Learning from neighbors, Palo Alto prepares to adopt 'headcount' tax | News | Palo Alto Online |

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Learning from neighbors, Palo Alto prepares to adopt 'headcount' tax

City Council to lean on businesses to help pay for transportation projects

"To tax or not to tax?" is a question that Palo Alto seemingly answered in September, when the City Council indicated its intent to place some kind of business tax on the November 2020 ballot.

On Monday night, the council began to wrestle with two thornier questions: What should the tax look like? And how should the money be spent?

City leaders know all too well that wrong answers can doom the entire project. In 2009, a proposed business tax based on gross receipts died at the ballot box, leaving Palo Alto as one of few cities in the region that still doesn't tax its employers. Yet council members also have a few reasons to feel optimistic this time around: a healthy economy and a new resident survey that shows a sizable majority of voters supporting a business tax, even if the details remain murky.

Emboldened by the data, the council voted 4-2, with council members Greg Tanaka and Liz Kniss dissenting and Vice Mayor Tom DuBois absent, to focus on a tax based on employee headcount — the most common method used in the area. The council also agreed that the tax would be a general tax, which requires a simple majority for passage, and that it would be primarily focused on transportation projects, including but not limited to improvements at rail crossings.

The council's approach was informed by a new survey from the city's polling firm, FM3 Research, which showed that a solid majority of Palo Alto voters would likely support a November measure that establishes a business tax, even if they have a range of views about how that money should be spent.

The survey showed 64% of roughly 500 responders saying they would likely vote yes on a business tax for general city services. This included 28% who said they would definitely vote yes and 31% who said they would probably vote yes (the remaining 5% said they were undecided but leaned toward supporting the measure).

Of the three business taxes that the council has been considering, a tax based on a building size proved the most popular option, with 70% of the respondents saying that they either strongly support such a tax (34%) or somewhat support it (36%). A tax based on employee count was slightly less popular, with 65% of the respondents expressing support (27% in the "strong" category and 38% in the "somewhat" category). A proposed payroll tax lagged far behind, with support from just 53% of the respondents.

The support, however, comes with several caveats. Most residents said they favor giving small businesses a break. Seven in 10 responders supported creating exemptions — or lower rates — for small businesses. By contrast, a majority of respondents said they do not believe retail businesses, hotels or restaurants should get exemptions or lower rates. And 78% said they prefer tiered rates over a flat tax, with smaller businesses or those with lower revenues paying less.

Voters also indicated that they aren't completely sold on the idea of a general tax, which has a lower threshold for passage and gives the council a wide latitude on how to spend the funds. More slanted toward a special tax, which dedicates funding to specific projects and requires a two-thirds majority for passage.

While the margin was relatively small (43% supported the former while 46% the latter), FM3 determined that, after responders heard messages advocating for each type of tax, support for a special tax rose by 8%.

Not surprisingly, the two issues that the surveyed voters identified as their priorities for a special tax were transportation and housing: 84% supported improving transportation; 71% chose providing more housing; and 27% picked improving safety at railroad crossings.

For the council, the ongoing effort to redesign the rail crossings is the main driver for moving ahead with the tax measure. Council members are in the midst of finalizing their preferred design for "grade separation," the redesign of rail crossings so that the tracks do not intersect with streets. While the city is expecting to get some funding for the project from the Santa Clara Valley Transportation Authority's Measure B, a 2016 tax measure that allocated $700 million for grade separation projects in Palo Alto, Mountain View and Sunnyvale, the county funds are not expected to cover the complex and expensive effort. Hence, the proposed tax.

But while council members are focused mostly on trains, residents seem to be more concerned about housing. When asked to choose among the three priorities, 41% of the survey takers picked housing over transportation improvements (29%) and railroad crossings (14%). Younger responders tended to pick housing, FM3 found, while those older than 65 leaned toward transportation improvements.

The council, however, recognized that while affordable housing is a critical priority, a business tax is neither a sufficient nor an appropriate vehicle to create it. Because employees directly contribute to traffic, the council saw it fitting that companies help solve that problem.

Council members also noted that while the city can subsidize housing, it doesn't actually build residential developments. As such, it wouldn't be clear how tax funds would be spent and what they could achieve.

By electing to go with the headcount tax, Palo Alto is taking a road well traveled. Redwood City, San Jose and Santa Clara all tax their businesses based on employee counts. Mountain View joined the club in November 2018, when 71% of its voters approved Measure P.

Mayor Adrian Fine and Councilwoman Alison Cormack each made a pitch for the headcount tax, which they noted is the easiest to administer and which has the strongest connection between the impacts of the business community and the services that the city is trying to fund. Cormack noted that 85% of people who take Caltrain to Palo Alto do so for work. She also proposed having a tier, with "minimal" rates for small businesses and no escalations. The tax would raise about $10 million annually, or a little less than 5% of the city's general fund.

Cormack also supported a general tax and noted that the city's needs change over time, which means the council needs to have flexibility on how to spend funds. Ten years ago, she said, people weren't really talking about grade separation.

"Ten years from now we may be absolutely panicked about sea level rise," Cormack said. "I think it's appropriate for it to be general."

The prevailing motion, which Cormack crafted, calls for the measure to charge small businesses a "minimal amount."

The survey also asked voters a general question about their highest priorities. Emergency communication topped the charts, with 73% of the responders calling it "extremely important or very important." Reducing traffic congestion, ensuring earthquake-safe fire stations and maintaining city streets also scored high.

Tanaka suggested that the survey was misleading. Including issues like emergency communication was disingenuous, he argued, because such wording erroneously implied that the city is like a "third-world country" when it comes to dispatching technology.

After City Manager Ed Shikada clarified that the question was intended only to get a sense of the voters' priorities — not to identify a problem — Tanaka continued to complain about the survey, calling it "deceitful to the voters."

Tanaka also took issue with questions on the survey that featured arguments in favor of each type of tax. Though these questions were included only for the purposes of gauging effectiveness of various types of arguments that would be made during a potential campaign, Tanaka demanded that these arguments be backed up by data.

"If we do make a statement like that, it should be true," Tanaka said, even after Shikada assured him that the sentence is not intended to be a statement of fact.

Breaking from the council majority, Tanaka proposed moving ahead with a specific tax, focused on transportation. Kniss agreed, though she argued that housing should also be added as a possible focus for the funds.

In advocating for a special tax, Kniss observed that a general tax makes it easy for agencies to change course and shift priorities.

"I can't support it if it isn't a specific tax because I've seen (it) so often with organizations that pass a general tax and then there's some kind of emergency," Kniss said.

She cited as an example of the historical tendency of the VTA (Santa Clara County Valley Transportation Authority) to shift revenues from its tax measures to BART projects in San Jose.

So far, business leaders aren't sold on the proposed tax. Charlie Weidanz, CEO of Palo Alto Chamber of Commerce, decried the city's lack of outreach to the business community and argued that the various tax options on the table are unfair.

"Rather than working with businesses, the business community has been excluded from this process," Weidanz said.

Dan Kostenbauder, vice president for tax policy at the Silicon Valley Leadership Group, told the council that not having a business tax gives Palo Alto a "competitive advantage." He pointed to the relatively low percentage of survey responders (33%) who said they believe the city needs more funds.

"I think it's important to realize there is pretty limited support for the idea the city does need more revenue right now," Kostenbauder said.

Others, however, argued that the new tax is badly needed. Resident Bob Moss pointed out that Palo Alto is an exception in the region, where just about every city has a business tax. Because businesses are responsible for some of the city's toughest problems — namely, traffic — the fact that the city doesn't have a business tax means residents have to pay more to solve these problems.

Former Mountain View Mayor Lenny Siegel submitted a letter to the Palo Alto council maintaining that a headcount tax is relatively simple to administer because it's easy to count the number of employees at a company at the same time each year. And because most successful companies pay their professional employees six-figure salaries, the tax represents "a tiny fraction of company payroll," he wrote.

"If we don't tax those who have the capacity to pay, our communities will suffer even worse traffic and residential displacement, but employers — start-ups as well as big names — will also be stifled because there is no place nearby for their employees, particularly new ones, to live and no efficient way for those with long commutes to get to work," Siegel wrote.

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Comments

44 people like this
Posted by Voting no
a resident of Greater Miranda
on Jan 27, 2020 at 11:39 pm

The city is running massive surpluses yet it is planning to have yet another tax? I know how I am voting.


42 people like this
Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Jan 28, 2020 at 6:11 am

It's way past time to start taxing businesses instead of pushing ALL of the costs of business growth onto residents. Hardly surprised by the accusations that the survey was "deceitful"; it's a PA specialty as per the city-funded survey on the ballot initiative proposal to curb office growth.

OF course the Silicon Valley Leadership Group opposes the tax; shifting the tax away from business and unto residents is its main lobbying purpose. That's why it pays its "leaders" such huge bucks.


24 people like this
Posted by NTIMBY
a resident of Mountain View
on Jan 28, 2020 at 6:40 am

PA Weekly might want to clarify that MV didn't create a new tax, it modernized its business license fees (which hadn't changed since 1954 see: Web Link )

Reaction from the SVLG is not surprising, their motto seems to be "No Tax In My (corporate) BackYard". Sounds like two Council Members also adopted that motto.


35 people like this
Posted by Anon
a resident of Evergreen Park
on Jan 28, 2020 at 8:19 am

Go big on taxing big business, finally !
As a poster above mentions its about time!
Council members Tanaka and kniss don’t support residents at all, never gave never will.

Don’t be fooled again and re-electTanaka;he worried last night that our unfriendly policies towards business
Has already driven out companies and this will
Make it worse!
What, has he not heard about our jobs housing imbalance ? Does he not know that we have the highest jobs housing imbalance of the very jobs heavy west bay?
An imbalance worse than San Francisco?

Completely clueless Absurd statements ! Vote no on Tanaka 2020


30 people like this
Posted by Resident
a resident of Another Palo Alto neighborhood
on Jan 28, 2020 at 8:41 am

Small businesses, restaurants, true retail, are all struggling particularly with minimum wage laws. It is not a good idea to put extra taxes on any small business because it just might be the last straw.

As it is, we are losing useful retail, table service restaurants and service providers. We should be encouraging businesses that serve residents to remain in Palo Alto.


48 people like this
Posted by Anon
a resident of Another Palo Alto neighborhood
on Jan 28, 2020 at 9:18 am

If the tax applies to small retail businesses, then, I will vote no. The tax needs to apply to businesses that are cramming software developers into 25 square feet.


20 people like this
Posted by Disgusting
a resident of Green Acres
on Jan 28, 2020 at 9:42 am

I’m very disturbed by the process. Since when is it okay for the city to lie about things to get us to vote for new taxes. Sad


24 people like this
Posted by Don't You Just Love Your City Leaders?
a resident of Crescent Park
on Jan 28, 2020 at 10:00 am

from the Weekly...

"On Monday night, the council began to wrestle with two thornier questions: What should the tax look like? And how should the money be spent?"

The City of Palo Alto = always looking for newer (and oftentimes wasteful)ways of spending money.

Another tax = another Christmas shopping spree for the city.


35 people like this
Posted by Rick
a resident of Adobe-Meadow
on Jan 28, 2020 at 11:09 am

Time for the adults in this town to take back our quality of life. Voters - please deny Tanaka and the other developer-centric council members reelection.

Council members: Please take up a motion to relieve Shikada of his position and hire a City Manager who is responsive to -our- needs.

Thank you.


21 people like this
Posted by Online Name
a resident of Embarcadero Oaks/Leland
on Jan 28, 2020 at 11:12 am

According to another report, there's no exemption for small business which will weaken support for the much-needed tax. Shame on the City Council for yet another end-run around what the residents vs big business and their lobbyists want.


11 people like this
Posted by Gus L.
a resident of Barron Park
on Jan 28, 2020 at 11:49 am

READ MY LIPS, No New TAXES!!
Stop It..


14 people like this
Posted by Annette
a resident of College Terrace
on Jan 28, 2020 at 1:38 pm

I agree w/Kniss that the tax should be specific and w/Anon that small businesses should be exempt. Only those voters who happen to have a PA business will pay this tax directly; the rest are somewhat insulated and that can make it painless to vote yes whether the tax is general or specific. A specific tax is fair in that it assures businesses that the money they are paying out is being spent on infrastructure projects that are directly tied to business impact. When leases are up for renewal, business owners will understandably assess if leasing space here continues to be a value proposition. If revenue from this tax is spent on projects that improve key factors for their employees, that will inform the renew/cancel debate in a positive way. Transportation and housing are the key issues now and that is likely to remain true for at least a couple more decades. Is there a sunset clause on this tax?


5 people like this
Posted by Novelera
a resident of Midtown
on Jan 28, 2020 at 2:05 pm

Unclear how much the per employee tax would be. If per employee amount is not a big number, then how is this so onerous for small retail businesses. Many commenters above want them exempt. But, if really small retail, they'd perhaps have 10 or less employees. The Big Tech companies that have a lot of employees would seem to be the target group to pay their fair share of the impacts on our city by their headquartering their businesses in Palo Alto.


8 people like this
Posted by chris
a resident of University South
on Jan 28, 2020 at 2:27 pm

Annette,

Before you lock into your ideas, understand the following:

1) A specific tax will lock the city into an inflexible position while the budget needs will vary widely over time. It will force the city to move money around in ways that subvert your intent anyway. Also, specific is not a well-defined concept.
Transportation is vague enough; housing is even more amorphous. You might as well pass a general tax. We all know what the city needs and there is a city council election every 2 years where you exercise your opinion.

2) Most businesses in Palo Alto are small businesses. You would ask a few businesses to either pay very high fees and not raise much money.. Everybody should have skin in the game. Big businesses will pay the most by far because they have the most employees anyway.

3) A sunset clause is silly. Shouldn't businesses always be contributing to the city's needs? PA without a business tax is an anomaly. If needs drastically change, the council can vote to change it. If the tax were to sunset at an inappropriate time, the renewal of the tax would become a huge political distraction when other issues are much more important.




22 people like this
Posted by mjh
a resident of College Terrace
on Jan 28, 2020 at 2:34 pm

A representative from the Silicon Valley Leadership group spoke and claimed how much businesses contribute to the city. However, when Prop 13 passed property tax revenues were divided approximately equally between residential and commercial properties Today commercial properties contribute only 25% of our property tax revenue, downward trajectory that will continue year on year. Because there are loopholes baked into Prop 13 which allow changes in ownership of commercial properties to be structured in a way that does not trigger new property tax assessments.

I don't imagine many residents are aware just how relatively small the percentage of property taxes paid by most owners of all that Palo Alto office space they lease is. How the burden of property taxes is increasingly falling to residents while most commercial property owners are laughing all the way to the bank.


30 people like this
Posted by mauricio
a resident of Embarcadero Oaks/Leland
on Jan 28, 2020 at 2:39 pm

This tax is long overdue, but it must exempt small businesses and target big tech.


10 people like this
Posted by Not sure I can vote for this, but maybe that's why some Council members pushed for this.
a resident of Another Palo Alto neighborhood
on Jan 28, 2020 at 6:14 pm

The tax should pay for grade separation planning/construction and supporting transit in Palo Alto. Both of these would serve businesses who are creating the monstrous increase in demand for transportation options. The number of residents simply hasn't changed that much. It is business growth that is driving current traffic problems and demand for trains and other transit. (And the lazy habit of picking our car keys every time we leave the house.) Growing companies should pay their fair share to mitigate the impacts of their growth. I would vote for a special tax, not a general tax. A general tax can be spent willy nilly on whatever. I want the revenue spending limited to these two needs. Our need for transit service will not diminish over time.

When sea level rise becomes a problem, people will still need to get around. The amount of money we are talking about here cannot fund a levee system or mitigate flooding issues of that scale. A city of our size will need federal support to fund that mitigation. Let's be careful who we vote for in Washington.


27 people like this
Posted by Rich
a resident of Downtown North
on Jan 28, 2020 at 8:08 pm

If Silicon Valley Leadership Group thinks a business tax is bad, then it's almost guaranteed to be good for residents. Remember, SVLG is paid by the largest and wealthiest businesses in Silicon Valley to do what ever is necessary to make sure that those wealthy companies pay as little as possible, preferably nothing, to mitigate the housing and transportation problem they largely created.


13 people like this
Posted by Barb
a resident of Charleston Meadows
on Jan 28, 2020 at 8:33 pm

Spend Tax Payer Money on Keeping the roads safe: Campers parked for 3 weeks on El Camino South Palo Alto, yesterday a boy on a bike was almost hit by a car biking on El Camino between Los Robles. Since Jan 3, 2020 the same trailers and campers have been parked in the same location. A bike, car, etc. cannot see pulling out of side streets onto El Camino Real.
White Trailer - Huge in size: CA License# 1LE7251; Another white trailer dropped-off: CA License# 1KP5337; Beige camper: CA License 8MWY400; Beige camper: CA License# 8EHE522. With all the schools in the area, kids on bikes not safe, VTA and Stanford buses use 2 lanes to get around the campers parked on El Camino. Worse when you add the huge trucks that do the same.


4 people like this
Posted by Decker Walker
a resident of Stanford
on Jan 28, 2020 at 9:57 pm

So, we tax based on the number of employees. How do we expect businesses to respond?
+ Hire fewer employees, thus fewer jobs, less employment, reduced tax revenue for local communities, more homeless.
+ Outsource to companies headquartered elsewhere with employees who will actually work in Palo Alto, though not be legally employed there.
+Replace employees with contract workers hired for specific short term assignments, without benefits.
Will this make Palo Alto and the Peninsula a better place to live?


21 people like this
Posted by Curmudgeon
a resident of Downtown North
on Jan 28, 2020 at 10:50 pm

Two suggestions:

1) Larger companies can pay progressively more, so tax them that way. The first employee is free, second employee gets the base rate, next employee is taxed at, say, 101% of the base rate, the next at 101% of that, and so on. At about 70 employees the rate has doubled, at 110 it has tripled, quadrupled at 140, etc. Small business get a break; large businesses with the big impacts get the bite.

2) Be very definite and clear about what the tax will be spent on.


9 people like this
Posted by Fewer employees?
a resident of College Terrace
on Jan 28, 2020 at 11:41 pm

"Hire fewer employees, thus fewer jobs, less employment"

We have a 3/1 jobs housing imbalance.

" reduced tax revenue for local communities"

A few less people buying lunch? Not that big of a deal.


10 people like this
Posted by Resident
a resident of Another Palo Alto neighborhood
on Jan 29, 2020 at 8:27 am

It is so easy to "hide" or lower the number of employees. Call them contract workers, temporary workers, seasonal workers, sub-contracts, casual workers, even lay workers off for a week (the week they are counted) and rehire with no loss of rights.

I approve of a business tax on large companies, I don't approve of headcounts. There are better ways to do this.

I also believe that a business tax should be specific for transportation. I don't see how a business tax could be used for housing unless the City is going into the housing/renting or providing cheap loans or housing subsidies to those who work in town business.


6 people like this
Posted by Annette
a resident of College Terrace
on Jan 29, 2020 at 8:34 am

@Chris - thank you for your comments on my comment; good things to think about.


17 people like this
Posted by Marie
a resident of Midtown
on Jan 29, 2020 at 10:32 am

I favor an employee based tax, higher with more employees and low for small businesses. Not only should businesses have to pay their fair share of transportation improvements, I believe this is the only way to really know how many businesses and employees are actually in Palo Alto. All measurements of the job/resident ratio are estimates.

What ever happened to the business registry, which would have produced real data on employee patterns of transportation etc? Has the city administration continued to fail to follow the city council's direction to get companies to comply with the registry, which is a minimal cost to businesses?

Perhaps if the city administration sees the potential of increased income to cover increased administration expenses, they will put in the effort to find out just how many employees are in Palo Alto.

Please focus on actual headcount, not estimates based on salary expense, and be sure to include onsite contractors.


10 people like this
Posted by I can't vote for this.
a resident of Another Palo Alto neighborhood
on Jan 30, 2020 at 2:02 pm

I would have preferred a special tax with focus on grade separation and transportation projects that support alternatives to driving, like transit, bike lanes, etc.

I won't vote for a general tax. I'm voting no, and I feel like they missed a great opportunity. Very disappointing.


10 people like this
Posted by Annette
a resident of College Terrace
on Jan 30, 2020 at 9:08 pm

Hoping "Chris" will chime in on general tax v specific tax. The focus of this tax now is transportation infrastructure. The promise of improving that will be the bait to get people to vote yes. But there's nothing but ethics requiring CC to spend the money on transportation. Unless the tax is specific, the revenue could be spent on anything, including paying down the unfunded pension liability, and *they* are free to come back again for yet another tax for infrastructure projects. And if the revenue from this tax isn't dedicated to transportation infrastructure, the need for a tax for that will continue to exist. Round and round and around we'll go.

I think a headcount tax makes the most sense but I continue to think it needs to be specific. Sad to say, relying on the word of CC isn't the way to go on this one. One need only look at CC's reversal on the downtown garage or the deeply flawed PC public benefit issue to see the perils inherent in relying on the City's word. This tax is meant to offset the impact that businesses have on the community, it is being sought specifically to improve transportation, and I think it would be a mistake to not make it specific to that. I think businesses should contribute to impact mitigation, but also think it important to bind the city to spending the money on the issue it is being raised for.

Others see this differently; I will read the comments with interest.


9 people like this
Posted by common sense
a resident of Midtown
on Jan 31, 2020 at 10:31 pm

Money is fungible. City Council/City Manager can easily say any new tax is paying for transportation, when that money should have already been allocated from existing budget funds.

And just because money spent on transportation doesn't mean it's being spent wisely; look at the road furniture on Ross Rd.

If they have a business tax, it should be on square footage - too many games can be played with employee head count (part time workers, contractors, etc). Much harder to play games with the square footage a company owns or rents. Start at $10/sq ft, and provide an exemption for retail.


17 people like this
Posted by Nayeli
a resident of Midtown
on Jan 31, 2020 at 11:10 pm

Vote NO on taxes to small businesses (including sole proprietors).
Vote NO on taxes to retail or restaurants.

In fact, I'd rather not create a tax that doesn't have a specific purpose.

I have no problem of imposing a tax to the large companies that employ non-residents who have made traffic into and out of Palo Alto a nightmare. It now often takes longer to get from Alma Street (via Oregon Expressway/Page Mill) to 101 or 280 than it does to get from the exits to Redwood City or Santa Clara.


11 people like this
Posted by Annette
a resident of College Terrace
on Feb 1, 2020 at 9:31 am

"Voters also indicated that they aren't completely sold on the idea of a general tax, which has a lower threshold for passage and gives the council a wide latitude on how to spend the funds. More slanted toward a special tax, which dedicates funding to specific projects and requires a two-thirds majority for passage. While the margin was relatively small (43% supported the former while 46% the latter), FM3 determined that, after responders heard messages advocating for each type of tax, support for a special tax rose by 8%."

So, 54% of survey respondents (that's US!) tilt SPECIFIC and CC tilts GENERAL. Huh? Is CC concerned support will not rise to the 2/3 level?

If I were a PA business owner I would welcome this CC decision b/c I would be thinking that it will be easier to launch a campaign against a general tax. Why, for instance, should any business pay OUR pension costs?

On the other hand, it's harder to argue that businesses, especially the large commercial enterprises that have hundreds of employees commuting here, shouldn't contribute to housing and transportation improvements such as grade separation and a reliable shuttle service.

If the vote were held tomorrow I would vote NO.


2 people like this
Posted by Transportation spending
a resident of Professorville
on Feb 4, 2020 at 3:33 pm

Common sense writes
>And just because money spent on transportation doesn't mean it's being spent wisely; look at the road furniture on Ross Rd.>

And those foolish bollards on Middlefield north of Embarcadero. Never have seen anyone use them, (are they for bikes??) they just make right-turns hazardous.


Like this comment
Posted by Anon
a resident of Another Palo Alto neighborhood
on Feb 8, 2020 at 3:29 pm

Posted by Nayeli, a resident of Midtown

>> Vote NO on taxes to small businesses (including sole proprietors).
>> Vote NO on taxes to retail or restaurants.

Most people seem to agree with this, but, I haven't seen specifics from the CC. I wish they would clarify this ASAP. We need to tax large employers that have blocks of non-creative work that can easily be moved out of here.

>> I have no problem of imposing a tax to the large companies that employ non-residents who have made traffic into and out of Palo Alto a nightmare. It now often takes longer to get from Alma Street (via Oregon Expressway/Page Mill) to 101 or 280 than it does to get from the exits to Redwood City or Santa Clara.

Yes, I would like to see the details of the small business exemption ASAP. It will be the key to getting widespread support for a new tax. Without that exemption, I will vote NO. We need to investigate all possible ways to get big companies to move unnecessary "bulk" that doesn't have to be here out of Palo Alto and off the Peninsula.


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