After seeing its negotiations with the business community fizzle, the Palo Alto City Council pushed forward on Monday with its plan to place a business tax based on square footage on the November ballot.
In doing so, however, the council agreed to revise the tax measure to exempt all businesses with less than 10,000 square feet of space, a change that effectively excludes all small retailers from the tax. Council members also moved to set the rate at 11 cents per square foot, a shift from an earlier proposal that would have set the rate at either 6 cents or 12 cents, depending on the size of the business.
The council left the door slightly ajar for last-second changes based on a potential agreement with a coalition of business groups that are opposing the tax. Council member Tom DuBois suggested that it's still possible for the council to tweak the proposal before the final resolution is adopted on Aug. 8, the council's last meeting before Santa Clara County's Aug. 12 deadline to place the measure on the ballot.
Barring any surprising developments, the council's action means that Palo Alto voters will get to weigh in on a tax measure that would raise roughly $15 million per year, with the proceeds used to fund public safety, transportation and affordable housing. The council voted 5-2, with council members Alison Cormack and Greg Tanaka dissenting, to support the revised proposal, which was based on recommendations from its ad hoc committee.
The committee's three members — Mayor Pat Burt and council members Tom DuBois and Eric Filseth — all argued Monday that the proposed tax would have a modest impact on large businesses, amounting to about 1% of rent costs. The latest revision, which raised the threshold for exempted businesses from 5,000 square feet to 10,000 square feet, aims to shield just about all small and medium retailers from the proposed tax.
DuBois noted that with the higher exemption, more than 50% of Palo Alto businesses — and all small businesses — are excluded. Filseth concurred.
"With 5,000 square feet, we exempt most of the restaurants in town and most the smallest businesses, but there's also kind of a fair number of community-serving retail businesses in the 5,000- to 10,000-square-foot range," said Filseth, citing Hassett Hardware, Palo Alto Bicycles and Mike's Bikes as examples. "We thought that 10,000 square feet was a more appropriate target on that."
There was no indication, however, that the revision would bring the council any closer to a compromise with the coalition of business leaders that is opposing the proposed tax, a group that includes the Silicon Valley Leadership Group, the Palo Alto Chamber of Commerce and NAIOP Silicon Valley, a group that represents commercial developers. Dan Kostenbauder, vice president for tax policy at the Silicon Valley Leadership Group, submitted a letter to the council prior to the Monday discussion arguing that Palo Alto's tax would be "disproportionately higher than the business taxes in neighboring communities."
He noted in the letter that Sunnyvale caps the tax that any business would pay at less than $14,000, while San Jose has a cap of less than $167,000. Palo Alto's proposed tax, however, would not have a cap of any sort, which creates a "significantly higher tax burden."
One company that is opposing the tax is Maxar Technologies, a manufacturer of satellites and other space technology and parent company of SSL (formerly Space Systems Loral), which has a manufacturing facility on Fabian Way.
Karen Cox, vice president for government relations and public policy at Maxar Technologies, asserted that the tax would be "particularly onerous for manufacturing, industrial, and research and development facilities, that often require substantial amounts of square footage that are disproportionate to their revenue stream or economic impact."
"For example, our company builds large satellites, robotics, and spacecraft systems that require a significant amount of square footage. The same is true for many of Palo Alto's research facilities. Basing the business tax on the square footage of the company's operation will penalize these important sectors of the City's economy and may encourage them to move elsewhere," Cox wrote.
The vast majority of the speakers at Monday's meeting fully supported the tax effort, with many pointing out that Palo Alto is an anomaly in not having a business tax. Alex Comsa, a Realtor who is running for a City Council seat, called the council's tax proposal "very progressive and very generous for business." He noted that local businesses have been facing annual rent hikes of 5% or more over the past few decades, a factor that far exceeds the impact of the proposed tax.
Mayor Pat Burt agreed and suggested that the notion that a 1% rent increase would drive the decision on whether a company stays in Palo Alto "just doesn't add up from a practical standpoint."
He also stressed the importance of raising money for the three areas targeted by the tax, particularly affordable housing. The city currently does not have anywhere close to the resources that would be required to meet the state's mandates for constructing below-market-rate housing, which typically relies on government subsidies.
Burt characterized the latest version of the business tax as a "compromise."
"I think we have a balanced measure and we have a reasonable measure going forward that meets some really important community needs," Burt said.
Other residents pointed to the need to raise revenue for grade separation, the redesign of rail crossings so that tracks would not intersect with roads. Palo Alto is currently planning for grade separations at the Churchill Avenue, East Meadow Drive and Charleston Road crossings — projects that will cost hundreds of millions of dollars. While some of the funding for grade separation is expected to come from Santa Clara County's Measure B of 2016, as well as other sources, local funds will also be crucial, said Nadia Naik, who served as co-chair of the Expanded Community Advisory Panel, a group that analyzed options for grade separation.
"Local funding for grade separation is needed to match Measure B dollars and pursue federal funding and this tax will help us achieve our long-term goal of trying to create a safe environment in the city and obviously separate the trains from the cars, pedestrians and bikes," said Naik, who spoke as an individual and not representing the group.
Keith Reckdahl observed that a generation ago, city taxes were evenly split between residents and businesses. Today, residents pay the vast majority of the taxes. The proposed business tax wouldn't even come close to restoring the parity, he said.
"If businesses are chased out of Palo Alto, it's because of landlords' rent increases, not because of this tiny tax," said Reckdahl, who serves on the Planning and Transportation Commission but spoke as an individual.
Tanaka and Cormack remained opposed to the tax, though for different reasons. Cormack was open to the idea of a business tax but argued for a lower tax rate, something in the neighborhood of 5 cents per square foot. The measure, she suggested, would have a higher chance of passing with a smaller rate and, potentially, less opposition.
Tanaka categorically opposed any attempts at business tax, arguing that it would hurt the local economy. On Monday, he argued that the city already has a huge budget and doesn't need another tax.
"We have to spend within our means," Tanaka said.