Mercury News January 16, 2016
SAN JOSE — Before a proposed ballot measure to alter the city’s business tax moves forward, two San José City Council members are calling for giving it a much closer look.
Councilmen Donald Rocha and Raul Peralez will ask the council’s Rules Committee on Wednesday to approve a study that compares the proposed measure with the current tax, analyzes how the new tax would impact businesses, estimates changes in city revenue under the tax and looks at which businesses are exempt. The councilmen also want the city attorney to glance over the initiative to ensure that it doesn’t “give rise to any legal concerns.”
The proposed ballot measure would establish a gross-receipts tax, which taxes businesses based on income. Oakland, Fremont and San Francisco are among a few dozen California cities with such taxes. Companies would pay either 60 cents, 90 cents or $1.20 for every $1,000 in revenue, with higher tax rates applied to those with more business income. It would exempt nonprofits and any business earning less than a million dollars annually. New businesses would be excluded for 24 months, allowing time to establish themselves and grow.
The councilmen’s suggestion to study the proposal came a day after its creator, San José State professor Scott Myers-Lipton — who led a successful 2012 campaign to raise the city’s minimum wage — submitted the proposed ballot language to the city clerk and filed papers to begin gathering signatures. If the group gathers 20,000 signatures in six months, the proposal will go before voters in November to decide.
If qualified, the measure would require a simple majority vote to pass because the tax isn’t earmarked for any specific program. Revenue from the proposed tax would go into the city’s general fund, which pays for basic services including police and fire protection, road repairs, libraries and affordable housing. The tax would replace San José’s existing business tax, which charges businesses by number of employees but is capped at $25,000 per year.
“I think it’s great news they want to study this,” Myers-Lipton said. “This shows the seriousness of the proposal and the need to modernize our business tax.”
Supporters say the proposed tax will put an estimated $30 million to $70 million in the city’s general fund at a time when San José has 400 fewer police officers, 170 fewer firefighters and a billion-dollar backlog in public infrastructure projects.
“I’m looking at a 2-feet long pothole on my street right now,” Myers-Lipton said. “That’s why we need this. We are the ‘richest city’ in the nation and yet we have the eighth-worst roads and an affordable housing crisis.”
San José’s current business tax brings in an estimated $11 million a year. The city is home to 85,000 businesses, city officials said.
Rocha and Peralez want the study done as quickly as possible — well before Myers-Lipton submits the petition — to allow for a public process and time to make changes. They also stressed the importance of an “unbiased” analysis.
“We would ask our staff, particularly staff on the 17th floor, to keep in mind that they are not advocates for corporate interests,” they wrote in the memo, referring to the city manager’s administration and economic development officials. “They are servants of the public, and the public interest should be foremost in their minds.”
With some controversy brewing over the measure, especially in business circles, Myers-Lipton this month started conversations with the San José Silicon Valley Chamber of Commerce, which has opposed the initiative and is gearing up to fight it, and city economic development officials. Those talks led to a decision to apply the lowest tax rate — 60 cents per $1,000 in revenue — to all retail and wholesale businesses, regardless of their size.
And corporate headquarters based in San José can choose between the gross receipts tax or a payroll tax — whichever is cheaper, obviously — but not both. The payroll tax would charge 0.26 percent on a company’s gross payroll in San José.
Any company requiring a business license is subject to the tax, including airlines. That could throw a wrench in airport officials’ push to attract more airlines to boost revenue and passenger traffic. Mineta San Jose International Airport trails airports in Oakland and San Francisco in passenger totals, though both of those cities have a gross-receipts tax.
San José airport spokeswoman Rosemary Barnes declined to comment, saying the airport’s leadership hasn’t had time to study the ballot measure.
SFO spokesman Doug Yakel said San Francisco’s airport doesn’t require airlines to obtain a business license, so the tax there hasn’t had an impact on the airport.
Supporters say the measure will prevail despite heavy opposition from business groups, just like Myers-Lipton’s successful 2012 ballot measure to raise the city’s minimum wage.
But Matthew Mahood, president of the San José Silicon Valley Chamber of Commerce, said the organization will “lead the charge” against it. “We have not had a single business or partner think this measure, which punishes our job creators, is a net positive for San Jose’s business climate,” he said.
And while some have questioned why Myers-Lipton and other supporters of the tax decided to go to voters instead of the City Council, Rocha and Perlaez said it’s not hard to see why.
Myers-Lipton’s minimum wage measure was strongly opposed by the council, but approved by voters with a nearly 20-point margin. Last month, the council quibbled over studying a commercial fee for new businesses and eventually killed the idea with a majority vote.
“Before we start pointing fingers, we should examine our own actions and our own values,” Rocha and Peralez wrote. “Are we true partners with those in our community who fight for economic justice?”
Gross-receipt tax rates are hard to study because they vary in each city. Oakland, which is half the size of San José, brought in an estimated $70 million this year from that tax. The city charges $1.20 for every $1,000 in revenue for wholesale and retail businesses. San Francisco, which collects $1 to $1.60 for every $1,000 in revenue, brings in $420 million a year.
Mayor Sam Liccardo said he supports studying the impacts of a gross-receipts business tax in San José but has “serious concerns” about how the tax might affect the city’s ability to attract employers that create middle-class jobs.
“I look forward to the opportunity to learn more from independent experts, particularly economists, to understand the impacts of this initiative,” he said.