New survey boosts Palo Alto’s push for a business tax

At first blush, the results of Palo Alto’s latest survey don’t look particularly flattering for city leaders, with a growing number of residents expressing pessimism about the future and dissatisfaction with the local government.

Yet the survey offered exactly the kind of information that the City Council had hoped to get. Conducted by the polling firm FM3, it suggests that most voters will likely support a new business tax, particularly if the proceeds are used to restore city services, invest in infrastructure like roads and community centers and address homelessness.

Buoyed by these results, the council’s Finance Committee on Tuesday took another step toward placing a business license tax based on square footage on the November ballot. By a 3-0 vote, committee members further refined the tax proposal by supporting exemptions for grocery stores and hotels and favoring a tiered approach that limits the annual bill for businesses with less than 5,000 square feet of space to $50.

Palo Alto has been marching toward a business tax since 2016, though the tax measure has morphed in both form and function over the years. Prior proposals such as a payroll tax or a parcel tax have been scuttled after much debate. And whereas the tax was initially seen as a vehicle to raise money for big-ticket items such as grade separation at rail crossings and affordable housing, it is now seen at least in part as a way to replenish the general fund, which pays for basic services such as parks, planning and public safety.

That appears to be just fine with many potential voters, the FM3 survey suggests. The firm polled 801 likely voters in late November and its results suggest that the city has a far better chance at passing a business tax this year than in 2009, when voters rejected a tax measure based on gross receipts. About 62% of the respondents in the new survey said they would likely support a business tax. And when asked to opine on an “acceptable reason” for a new tax, 82% rated investment in community-owned assets such as roads, libraries, parks and public safety facilities as either “very acceptable” or “somewhat acceptable.” Maintaining and restoring city services also scored highly as acceptable rationales, with 81% and 79% of respondents, respectively, deeming them to be reasonable areas for the new tax to address.

Support for using a tax for rail improvements (72%), affordable housing (69%) and advancing the city’s climate action plan (68%) fell somewhat lower on the acceptability scale.

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The relatively high show of support for a business tax is particularly striking given the growing gloom, which is also reflected in the survey. When asked whether they feel Palo Alto is heading in the “right direction,” only 40% of the voters said it is, while 34% said it’s on the wrong track (the rest said they didn’t know). The percentage of those who feel the city is going in the right direction fell slightly from 2018, when 43% of respondents expressed that view and dropped significantly from 2016, when 61% chose the optimistic alternative.

Residents have also become more critical of the local government. While 54% of survey respondents said they believe the city government is doing an “excellent” or “good” job, that’s down from 60% in 2018 and 74% in 2016, according to FM3.

David Metz, president of FM3, said this trend in public sentiment is not in any way unique to Palo Alto.

“We see the same dynamics taking place in cities throughout the Bay Area over the last several years, for obvious reasons,” Metz said.

Residents throughout the Bay Area express common concerns about high costs of living and homelessness, Metz said. Those have more recently been compounded by new concerns pertaining to the pandemic and crime.

The recent FM3 survey is intended to be the first in a sequence, with the next one focusing on a more refined tax proposal. Finance Committee members suggested Tuesday that they might want to also commission a third survey, which would help them draft the actual language for the ballot. The council will consider this recommendation on Monday.

The committee also took a step Tuesday toward finalizing the actual tax proposal. Its three members — Chair Alison Cormack, Mayor Pat Burt and council member Eric Filseth — backed a “tiered” structure that would require small businesses to pay an annual $50 fee, the same payment that they currently make as part of the city’s business registry system (the new payment would basically replace the current one). Larger businesses would pay a flat fee of $50 for the first 5,000 square feet and then a monthly rate for every square foot beyond the 5,000-foot threshold.

Staff from the Administrative Services Department estimated that such a tax could generate between $12 million and $47 million, depending on the amount that the city plans to charge and the exemptions that it opts to include in the tax measure. While the Finance Committee agreed that the tax should not apply to hotels and grocery stores, members also agreed that they should limit the number of other exemptions so as to avoid making the ballot measure overly complicated.

“Every time you try to massage it to make it more fair, it makes it more complex and you run the risk of support being diminished as a result,” Burt said.

The committee also supported the city’s outreach plan, which calls for focus groups, stakeholder meetings and public hearings for the broader community. It notably steered clear, however, of determining on Tuesday how the money should be spent, leaving that critical question for the full council to hash out on Monday.

While the council majority has consistently supported adopting a business tax (Greg Tanaka is the only council member who opposes the idea), the proposal is unlikely to win much support in the business community. Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce, said his organization believes this is a particularly bad time to burden the business community, which continues to struggle with the economic impacts of the pandemic. Businesses are already helping to keep Palo Alto fiscally sustainable, he argued, by contributing sales tax, property tax and utility tax revenues.

“Economic recovery is still uncertain and the business license tax is just another burden that our small and medium businesses just can’t afford at this time,” Weidanz said.

Dan Kostenbauder, vice president for tax policy at the Silicon Valley Leadership Group, also asked the city not to move ahead with the tax until it more fully considers its impact on the local economy. This includes exploration of the possibility that some businesses would either depart from Palo Alto or reduce their local footprint.

“The council should consider assessing the broader economic impacts of imposing a business tax before placing one on the November ballot,” Kostenbauder told the committee.

The impact on small retailers is also an area of concern. Nancy Coupal, owner of Coupa Café, suggested that even if these businesses are exempt from the tax, they could feel the pain indirectly. The final impact, Coupal said, would be on consumers and there will be a “pass-down impact from the larger businesses to the smaller businesses.”

Coupal, whose chain of cafes includes two downtown locations, said the area continues to suffer from the pandemic.

“We’re far from normal. We are not recovered. I think very few businesses are seeing numbers that they saw in 2019,” Coupal told the committee. “I can tell you, I’m still 40% down and I consider myself lucky. And I don’t think this year is going to be a lot better, the way it’s begun.”