Palo Alto voters will have a chance in November to approve a business tax, though the measure they'll be considering will be far more modest than the one that the City Council was contemplating just days ago.

The City Council voted 6-1 on Wednesday night to approve a measure that would allow the city to shed its long-held status as one of very few municipalities in the state that don't have a business tax. But in a last-minute compromise with leaders of a business coalition, city leaders agreed to reduce the rate of the business tax from 11 cents per square foot per month to 7.5 cents per square foot and to set a $500,000 cap on the amount any business would pay, down from the $1 million cap that was in the prior proposal.

Both versions of the tax exclude all companies with less than 10,000 square feet of space.

The council agreed to scale down the tax proposal after two days of negotiations with two leading critics of the tax: the Silicon Valley Leadership Group and the Palo Alto Chamber of Commerce. Another group, NAIOP Silicon Valley, had previously participated in the anti-tax coalition, but it announced earlier in the week that it is pulling out of the opposition because it doesn't have the resources to campaign against the business tax.

On Wednesday, the opposition abruptly dissolved as representatives from both groups confirmed that they will no longer fight the tax proposal. Their decision came after a Tuesday mediation session coordinated by former Mayor Larry Klein, negotiations with a council ad hoc committee composed of Mayor Pat Burt and council members Eric Filseth and Tom DuBois and continuous tweaks by city staff to the tax proposal.

City Manager Ed Shikada said that the Tuesday mediation effort was productive but had concluded without an agreement.

"That effort was quite extensive and, quite frankly I think, very illuminating to all parties in drawing out interests as well as areas of flexibility," Shikada said on Wednesday. "Unfortunately, the mediation effort yesterday was not successful so at the end of the day all parties left and had concluded that there was a gap that was yet to be addressed and we were prepared to report that no progress had been made."

Staff continued having conversations with business leaders on Wednesday and, after making further changes, secured the commitment of the business groups to not oppose the measure.

With this agreement at hand, the council voted Wednesday to revoke the tax resolution that it had passed on Monday, which had called for an 11 cents square foot tax, and adopted the new resolution with a lower rate, which the city is required to submit to Santa Clara County by Friday. If approved by voters, the business tax would generate about $9.6 million annually, with the proceeds going to support affordable housing, public safety and improvements to the rail corridor.

"Our chances of success with the voters are drastically improved as a result of a compromise where we do not have opposition from the business community," Burt said. "I think this accomplishes a great deal. We didn't get everything we wanted, but at this point in time we got what we needed."

As part of the same vote, the council placed on the ballot a measure that would affirm the city's historic policy of transferring revenues from the gas utility to the general fund. The city recently halted the transfers after a lawsuit from resident Miriam Green led a court to conclude that the transfers constituted an illegal tax and ordered the city to issue refunds.

The business coalition had previously vowed to campaign against both tax measures, but after the Wednesday compromise it assured the city that it would not oppose either.

Dan Kostenbauder, vice president for tax policy at the Silicon Valley Leadership Group, which represents large corporations, said his group had carefully studied the city's revised business tax proposal and members were united in agreeing to drop their opposition. On Monday, both his group and the Chamber of Commerce were lobbying for a rate of no greater than $0.06 per square foot and were noncommittal about the possibility of their groups shifting their respective positions. But on Wednesday, they both agreed to not oppose a slightly higher rate.

"It has been a long journey, but our alliance will not stand in the way of this opportunity for Palo Alto to finally have a business tax," Kostenbauder said Wednesday.

The Wednesday vote concludes what has been a tortuous journey that began more than five years ago. The council had initially considered placing the measure on the 2020 ballot but aborted that plan because of the pandemic before resuscitating it last year. But while the last-second revisions succeeded in cooling some of the passions in what had been a heated debate, they also left some of the tax supporters feeling lukewarm and deeply ambivalent about the final product.

DuBois and Council member Lydia Kou both said they were disappointed by where the city ended up with the tax, which DuBois called "insufficient."

"The question council members have to ask themselves is: Is something better than nothing? Perhaps. But for the amount of effort that's needed, it's a huge disappointment to go through this effort and at the end of the day not being able to fund very much," DuBois said.

Kou took issue with the nature of negotiations, which involved the business groups but which she argued did not give enough weight to what residents wanted.

"It was mostly communications and negotiations with the coalition, when there should have been involvement with the residents as well," Kou said.

Council member Greer Stone shared their disappointment but concluded after speaking to the city's polling consultants that the tax would likely have a much higher chance of passing without an organized opposition. With surveys showing a tight split over the measure, the outcome would probably be a "jump ball" if businesses were to campaign against it, he said.

He called the Wednesday vote "one of the harder votes I'll be taking."

"I'm not happy with this, but we're working with the art of the possible," Stone said.

The only council member who opposed the measure was Greg Tanaka, a steadfast opponent of all prior attempts to tax businesses. Council member Alison Cormack, who had joined him in voting against prior attempts to place a higher business tax on the ballot, saw the Wednesday outcome as a major victory and enthusiastically supported the revised version.

"The lack of opposition is critical to our success," Cormack said. "I believe we will set this community up for a very stable and positive future."