08/10/2022

UDS-Biz

Growing Your Income

Palo Alto advances new tax over objections from businesses | News

Pam Decharo is still recovering from two years of pandemic-induced upheaval.

Decharo, owner of Hair International at Stanford Shopping Center, shut her salon down for seven months during the early days of Covid-19 in March 2020. Since then, she has been navigating through the ever-shifting public health mandates, investing in personal protective equipment and hoping that her customers will come back after a prolonged absence. She said she had to dip into her retirement account so that she could change the air conditioning unit in her salon and she is still spending thousands of dollars for K95 masks, filters and HEPA (high efficiency particulate air) filters.

Now, she and many other business owners are dismayed to see the City Council move ahead with their plan to place a business tax on the November 2022 ballot. On Tuesday night, the council’s Finance Committee took another step toward the ballot measure when it made various refinements to the tax proposal, which will exclude grocery stores and hotels and which will be based on square footage.

Palo Alto officials are hoping to protect businesses like Hair International and other small retailers and service providers by making the first 5,000 square feet of every business largely exempt, subject to only a $50 annual fee. Beyond the 5,000-square-foot threshold, each business will have to pay a per-square-foot fee that the city has yet to set, though officials have signaled that it would probably be between $0.10 and $0.15 per square foot per month.

Even with these exemptions, Decharo believes the tax sends a terrible message to the business community.

“I understand this business tax isn’t going to be huge for small businesses in dollars, but it’s just the thought that they can be so tone deaf to discuss this right after our big fight to get reopened,” Decharo said in an interview. “And then we’re still in the middle of this pandemic and it won’t go away. This thing can turn around and we would get shut down again.”

She is hardly alone in opposing a business tax. During recent focus groups, just about all participating businesses expressed concern or outright opposition to the proposed measure, said Shawn Spano, whose firm Public Dialogue Consortium has been facilitating the meetings over the past month. Many suggested that this was a bad time for a new tax, which they said will provide a disincentive for attracting new businesses and drive some existing companies out of business.

“There were also several members of the focus groups who were very clear and direct, who said they would not support the business license tax under any conditions,” Spano said.

The skepticism in the business community has not, however, spilled over to the city’s electorate. Recent surveys conducted by the city’s consulting firm FM3 show about 63% of the respondents indicating that they will likely support a business tax. The survey also indicated that most voters would also support a separate measure affirming the city’s historic practice of transferring funds from its gas utility to the general fund to pay for basic city services. Palo Alto halted practice, which dates back to the 1950s, in 2021 after resident Miriam Green sued the city and the court upheld her challenge, deeming the transfer an illegal tax.

“There’s a sizable group of voters who would vote yes on both measures,” Dave Metz, president of FM3, told the Finance Committee on Tuesday.

The numbers for the utility measure proved particularly strong, with about 70% of the survey’s 427 respondents indicating support. This included 82% of those who said they support the business tax and 54% of those who oppose adopting a business tax.

“The more voters understand it, the more confidence they tend to have in voting yes,” Metz said of the utility measure.

Faced with the encouraging results, the Finance Committee advanced both measures. It voted to cap the gas transfer at 18% of annual sales, which is roughly in line with past practice. If approved, the utility measure would raise about $7 million annually, allowing the council to restore many of the services and positions that it had cut over the past two years, including positions in Police and Community Service departments.

The business tax could raise significantly more. According to staff estimates, a measure based on square footage could raise between $10.9 million (if the rate is set at $0.05 per square foot per month) and $43.4 million (if it’s set at $0.20 per square foot per month). The committee on Tuesday supported a proposal by Chair Tom DuBois to set the rate at about $0.12 per square foot when the measure takes effect in January 2024 and then gradually raise it over the next few years, possibly to as high as $0.20.

The full council is set to consider the rate of the business tax on April 18 and several council members, including Eric Filseth and Alison Cormack, had opposed moving to the higher end of the rate range. Filseth, who serves on the Finance Committee, indicated that he would likely support a lower rate when the question goes to the full council.

The city’s largest companies, which would bear the brunt of the new tax, argued over recent meetings that the tax should be scrapped altogether or, at the very least, delayed. Decharo participated in a March 3 focus group that included more than a dozen representatives from Stanford Research Park giants such as VMWare, SAP and Lockheed Martin. Everyone at the meeting was against the measure for one reason or another, she said.

Shweta Bhatnager, senior director of government affairs at Stanford University, spoke for many in the business community on Tuesday, when she asked the council to reconsider the measure.

“Businesses are still facing some uncertainty with high inflation, supply chain issues, an unstable workforce and possible new variants emerging,” Bhatnager said.

Stanford Research Park and Stanford Shopping Center already make a huge contribution toward the city’s economy, she said. Research Park companies contribute about $20 million in direct sales tax to the city’s General Fund and another $22 million to the Palo Alto Unified School District, she said. The shopping center contributes another $6 million in sales tax revenues to Palo Alto, as well as $5 million in utility taxes.

“Adding a new tax to the mix increases the tax burden on local businesses,” Bhatnager said. “This will no doubt impact a company’s decision to locate or stay in Palo Alto.”

While largely focused on big businesses, the tax could hurt small ones as well, said Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce. He suggested that if large companies end up leaving the city because of the square-footage tax, their departure will have a devastating spill-over effect on the small retailers, restaurants and service providers who depend on them for customers.

“We are hearing from our business members how difficult it is to make ends meet here in Palo Alto, and our business community can’t afford a business tax of this magnitude. … A new business license tax can negatively impact on our retention of business as well as a reduction in new businesses to fill all the vacancies we have, resulting in fewer customers to support the small business owner,” Weidanz said.

Bhatnager asked that if the city does move ahead with the tax measure, it should make sure that the use of the funds has a “well understood nexus to the business community.”

While the opposition from the business community did not dent the committee’s enthusiasm for the new tax, Filseth concurred with Bhatnager’s argument that the revenues from the tax should be spent on services that benefit the business community.

“We’ve got to make sure it works for everybody, including the business community,” Filseth said. “And I think they have a lot of needs.”

He pointed to enhancement of public safety, including additional security on University Avenue, as a service for both residents and businesses. Council member Lydia Kou noted that the revenues could also help the city hire a new economic development manager, who would be tasked with improving the city’s business mix and filling the growing number of vacancies in commercial districts along El Camino Real and on California Avenue.

Kou also suggested, however, that no matter how the city chooses to spend the proceeds from the business tax, local companies will “find it really hard to support another tax on them.”

Should the measures pass, the City Council will have wide latitude on how to spend the money. Both of the proposed revenue measures are general taxes, which require a simple majority to pass and which do not require the council to commit to a particular project. The poll by FM3 showed that potential voters are particularly enthusiastic about investing in public safety, affordable housing, pedestrian and bike projects and climate-action programs. It’s likely that a large share of the proceeds would be devoted to these areas.

DuBois made a pitch for also allocating some of the funding to improving the rail corridor. The City Council has spent years talking about implementing grade separation at its four rail crossings so that roads and tracks no longer intersect. Some of the proposed designs could push the price tag of the project to more than $1 billion, DuBois observed.

The Finance Committee also suggested that when it comes to the timing of the tax measures, Palo Alto’s large corporations may be protesting too much. Filseth flatly rejected the argument made by many that the council should not be adopting a tax this year because the city is just coming out of the pandemic.

“The reality is that tech companies did great during Covid,” Filseth said. “They did better in Covid than before Covid, at least some of them. So the ‘coming out of Covid’ argument really doesn’t apply to the sweet spot of where we’re targeting this, which is large, enterprise corporations with global customers as opposed to local bookstores.”