Palo Alto looks to business tax to fund shuttles, rail improvements

As Palo Alto prepares to join the recent wave of cities that have adopted a business tax, transportation is emerging as the highest priority for how the revenues would be used, with public shuttles and safer rail crossings at the top of the City Council’s priority list.

The city is moving toward placing a revenue measure on the November 2020 ballot, following in the footsteps of East Palo Alto and Mountain View, the last two area cities to adopt new taxes. But even though the City Council generally supports the creation of a new revenue source, members have not yet decided what the new tax would look like.

The council’s Finance Committee on Tuesday night began to narrow its menu of options for the new measure, recommending that the city officially cut from consideration a tax based on gross revenues. This type of tax, which is in place in San Francisco and San Mateo, is also what Palo Alto had considered in 2009, its last effort to institute a business tax (that measure fizzled in the election).

Rather, the committee agreed that the city should base its new business tax on either square footage, like Cupertino, or on employee count, the most common method in the region and one used in Mountain View, San Jose, Santa Clara and Sunnyvale, according to a report from the city’s consultant, Matrix Consulting Group.

Councilwoman Alison Cormack, a member of the Finance Committee, made the case for employee count, noting that this method has the most direct link to transportation, the area that the committee agreed should be the top priority for the tax revenues. As the council’s leading proponent of expanding the city shuttle system, Cormack argued that programs that improve mobility “would be good fits for a version of the business tax, especially one more connected to people as opposed to buildings.”

“We have a major transportation problem and everyone else has a business tax and we don’t have one,” Cormack said during the lengthy discussion.

In addition to transportation, the council considered affordable housing and further infrastructure improvements as possible targets for business-tax funds. But while a percentage of the business-tax proceeds may still go to affordable housing, the committee agreed that the city should consider other funding sources for infrastructure projects such as the expansion of the animal shelter, the redevelopment of Cubberley Community Center and the renovation of the historic Roth Building, the future site of the Palo Alto History Museum.

The committee agreed that these infrastructure improvements would be more appropriately funded by a general obligation bond, the type of mechanism that was used to pay for the recent reconstruction of local libraries.

At the same time, the committee couldn’t reach a consensus on whether the new tax should be a “general tax” that only requires a majority support and that gives the city complete discretion in how the funding would be used or a “special tax” that requires a two-thirds majority and that specifies how the money would be used.

Committee Chairman Tom DuBois favored the former approach, with a “general tax” accompanied by an “advisory measure” that tells the public how revenue would be allocated without legally binding the council to this commitment. Vice Mayor Adrian Fine leaned toward a “special tax,” which is harder to pass but offers voters and businesses more assurance about how the money would be spent.

Fine also suggested that if the city moves ahead with a business tax, it should consider offering some additional assistance to local businesses, some of which are already struggling to get by. This could mean a streamlined permitting process for work such as signage improvements, Fine said.

“If you walk up and down California Avenue and University Avenue, you’ll see there’s a lot of empty storefronts,” Fine said. “A business tax will pinch businesses and there may be some role we can play in economic development.”

Assistant City Manager Michelle Poche Flaherty also cautioned about placing too big a burden on local businesses. She pointed to a recent report from Joint Venture Silicon Valley showing that startups are increasingly moving to San Francisco rather than to cities in Santa Clara and San Mateo counties. She also noted that if companies end up leaving Palo Alto, that would put a greater burden on residents to supply the needed revenues.

“Commercial properties fill less than 10% of Palo Alto parcels but generate 30% of property tax revenues,” Flaherty said. “If we lose a tenant at Stanford Research Park, it may only be one company, but in terms of the contribution we get in the tax base, it’s one contributor but it may leave a rather big footprint.”

In a nod to the challenges faced by local retailers, the committee recommended exempting from the new tax companies involved in public utility, retail, the restaurant and hospitality industries.

Several business leaders urged the committee on Tuesday to make sure the new measure isn’t overly burdensome or opaque. Dan Kostenbauder, vice president for tax policy at the Silicon Valley Leadership Group, a public-policy group that advocates on behalf of area employers, cautioned against adding new taxes at a time when the economy may be heading for a slowdown.

“We’ve had such a good period of economic growth and a lot of tax revenue. Certainly, the prospect of an economic downturn would lead to lower taxes,” Kostenbauder said. “Putting higher taxes on businesses at a time when the economy is weakening is not necessarily a good idea.”

He also said the Leadership Group feels strongly that additional business taxes should be special taxes.

“The purpose of the tax should be identified and put into the ballot measure so we know exactly where the funds are going and it’s specifically designated,” he said.

Judy Kleinberg, president of the Palo Alto Chamber of Commerce, similarly argued that a tax during an economic slowdown would hurt local businesses, particularly small businesses that are already feeling the pressures of e-commerce. A special tax, rather than a general one, is the only way that businesses can be assured there is a nexus between their contributions and what the money is used for.

“Please remember that accountability and transparency is extremely important,” Kleinberg said.