With little opposition, Palo Alto asks voters to approve business tax

When the Palo Alto City Council voted Monday to formally endorse Measure K, which would create a business tax, the most striking comments were the ones that weren’t spoken.

Not a single person from the business community addressed the council to oppose the measure — a scenario that two months ago would have seemed unlikely, if not unthinkable. The only person who had anything to say against the measure was council member Greg Tanaka, who has historically opposed all business tax proposals.

The sound of silence was music to Palo Alto leaders and other supporters of the business tax, many of whom are well aware of the business community’s power and influence. Mayor Pat Burt was on the council in 2009, when the city last tried to enact a business tax only to see it fizzle amid intense business opposition. This time, Burt led a council committee to negotiate with the measure’s leading opponents, a group that consisted of the Silicon Valley Leadership Group and the Palo Alto Chamber of Commerce (NAIOP Silicon Valley, a group that represents commercial developers initially took part but then bowed out in July because of insufficient staffing).

Success was by no means assured. For months, the business coalition has been criticizing the tax proposal and arguing that it would devastate the local business climate and prompt some companies to leave the city. But Aug. 10, just before the state deadline for submitting ballot measures, the business coalition and the city announced a deal that dramatically scaled down the proposed tax measure and effectively muted formal opposition to the measure.

The Aug. 10 vote to place Measure K on the ballot felt at once momentous and anticlimactic. On the one hand, the move was a culmination of nearly a decade of planning and revisions. Palo Alto’s drive toward the tax accelerated in 2016, when council members began to confront the enormous costs of needed rail improvements, and then grounded to a halt in 2020, when the pandemic prompted them to reshuffle their financial priorities. For many residents and city officials who have long argued that it’s time for Palo Alto to shed its status as the only Silicon Valley city without a business tax, the fact that voters will now have a chance to adopt one is a big deal.

“There’s a lot of anger in the community about the fact that businesses aren’t paying their fair share,” Nadia Naik, an advocate for rail improvements, told the council during an Aug. 8 hearing on the business tax. “I’m not sure that the Silicon Valley Leadership Group or the Chamber, or some of the large companies in town understand how frustrating it is for residents.”

Yet the actual tax measure left many tax supporters feeling underwhelmed. For one thing, it exempts all small businesses and applies only to those with more than 10,000 square feet. The rate would be $0.075 per square foot, well below the 12-cent rate that the council had considered as recently as early August. The largest corporations would see their taxes capped at $500,000.

The tax is projected to raise about $9.6 million annually, with proceeds going into three categories: affordable housing, rail improvement and public safety. While the measure is a welcome boost for a city that has seen its revenues yo-yo over the past two years, it’s well short of the $15 million that the council was banking on just weeks before it voted to place the measure on the ballot.

Some residents who have supported the tax found it hard to hide their disappointment with the final product. Winter Dellenbach, a Barron Park resident and council watchdog, urged council members to raise the measure to 11 cents per square foot and said the measure is “less than what many of us had hoped.” And council member Tom DuBois, a longtime proponent of adopting a business tax, said the reduced proposal felt “insufficient.”

But Keith Reckdahl, a city planning commissioner who is leading the campaign in favor of Measure K, said the city’s approach toward adopting business is pragmatic. The final product addresses some of the biggest concerns from the business community while raising money for critical city priorities.

“This is a compromise. In a compromise no one is happy,” Reckdahl said in an interview.

Reckdahl said his group believes the business tax would have a “reasonable impact” and that it would benefit not just the broader Palo Alto community but local businesses as well. Palo Alto companies rely on the city’s transportation networks. Their workers need housing. And more than half of the city’s police calls, Reckdahl said, are sent to businesses.

“They all have a vested interest in having these,” he said.

He also noted that in addition to small businesses, the tax exempts grocery stores and hotels, which can offset their business tax payments with hotel tax proceeds.

The measure has already proven successful in one sense: Business leaders have honored their part of the bargain. Aside from Tanaka’s dissenting vote, there is no formal opposition to Measure K and no campaigns raising money to fight the measure. Six of the seven current council members support it. While various civic leaders have signed on to arguments in favor of Measure K, the only people listed in the opposition argument are resident Alan Kaiser and John Dehn, chair of Santa Clara County’s Libertarian Party (the two are also the only signatories to the argument against Measure L, which affirms the city’s policy of transferring funds from the gas utility to the general fund). The tax, Dehn and Kaiser wrote in their argument against Measure K, “will contribute little of usefulness to the kind of Palo Alto our residents would like to have.”

“Furthermore, the elements of this proposal that single out different kinds of businesses as taxable, while others are not, implies a considerable value judgment being made about which kinds of businesses we ‘like’ as a city,'” the argument states.

But unlike in 2009, business leaders remain on the sidelines. With no vocal opposition to Measure K, DuBois said Monday that he hopes most voters will find it to be a “no-brainer.”

“It’s a small modest tax that excludes all the small businesses in town and it helps pay for public safety, for affordable housing and rail safety as well,” DuBois said.

Measure K is also supported by all seven candidates running for council. Lisa Forssell, a utilities commissioner, contributed $250 to support the measure and called the tax proposal “progressive” because it excludes small businesses. Brian Hamachek, who had initially opposed the tax, flipped after the council scaled down the proposal and exempted small businesses. Vicky Veenker said at a September forum that she believes businesses will “take pride in paying their fair share.”

As of Sept. 24, proponents have raised $9,142 to get the measure across the finish line. Former Vice Mayor Greg Schmid and council members Alison Cormack, Tom DuBois and Eric Filseth have all donated money to the campaign, as has Ventura neighborhood activist Rebecca Sanders, Reckdahl and Naik, a community advocate for redesigning the rail corridor.

In their argument in favor of the tax, supporters argue that because employees benefit from city services, it’s only fair to make businesses chip in for the cost of these services.

“All parts of community must contribute to funding their essential services. Palo Alto has fewer visitors and business travelers now because of COVID, and we are the last major city in our region without a Business Tax,” supporters wrote in a rebuttal to Dehn and Kaiser. “We must adapt, and the time has come.”