now it seems as though they have indeed turned off the night lights at Byxbee Park's maintenance yard. This will save the City money and reduce the power load.


tpencek
Registered user
Midtown
on Sep 23, 2021 at 11:03 am
tpencek, Midtown
Registered user
on Sep 23, 2021 at 11:03 am

I am against an increase in utility tax. It is a very blunt instrument, and is difficult to titrate against fluctuating needs. The idea of taxing gas usage at a greater level that other utilities sounds like city leaders are suggesting using a mandatory tax as an instrument of social/environmental change. Regardless of my support for the goals (reduced carbon in the air), I think a mandatory tax on fuel needed to heat homes and water is high handed.

If a poll of residents indicates NO support for ANY tax increases, are those who support such measures going to resign or change their opinions? Those that are suggesting some Citywide belt tightening before demanding more from residents have merit to their argument, in my opinion.


PST
Registered user
South of Midtown
on Sep 23, 2021 at 11:39 am
PST, South of Midtown
Registered user
on Sep 23, 2021 at 11:39 am

Whatever revenue that is needed should come from a new business tax only. It’s long overdue.


Anne
Registered user
Midtown
on Sep 23, 2021 at 11:52 am
Anne, Midtown
Registered user
on Sep 23, 2021 at 11:52 am

Utility taxes are already too high. NO.


jr1
Registered user
Greenmeadow
on Sep 23, 2021 at 1:31 pm
jr1, Greenmeadow
Registered user
on Sep 23, 2021 at 1:31 pm

Palo Alto always needs more money, they never look to eliminate waste.


Online Name
Registered user
Embarcadero Oaks/Leland
on Sep 23, 2021 at 3:26 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Sep 23, 2021 at 3:26 pm

The City's unfunded pension liability is now $500,000.000 and it only has 65% of what's needed to pay it off.

Yet they keep dithering about a business tax while spending money on all sorts of absurdities. They waste months of people time considering "medical retail" without ever bothering to define. Same waste with the Casti "planning" process.

For all those "leaders" and "planners" who decided to make our whole tax base dependent on commuters and business travel, how about reducing their salaries and retirement by the amounts of the declines? Instead, they keep getting raises while using OUR money to appeal the judgement to pay US what's owed to US!

Los Altos fired their city manager for ignoring City Council dictates.


peppered
Registered user
Community Center
on Sep 23, 2021 at 6:38 pm
peppered, Community Center
Registered user
on Sep 23, 2021 at 6:38 pm

CPAU is a scam. Thank Ms. Green and the court for exposing it.
The City is BLOATED. This is a golden opportunity for the Council to do the right thing: CUT staff and OUTSOURCE.
Of course the Unions are gonna scream.
But if there's no money...


Giraffe
Registered user
Duveneck/St. Francis
on Sep 23, 2021 at 7:19 pm
Giraffe, Duveneck/St. Francis
Registered user
on Sep 23, 2021 at 7:19 pm

The city has to stop "transferring money from its gas operation to pay for basic city services". Won't the city then have to reduce the gas charges by the amount that is no longer being transferred? So, the gas charge on our bills goes down while the new tax probably adds about the same amount back to the bottom line of the bill. We just will have a clearer pic of the costs.


William Hitchens
Registered user
Mountain View
on Sep 26, 2021 at 5:18 pm
William Hitchens, Mountain View
Registered user
on Sep 26, 2021 at 5:18 pm

Maybe the correct option for PA to explore is to shed under-performing and redundant staff by layoffs, and to freeze the pay and pension payouts for the rest of its administrative employees. If this means abrogating existing union contracts, they by all means DO SO. "Make them an offer they can't refuse" and if they refuse, renegotiate those contracts.


Rebecca Eisenberg
Registered user
Old Palo Alto
on Sep 30, 2021 at 12:24 pm
Rebecca Eisenberg, Old Palo Alto
Registered user
on Sep 30, 2021 at 12:24 pm

City Council should be recalled. Palo Alto is the ONLY city in the state -- and likely country -- with a business presence that fails to tax its businesses *at all*.

The biggest and most profitable companies in the world have large offices serving thousands of employees in Palo Alto, including Tesla, Amazon (AWS), Facebook (Occulus), Alphabet (Nest and Google), and Palantir, that still has not given up one square foot of office space. These companies generate billions of dollars annually using our streets and utilities without paying for their maintenance or delivery. It is literally criminal.

Because City Council refuses to fix this situation, despite having years to do so, relying on the pandemic state of emergency like all better run cities have done, City Council agreed to overcharge residents for utilities. Once the courts correctly found the City liable for stealing money from residents, now City Council is refusing to repay the money we stole, and proposes to steal more. All because they refuse to tax Tesla, which has never paid one dime in business tax to our city.

We do we stand for this? City Council is acting with the least possible degree of integrity and courage. When there is a way to screw residents at the hands of the billionaires, our elected leaders choose to do so. Shame on the Palo Alto Weekly for urging voters to elect them. Our city deserves better.


Rebecca Eisenberg
Registered user
Old Palo Alto
on Sep 30, 2021 at 12:26 pm
Rebecca Eisenberg, Old Palo Alto
Registered user
on Sep 30, 2021 at 12:26 pm

("we" stole should be "they" stole - thanks!)


Rebecca Eisenberg
Registered user
Old Palo Alto
on Sep 30, 2021 at 12:35 pm
Rebecca Eisenberg, Old Palo Alto
Registered user
on Sep 30, 2021 at 12:35 pm

Specifically as to the business tax, no rational business taxes are based on "type" or "size" of businesses. Not one person in city leadership appears to have the slightest understanding of how businesses taxes work, despite the fact that EVERY other city with a business presence has one.

The best business taxes are based on:

- Revenues generated; and
- Payroll ; with
- Overpaid executive enhancement - for companies that pay their top executives more than 100 times median salary (this tax has generated hundreds of millions of dollars in other cities!)

It's not rocket science, guys. Tax based on revenue generated and payroll, have a very generous threshold -- eg don't tax businesses that generate under $50 million annually, and that have a payroll (including equity comp) under $10 million and/or 200 employees. You loop in all the VCs but leave out the retail and restaurants. There are frameworks for this online! There are also frameworks in the countless emails I have sent to Council members, including most recently to Pat Burt.

Such a shame that our elected leaders act with ignorance and willful blindness instead of courage and integrity. Our city deserves so much better!


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