As one of few cities in the area without a business tax, Palo Alto is preparing to shed that label in November 2020.

First, however, the City Council has to figure out exactly what kind of tax it wants to adopt, who should be exempt from the tax and what projects it should fund. That process began Tuesday, when the council's Finance Committee began winnowing down options and hashing out details.

In determining what type of tax to adopt, Palo Alto has plenty of nearby cities it can look at for examples. Mountain View, for example, adopted in 2018 a business tax based on employee count. The tax, which will take effect next year, requires a payment of $150 per employee.

East Palo Alto, which also passed its business-tax measure in 2018, bases its tax on square footage. Large office developments are required to pay an annual tax of $2.50 per square foot.

San Francisco, meanwhile, supplemented its existing employee-based tax ($1,500 per employee) with one based on gross receipts. The new tax, adopted last November with the passage of Measure C, limits itself specifically to companies that generate more than $50 million in revenue, with proceeds going to homelessness services and housing.

In Palo Alto, the main objective is to get funding for grade separation, the redesign of the local rail corridor so that train tracks no longer intersect with local streets. City officials have also talked about using some of the funding to support affordable-housing projects and new community projects such as the redevelopment of Cubberley Community Center and the implementation of parks master plan.

During the Tuesday discussion, the Finance Committee considered the full spectrum of options for a 2020 tax measure, including potential increases to the sales tax, the hotel tax and the documentary transfer tax. Ultimately, the committee agreed to strike from consideration all of these options, though members agreed that a parcel tax should remain in the mix for further exploration.

But the elephant in the room is a business tax — a revenue source that the council has been considering on and off for more than a decade. The city last tried to adopt a business tax in 2009, a time when the city's revenues were plummeting because of the economic downtown. That measure was shot down by the voters.

In recent years, with grade separation emerging as a pressing community need, council members have renewed their push toward a business tax. Finance Committee Chair Tom DuBois said Tuesday that a business tax, rather than the other alternatives, should be the focus of the committee's deliberation.

"We are one of few cities that doesn't have one. That's what the council has been interested in," DuBois said.

The new tax will likely look substantially different from the one in 2009. The Finance Committee agreed Tuesday not to consider a tax based gross receipts this time but to consider measures based on square footage (like East Palo Alto), employee count (like Mountain View) and payroll (like San Francisco). The committee also agreed to survey local business and analyze the potential impacts that the new tax.

Preliminary estimates from staff show a Mountain View-style tax of $150 per employee could generate about $14.6 million in annual revenues in Palo Alto. A tax on square footage, akin to East Palo Alto's, could bring in about $31 million annually, according to staff. In both cases, the estimate assumes that the city will not create any exemptions or create tiers with varying tax rates.

Some business leaders are already raising concerns about the proposed tax measure. Judy Kleinberg, president of the Palo Alto Chamber of Commerce, urged the committee Monday to tread cautiously and get a full analysis on the impacts of the new taxes on businesses before moving ahead.

"When all you talk about is gross receipts and gross revenues, you're talking about potentially a very draconian impact on certain industries, especially the hospitality industry, hotels and restaurants," Kleinberg said.

Each tax that the city is exploring can have a very different — and very harmful — impact on the business community, Kleinberg said.

"There are two Palo Altos, the Palo Alto that you see and the Palo Alto that is. ... There are businesses that look like they're thriving and they're being held up by a landlord or a property manager or a property owner so that there's no empty storefronts," Kleinberg said.

Tiffany Griego, managing director at Stanford Research Park, said the companies at the research park already generate about $17 million in general fund revenues for the city. Many of the companies arrive at the park as startups, she said. She urged the council not to adopt a tax that would send a message that startups are not welcome.

The real estate market at the business park is cyclical, she said, with the vacancy rate at times going as high as 18%.

"I'd like to make sure we have a good, strong discussion on fiscal resilience," Griego said.

Vice Chair Adrian Fine said the council should also consider how the new business tax will support the businesses that pay it, whether through improved transportation services or economic-development support. He also suggested that the city will have an easier time getting the business community's support if it pursues a "special tax," which requires 66.67% voter approval and which is dedicated to specific projects, over a "general tax" that only requires a simple majority. Pursuing a tax with the higher threshold will "force us to be more judicious on decision-making," Fine said.

Councilwoman Alison Cormack concurred and said that pursuing a special tax, which clearly lays out what the money will be used for, is the more transparent route. She also noted, however, that the council's decision will be ultimately be influenced by polling, which will shed some light on what the electorate is interested in. In the meantime, she said, the council should consider both the Mountain View and the East Palo Alto models.

"Last year everyone was talking about head tax. This year, everyone is talking about square footage. I think more research of those would be appropriate," Cormack said.