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Palo Alto city, business leaders reach compromise on new tax measure

PALO ALTO — After days of negotiations between the council and a coalition of business leaders, Palo Alto council members voted Wednesday night to place a compromise business tax measure on the November ballot which could yield the city nearly $10 million a year.

Palo Alto council members voted 6-1 during a special meeting Wednesday to place a 7.5 cent tax per square foot of office space for all non-exempt businesses above 10,000 square feet. The tax measure includes an annual cap of $500,000 annually, and a flat 2.5% increase per year to be applied to both the monthly rate and the tax cap beginning in 2026.

The tax is set to bring in about $9.6 million a year in revenue, of which city leaders specified $5.2 million would go toward affordable housing and $3.2 million for public safety. While city officials had expected more and business leaders wanted no tax at all, the compromise ensures that business interest money won’t be used to launch an opposition campaign against the tax measure.

“We have come forward with an agreement that is higher revenue than what those parties wished this measure would be and less than what many of us had hoped,” Mayor Pat Burt said Wednesday evening. “Our chances for success with voters drastically improve as a result of the compromise where we do not have opposition from the business community.”

Burt, who was part of the ad hoc committee of council members tasked with leading tax measure negotiations, has advocated for a business tax for years, even before his time on the council. Palo Alto remains the only major Bay Area city without a business tax.

Dan Kostenbauder, Vice President for Tax Policy at the Silicon Valley Leadership Group, said his alliance of business leaders considered Wednesday’s compromise proposal “very carefully” and added that members were “united in dropping our opposition to this business tax measure.”

“We rode with the chamber of commerce and are able to join together in agreement not to oppose the business tax,” Kostenbauder said. “Our alliance won’t stand in the way of this opportunity for Palo Alto to finally have a business tax.”

The compromise rate is a far cry from the 11-cent tax measure council members initially proposed, which would have brought in $16.5 million a year. Residents who spoke during Wednesday’s meeting expressed disappointment by the final result and urged the council to go for a higher rate and face the business community on the public square over the next couple of months.

“We were at 11 cents the other night and now it’s 7.5 cents?” said Barron park resident and attorney Winter Dellenbach. “The hope with this tax is just plunging. Let’s have a business tax stay at 11 cents and let’s go for it. The residents of this city will be much more willing to do that than the direction you are all taking. We can stand up and do this.”

Some council members also criticized the move to compromise at a lower rate, with councilman Tom DuBois arguing that $5 million for public housing won’t build many units.

“It really feels insufficient,” DuBois said. “The question council members have to ask themselves is: is something better than nothing? Perhaps. But for the amount of effort that is needed, I have to say, it’s a huge disappointment to go through all this effort and at the end of the day not be able to fund very much.”

Vice Mayor Kou also criticized the compromise negotiations, arguing that residents were not asked what they wanted to see in the measure and instead the city mostly negotiated with a coalition of business leaders.

“We can rationalize all we want but at the end of the day this is not enough,” Kou said, adding that it’s “very evident” the city will have to build affordable housing by itself and gave the Wilton Court and 525 East Charleston developments as examples.

“That property we have at the former Fry’s site, even if a developer comes in to put in affordable housing, they can claim it’s 100% affordable at 120% AMI, which is almost market rate. It’s not going to be the developers who build these,” Kou added. “They’re going to give us chump change.”

In a retort to Kou and DuBois’ comments, Burt said the money the city gets from this tax will be “highly leveraged” to allow the city to qualify for regional, state and federal funds which often require a local contribution or matching investment.

“When the local dollars become extremely leveraged, that’s the backbone necessary to be able to qualify for those big dollars,” Burt said. “Because of new opportunities in both grade separation and affordable housing, we have the potential to really accelerate those processes in ways we have not seen in past years because of a new measure that has put new massive dollars on the table we don’t want to lose the opportunity to obtain.”

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