As decision time nears, Palo Alto is changing its business tax

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Additionally, the council allowed room for last-minute adjustments based on a potential agreement with a coalition of business organisations that are opposed to the tax. Tom DuBois, a council member, stated that the idea could still be changed before the final resolution is adopted on August 8, the council’s penultimate meeting before the county deadline of August 12.

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.

DuBois noted that with the higher exemption, more than 50% of Palo Alto businesses – and all small businesses – are excluded. Filseth concurred.

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 new tax.

Story Highlights

  • But in doing so, the council also decided to amend the tax proposal to exempt all establishments with a footprint smaller than 10,000 square feet, thereby excluding all small merchants from the levy. Members of the council also moved to change the proposed cost from $0.06 cents to $0.12 cents per square foot, depending on the size of the firm, to $0.11 per square foot.

  • If nothing unexpected happens, the council’s decision means that Palo Alto residents would be given the opportunity to cast a vote on a tax initiative that would raise about $15 million annually, with the money going toward affordable housing, public transportation, and public safety.

“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 Bicyclies 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 new 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 Technology, a manufacturer of satellites and other space technology and parent company of Space Systems Loral, which has a manufacturing facility on Fabian Way.

Karen Cox, vice president for government relations and public policies 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 decades, a factor that far exceeds the impact of the new tax. Mayor Pat Burt agreed and suggested that the notion that a 1% cost 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 state’s mandates for constructing below-market-rate housing, which typically relies on government subsidies.