News

Palo Alto looks to tax businesses based on square footage

City backs away from earlier proposal to base new tax on employee count

VMware is one of about 150 companies located within Stanford Research Park in Palo Alto. Photo by Lloyd Lee.

As Palo Alto advances its effort to bring a business tax to the November 2022 ballot, the City Council is moving toward a consensus on what the tax would look like even as members remain at odds over what exactly it would fund.

On Monday night, the council majority voiced strong support for a tax that would target major commercial companies and that would be based on building square footage. By a 5-1 vote, with Eric Filseth absent and Greg Tanaka dissenting, the council supported a work plan that calls for additional outreach and polling for a business tax, with the expectation that the council will finally adopt the final ballot language by May 2022.

Concurrently, the city is exploring changes to its utilities user tax, with the goal of both winning voter support for the city's historic — and legally questionable — practice of transferring money from utilities into the general fund and raising funds for sustainability programs such as the conversion of gas appliances to electric ones. It also plans to consider participating in the California Community Housing Agency, a joint powers authority that works with cities on purchasing properties and creating deed-restricted affordable housing.

But even despite broad consensus over the general contours of the new business tax, council members remain split over some of the details. Vice Mayor Pat Burt noted that Palo Alto is the only city in the region that doesn't have a business tax and suggested that if it followed the example of East Palo Alto or San Francisco, it could raise tens of millions of dollars annually for programs, services and key infrastructure projects.

Others favored stricter limits on how much would be raised and how the money would be spent. Council member Greer Stone supported reserving the tax revenues from the business tax for key infrastructure projects, including rail grade separations and affordable housing. Council member Alison Cormack suggested that she'd be reluctant to support a tax that seeks to raise more than $10 million annually from the business community.

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The Monday discussion reflected Palo Alto's changing circumstances since the council last considered the tax in early 2020. With the COVID-19 pandemic triggering an economic shutdown in spring 2020, the council agreed to halt its effort to place a business tax on the ballot that year. Since then, the city has continued to see economic pain, with its sales- and hotel-tax revenues taking a major hit over the course of the pandemic, spurring the council to cut dozens of positions and reduce popular services such as Children's Theatre programs and library hours.

Given these changes, one question that the council has yet to answer is whether the new tax should be used to restore these programs or to fund long-planned infrastructure projects like grade separations, as initially intended.

Mayor Tom DuBois sided with Burt in favoring a broader approach that would allow the city to use business tax revenues to pay for public safety and other services that are funded through the general fund. He noted that business has shifted in recent years from products to services, a shift that has a negative impact on city revenues.

"Whereas cities used to get sales tax, the amount is going down and services don't generate funds for the city," DuBois said.

The council has yet to determine whether the business tax will be a "general tax," which can be approved with a simple majority and which gives the council great flexibility when it comes to spending, or a "special tax," which requires a two-thirds supermajority to pass and which specifies how the money must be spent. DuBois said he favored the former approach, while council member Greer Stone leaned toward a special tax, though he reserved the right to change his mind.

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"I do want to see a lot of these funds being committed to priorities that the city had not been able to accomplish for so long, such as affordable housing, such as grade separation, but understanding the difficulty of passing a special tax over a general tax, I'm open to understanding more and seeing what the challenges are on passing either one of those," Stone said.

While the city is still months away from finalizing the details of the new tax, the effort is already generating concern and opposition from the city's business community. Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce, urged the council not to adopt a tax, which he argued would hurt the business community at a particularly difficult time.

"Businesses continue to struggle to pay their rent, payroll and other operational expenses and we respectfully ask you to reconsider, or consider deferring, a business tax at this time and allow businesses to concentrate on the challenge of surviving through this difficult and continuing period," Weidanz said. "This is simply not the right time for a new business tax."

But others, including Burt, argued that a tax is well overdue. He noted that the business community has opposed every past effort by the city to institute a tax, during both boom and bust years. This includes in 2009, when the city asked voters to approve a business tax based on gross receipts. That ballot measure was rejected at the polls.

Burt noted that San Francisco has a business tax well beyond what Palo Alto is considering. In 2018, East Palo Alto instituted a business tax based on square footage, an effort that has done nothing to halt development proposals. Palo Alto's proposed tax, he argued, would be relatively modest, particularly given the city's increasing funding needs.

"We've had drastic service cuts to police and fire, code enforcement, libraries, parks and other community services — every place across the board — and the community is just starting to understand how deep those cuts are," Burt said. "We don't have yet a projection that allows us to restore ourselves to the services that this community has had for decades and decades."

Council member Greg Tanaka, who has historically opposed all of the council's attempts to institute a business tax, suggested on Monday that adopting a tax at this time would threaten Palo Alto's status as a capital of innovation and drive startups away from the city.

"We've been the envy of the world for a while, but that isn't always true," Tanaka said. "We can't take that for granted. We have to ask ourselves, 'Will we kill the golden goose?" Will Palo Alto become the Detroit of the 1950s and 1960s?"

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Gennady Sheyner
 
Gennady Sheyner covers the City Hall beat in Palo Alto as well as regional politics, with a special focus on housing and transportation. Before joining the Palo Alto Weekly/PaloAltoOnline.com in 2008, he covered breaking news and local politics for the Waterbury Republican-American, a daily newspaper in Connecticut. Read more >>

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Palo Alto looks to tax businesses based on square footage

City backs away from earlier proposal to base new tax on employee count

by / Palo Alto Weekly

Uploaded: Tue, Aug 17, 2021, 2:46 pm
Updated: Wed, Aug 18, 2021, 12:27 pm

As Palo Alto advances its effort to bring a business tax to the November 2022 ballot, the City Council is moving toward a consensus on what the tax would look like even as members remain at odds over what exactly it would fund.

On Monday night, the council majority voiced strong support for a tax that would target major commercial companies and that would be based on building square footage. By a 5-1 vote, with Eric Filseth absent and Greg Tanaka dissenting, the council supported a work plan that calls for additional outreach and polling for a business tax, with the expectation that the council will finally adopt the final ballot language by May 2022.

Concurrently, the city is exploring changes to its utilities user tax, with the goal of both winning voter support for the city's historic — and legally questionable — practice of transferring money from utilities into the general fund and raising funds for sustainability programs such as the conversion of gas appliances to electric ones. It also plans to consider participating in the California Community Housing Agency, a joint powers authority that works with cities on purchasing properties and creating deed-restricted affordable housing.

But even despite broad consensus over the general contours of the new business tax, council members remain split over some of the details. Vice Mayor Pat Burt noted that Palo Alto is the only city in the region that doesn't have a business tax and suggested that if it followed the example of East Palo Alto or San Francisco, it could raise tens of millions of dollars annually for programs, services and key infrastructure projects.

Others favored stricter limits on how much would be raised and how the money would be spent. Council member Greer Stone supported reserving the tax revenues from the business tax for key infrastructure projects, including rail grade separations and affordable housing. Council member Alison Cormack suggested that she'd be reluctant to support a tax that seeks to raise more than $10 million annually from the business community.

The Monday discussion reflected Palo Alto's changing circumstances since the council last considered the tax in early 2020. With the COVID-19 pandemic triggering an economic shutdown in spring 2020, the council agreed to halt its effort to place a business tax on the ballot that year. Since then, the city has continued to see economic pain, with its sales- and hotel-tax revenues taking a major hit over the course of the pandemic, spurring the council to cut dozens of positions and reduce popular services such as Children's Theatre programs and library hours.

Given these changes, one question that the council has yet to answer is whether the new tax should be used to restore these programs or to fund long-planned infrastructure projects like grade separations, as initially intended.

Mayor Tom DuBois sided with Burt in favoring a broader approach that would allow the city to use business tax revenues to pay for public safety and other services that are funded through the general fund. He noted that business has shifted in recent years from products to services, a shift that has a negative impact on city revenues.

"Whereas cities used to get sales tax, the amount is going down and services don't generate funds for the city," DuBois said.

The council has yet to determine whether the business tax will be a "general tax," which can be approved with a simple majority and which gives the council great flexibility when it comes to spending, or a "special tax," which requires a two-thirds supermajority to pass and which specifies how the money must be spent. DuBois said he favored the former approach, while council member Greer Stone leaned toward a special tax, though he reserved the right to change his mind.

"I do want to see a lot of these funds being committed to priorities that the city had not been able to accomplish for so long, such as affordable housing, such as grade separation, but understanding the difficulty of passing a special tax over a general tax, I'm open to understanding more and seeing what the challenges are on passing either one of those," Stone said.

While the city is still months away from finalizing the details of the new tax, the effort is already generating concern and opposition from the city's business community. Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce, urged the council not to adopt a tax, which he argued would hurt the business community at a particularly difficult time.

"Businesses continue to struggle to pay their rent, payroll and other operational expenses and we respectfully ask you to reconsider, or consider deferring, a business tax at this time and allow businesses to concentrate on the challenge of surviving through this difficult and continuing period," Weidanz said. "This is simply not the right time for a new business tax."

But others, including Burt, argued that a tax is well overdue. He noted that the business community has opposed every past effort by the city to institute a tax, during both boom and bust years. This includes in 2009, when the city asked voters to approve a business tax based on gross receipts. That ballot measure was rejected at the polls.

Burt noted that San Francisco has a business tax well beyond what Palo Alto is considering. In 2018, East Palo Alto instituted a business tax based on square footage, an effort that has done nothing to halt development proposals. Palo Alto's proposed tax, he argued, would be relatively modest, particularly given the city's increasing funding needs.

"We've had drastic service cuts to police and fire, code enforcement, libraries, parks and other community services — every place across the board — and the community is just starting to understand how deep those cuts are," Burt said. "We don't have yet a projection that allows us to restore ourselves to the services that this community has had for decades and decades."

Council member Greg Tanaka, who has historically opposed all of the council's attempts to institute a business tax, suggested on Monday that adopting a tax at this time would threaten Palo Alto's status as a capital of innovation and drive startups away from the city.

"We've been the envy of the world for a while, but that isn't always true," Tanaka said. "We can't take that for granted. We have to ask ourselves, 'Will we kill the golden goose?" Will Palo Alto become the Detroit of the 1950s and 1960s?"

Comments

Online Name
Registered user
Embarcadero Oaks/Leland
on Aug 17, 2021 at 3:22 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Aug 17, 2021 at 3:22 pm

Speaking of the utility tax, whatever happened to our checks from the two legal settlements? You'll recall the city's been "overcharging" us about $20,000,000 each and every year for the last 5+ years -- do the math! -- funnel money from us to fund their other spending on salaries, consultants, pet projects, etc. while continuing to charge residents more than businesses each tine they raise utility rates.

At a recent City Council meeting, they said they're planning a 3% utility hike of 3% this year and 5% more for EACH of the next few years. I guess that's on top of the $20,000,000 each year.

With that kind of money, I'm horrified that Ms. Cormack objects to charging businesses a tax that *might* raise $10,000,000 while leaving US to pick up the difference. Shame on her and shame on Mr. Tanaka for their knee-jerk support of businesses while residents continue to suffer from lack of services, especially closed or only partially open libraries.

A REAL business tax based is long overdue!


Allen Akin
Registered user
Professorville
on Aug 17, 2021 at 3:33 pm
Allen Akin, Professorville
Registered user
on Aug 17, 2021 at 3:33 pm

Most of the negative consequences of too much commercial growth scale with the number of employees, rather than the size of their buildings, so I would rather have a tax based on employee count. I appreciate the practical difficulties involved in making that work, though. A tax based on building size is still a big improvement over no tax at all.


Citizen
Registered user
College Terrace
on Aug 17, 2021 at 4:16 pm
Citizen , College Terrace
Registered user
on Aug 17, 2021 at 4:16 pm

Way to go city council - drive out businesses and then there won't be these crazy demands for new housing! Problems solved through leftist economics.


Online Name
Registered user
Embarcadero Oaks/Leland
on Aug 17, 2021 at 5:33 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Aug 17, 2021 at 5:33 pm

@Citizen, are you aware that Palo Alto is the only community WITHOUT a business tax which the other surrounding "leftist economies" have long imposed.

Just curious how you'd characterize the literally hundreds of millions of dollars --($124,000,000 I think) that high tech companies like DoorDash spent in the last election lobbying against paying their workers even minimum wage with no benefits while paying their CEO $450,000,000+?


Bystander
Registered user
Another Palo Alto neighborhood
on Aug 17, 2021 at 7:34 pm
Bystander, Another Palo Alto neighborhood
Registered user
on Aug 17, 2021 at 7:34 pm

With remote working, a business can have large number of employees working anywhere other than Palo Alto and only needs a small office space for group meetings and a reception area to get a Palo Alto address.

The trend to get rid of cubicles and working in shared space was happening before the pandemic and now the pandemic has made remote working with only occasional or one day a week per department for office space. I would have said in the past that square footage was better than the number of employees.

Now I am not so sure.


chris
Registered user
University South
on Aug 17, 2021 at 11:06 pm
chris, University South
Registered user
on Aug 17, 2021 at 11:06 pm

Making real estate more expensive for businesses will make building housing more attractive. If businesses leave, more acreage can be converted to housing.


Palo Alto Green
Registered user
Duveneck/St. Francis
on Aug 18, 2021 at 10:42 am
Palo Alto Green, Duveneck/St. Francis
Registered user
on Aug 18, 2021 at 10:42 am

"Businesses continue to struggle to pay their rent, payroll and other operational expenses"

Large businesses are currently the most profitable they have ever been in American history. This includes the likes of Palantir and Telsa. As long as the tax is focused on office, etc... and not retail & restaurants, it's fine.

Time for Palo Alto to tax businesses like every other business on the Peninsula already is.


Consider Your Options.
Registered user
Another Palo Alto neighborhood
on Aug 18, 2021 at 11:48 am
Consider Your Options. , Another Palo Alto neighborhood
Registered user
on Aug 18, 2021 at 11:48 am

Suggestion: Hotels already pay a TOT. Might we consider excluding them from this tax for that reason?

Generally, I do support a business tax. I'm not certain basing it on square footage is the best way to do it. Basing it on the number of employees businesses pack into their square footage may be more practical. Or it might be harder to measure.

How do we minimize impacts of smaller struggling businesses during the pandemic period--lengthened by the Delta variant, thanks to anti-vaxxers giving it a toehold?


Novelera
Registered user
Midtown
on Aug 18, 2021 at 12:19 pm
Novelera, Midtown
Registered user
on Aug 18, 2021 at 12:19 pm

I work in a business in an accounting capacity. The work is construction. Our company pays what we call business licenses and what some of them call business taxes to every location where we have construction projects. This includes Atherton, Portola Valley, Hillsborough, San Francisco, San Jose, Los Gatos, Los Altos, Town of Los Altos Hills, Burlingame, and Salinas.

I have always wondered why businesses get off scot free in Palo Alto. Could it be campaign donations?


Citizen
Registered user
College Terrace
on Aug 18, 2021 at 12:28 pm
Citizen , College Terrace
Registered user
on Aug 18, 2021 at 12:28 pm

Just because other cities are taxing businesses doesn't make it a good idea. Just because businesses are earning a profit doesn't mean it is for someone else to take. Pat Burt brings up San Francisco. Is San Francisco such a great example? Rents are down 27% in SF, businesses are leaving and commercial office space subleasing there is soaring. Poop is on the streets, tracked by an app, while open air drug dens flourish and crime increases. Their municipal finances are in bad shape for lots of reasons. Sure, San Francisco is a great example to cite for Palo Alto - to do the opposite. Leftist economics at work.


Novelera
Registered user
Midtown
on Aug 18, 2021 at 1:09 pm
Novelera, Midtown
Registered user
on Aug 18, 2021 at 1:09 pm

@citizen. You cited your view of dysfunction in San Francisco and leftist economics. Perhaps your eye went to your favorite target, San Francisco, and didn't observe that Atherton and Los Altos Hills, towns probably containing more registered Republicans than anywhere else in the Bay Area, also have a business tax.


David Jenkins
Registered user
Stanford
on Aug 18, 2021 at 3:15 pm
David Jenkins, Stanford
Registered user
on Aug 18, 2021 at 3:15 pm

If the City of Palo Alto could actually demonstrate that it is proficient in managing additional taxpayer based revenue, maybe this tax assessment concept would have more favorable leanings.

As it stands, I wouldn't trust the city managing my kid's weekly allowance.


Citizen
Registered user
College Terrace
on Aug 18, 2021 at 4:08 pm
Citizen , College Terrace
Registered user
on Aug 18, 2021 at 4:08 pm

Maybe the City should scale back its spending and ambitions and live within its means. Businesses already do pay taxes. So do residents. After the City expanding to now tax businesses (again), who will they move to tax next?


Citizen
Registered user
College Terrace
on Aug 18, 2021 at 4:14 pm
Citizen , College Terrace
Registered user
on Aug 18, 2021 at 4:14 pm

@novelera just because Los Altos is doing it doesn't make it a good idea. Yet another government money grab in the highest taxed state, California. Highest sales tax, highest state income tax, etc. Cutting spending sounds like a good idea.


William Hitchens
Registered user
Mountain View
on Aug 18, 2021 at 6:04 pm
William Hitchens, Mountain View
Registered user
on Aug 18, 2021 at 6:04 pm

Employee count? Square feet? It's all the same thing in the end. Palo Alto already is an extremely expensive place in which to run a business thanks to inflated salaries, real estate prices & rent, and lots of other incredibly ignorant regulations to disrupt companies' abilities to run efficient, cost-effective businesses. If PA keeps piling on more stupid expenses and restrictions upon its best money-making enterprises, then they will move somewhere less ignorant and snooty to run their businesses properly; for their investors, their employees, and their customers. Poor Palo Alto.


Online Name
Registered user
Embarcadero Oaks/Leland
on Aug 18, 2021 at 6:51 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Aug 18, 2021 at 6:51 pm

It's not just Los Altos charging business taxes, it's also the city of San Jose, Mountain View, Santa Clara, Sunnyvale and so many more. Palo Alto is the rare exception that doesn't have a business tax; the business community objects to them when times are good, when tines are bad and when times are mediocre.

Somehow it's just never ever the right time for them to stop shifting the costs to taxpaying residents.


Citizen
Registered user
College Terrace
on Aug 19, 2021 at 12:51 pm
Citizen , College Terrace
Registered user
on Aug 19, 2021 at 12:51 pm

@Online Name:
Door Dash has had one quarter of profit in 8 years of operation. Guess they can't afford to pay what they are paying since they are unprofitable.

Both businesses and residents already pay taxes. Time for city government to live within its means, and if it can't, cut expenses, and dampen its ambitions. Already the most and highest taxed state.


Online Name
Registered user
Embarcadero Oaks/Leland
on Aug 19, 2021 at 1:50 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Aug 19, 2021 at 1:50 pm

DoorDash just spent about $124,000,000 lobbying against paying its workers a living wage, pays its CEO $450,000,000+ making him the 2d most highly paid exec after Palantir's and charges struggling restaurants usurious rates.

That one quarter of profitability was, I think, when they and Uber and Lyft were being subsidized by governments aka taxpayers like us. Now that the subsidies have ended, they've raised rates even more WITHOUT compensating their workers who've been striking because they can't even afford childcare. Remember that poor driver whose car was hijacked with his infant son inside??

I guess it takes a while to earn enough to offset the lobbying fees and the CEOs pay.

But DoorDash et al aside, I think highly profitable companies like Google and Facebook can well afford to pay their fair share rather than continuing to shift the burden to us, the residents, in the form of congestion, the cost of administering paid residential parking programs, funding programs for the homeless etc.


Citizen
Registered user
College Terrace
on Aug 19, 2021 at 2:47 pm
Citizen , College Terrace
Registered user
on Aug 19, 2021 at 2:47 pm

@Online Name - so glad you mentioned some should pay their 'fair share.' What does that mean, anyway? Who determines it, besides socialist sympathizers? Seems like we are all paying more than our 'fair share' in the highest taxed state in the nation. Not surprising it's hard to afford living here for many, yet the city proposes more taxes on businesses, which will lead to lower salaries or fewer jobs in exchange. Great job City!


Online Name
Registered user
Embarcadero Oaks/Leland
on Aug 19, 2021 at 3:16 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Aug 19, 2021 at 3:16 pm

@Citizen, of course we're all paying high taxes. Housing keeps getting less and less affordable while companies like Google keep adding literally millions of sq feet of office space and 20 jobs of each housing unit, thus increasing competition for housing and causing congestion and other infrastructure stresses.

How much of a company like Google's business is generated locally and hence locally taxable? A company like Visa's Palo Alto offices? They're global companies, probably registered in low-taxed Delaware.

We do know that the burden of taxes has shifted from businesses to residents each and every year. Former Mayor Greg Schmid made an excellent presentation on that shift during a City Council meeting a few years ago it showed residents' share of taxes rising to 80% while commuters outnumbers resident 4:1.

Who bears the costs for the homeless? Residents. Whose utility rates rise the most percentage wise? Residents (check the latest proposal).

So who benefits from the aggressive growth of offices and the pressure to house those workers? Who benefits from shifting the tax burden from businesses to residents?


TimR
Registered user
Downtown North
on Aug 19, 2021 at 3:36 pm
TimR, Downtown North
Registered user
on Aug 19, 2021 at 3:36 pm

"...[R]emain at odds over what exactly it would fund." So, tax first, figure out how to spend the revenue later? Sounds about right for around here.


Me 2
Registered user
Old Palo Alto
on Aug 19, 2021 at 3:41 pm
Me 2, Old Palo Alto
Registered user
on Aug 19, 2021 at 3:41 pm

"We do know that the burden of taxes has shifted from businesses to residents each and every year. "

Not in my neighborhood. The neighbors that have been here 20-30 years have been paying less each year relative to inflation thanks to Prop 13.


Online Name
Registered user
Embarcadero Oaks/Leland
on Aug 19, 2021 at 3:44 pm
Online Name, Embarcadero Oaks/Leland
Registered user
on Aug 19, 2021 at 3:44 pm

TimR makes a valid point. No one would ever accuse Palo Alto of spending wisely or well. Instead of cutting top-heavy management staff. communications staff that STILL fail in their outreach and consultants, it cuts and/or threatens to cut resident-serving entities like the libraries.

When confronted with poorly performing employees and departments like the solar permitting fiasco, what does it do? It doesn't cut the poor performers; it double teams the inspections at twice the cost. When residents object to things like the Ross Rd roundabout, it hires consultants to tell US we're wrong.


Citizen
Registered user
College Terrace
on Aug 20, 2021 at 8:11 am
Citizen , College Terrace
Registered user
on Aug 20, 2021 at 8:11 am

@Online Name
Glad to hear you agree that our dollars are not well spent by the city government. So why support them getting more of our dollars? Businesses that have to fork over even more taxes to our city will either lower salaries or hire fewer people, in exchange for our city having more dollars to spend. That's a bad tradeoff, imo. The city benefits from sales taxes from Stanford shopping center(!) among other revenue sources. Tighten your belt, city.


Name hidden
Downtown North

Registered user
on Aug 23, 2021 at 7:34 pm
Name hidden, Downtown North

Registered user
on Aug 23, 2021 at 7:34 pm

Due to repeated violations of our Terms of Use, comments from this poster are automatically removed. Why?


Leland
Registered user
Crescent Park
on Sep 5, 2021 at 11:02 am
Leland , Crescent Park
Registered user
on Sep 5, 2021 at 11:02 am

How can you expect to generate more revenue by increasing sf taxes. Business are leaving office spaces, people are zooming and not staying in hotels for meetings, and added taxes will simply ensure that these businesses will pick Mt View or elsewhere.

Implement a tax when the economy is strong and business is booming. The city has impeccably bad timing to raise taxes in the middle of a pandemic and economic meltdown. Now is NOT the time to discourage businesses from returning to Palo Alto.


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