As Palo Alto continues its march toward a November 2020 ballot measure for transportation improvements, city leaders are confronting two questions: What will the revenues fund? And what kind of tax should they ask the voters to approve?

While the first question remains murky, the City Council's Finance Committee moved a step closer toward answering the second when all three members indicated that they are leaning toward a business tax based on employee count. If the council pursues this option, it will join the likes of Santa Clara, San Jose, Redwood City and Mountain View, all of which tax their businesses based on the number of workers.

East Palo Alto, by contrast, approved in 2018 a parcel tax based on the square footage of office buildings. The tax imposes an annual tax of $2.50 per square foot on commercial properties with more than 25,000 square feet of office space.

In Palo Alto, a tax based on headcount was one of three options under the Finance Committee's consideration, along with a parcel tax and an employee tax based on square footage. On Tuesday, all three committee members agreed that of those three, an employee count tax is their preferred option.

Councilwoman Alison Cormack offered two reasons for why an employee-count tax is her top choice: It's easier to administer than the other taxes and "simpler is better." It also creates a logical connection between the funding source and the improvements being funded. Given that employees are particularly dependent on public transit to travel to work, it makes sense to use an employee tax to fund transportation improvements along the rail corridor and elsewhere in the city.

"I continue to believe we have strongest nexus between a business headcount and the fact that people come here to work and the vast majority of riders on Caltrain at stations are coming to work," Cormack said.

Vice Mayor Adrian Fine agreed and noted the other alternatives, particularly a business tax based on square footage, would be much harder to administer. The three committee members agreed that a parcel tax and square-footage tax is their second and third choices, respectively.

The discussion was informed by a recent report from Matrix Consulting Group, which evaluated different business tax proposals and estimated that Palo Alto would raise about $2.8 million annually from an employee-count tax if it were to adopt Mountain View's tax rates.

Whichever tax the council chooses, it is almost certain to encounter resistance from the business community. Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce, said his organization has met with more than 65 local business leaders in the last few months to discuss the city's tax proposals. Weidanz said the businesses expressed "a very strong concern that this is going to have quite a negative impact and negative consequences on their ability to thrive and survive during the economic challenges that might be coming ahead."

Each tax proposal that the city is considering has distinct problems, he said. The headcount tax, he said, would disproportionately target small businesses with just one location in the city. Larger businesses with multiple locations, including one in Palo Alto, would be less affected, he said. A tax based on square footage, by contrast, disproportionately impacts those businesses that need extra space to do their businesses, even if these businesses provide a point of sale. Software firms, meanwhile, require relatively little space and would get off light.

He also indicated that businesses particularly oppose a "general tax," which would require a simple majority of voter support and does not specify how the money would be spent. This in contrast to a "special tax," which needs a two-thirds majority to pass and which clearly defines how the revenues will be allocated.

"Though we don't support any of the taxes at the time, we strongly object to it being a general tax, where there's no accountability and no oversight for projects that have not been identified yet," Weidanz said.

Other speakers, however, supported adopting a new tax, particularly if revenues would be used for transportation and housing. While the council hasn't yet specified exactly how the money would be spent, the biggest chunk is expected to go to grade separation, the city's effort to redesign the rail corridor so that the tracks would no longer intersect with streets at the Churchill Avenue, Charleston Road and Meadow Drive crossings.

Pat Burt, a former mayor who is now working with a citizens group that advocates for a new revenue source for transportation and housing, argued that the business community will not support any tax. This despite the fact that Silicon Valley is a "historically low tax region," when compared to San Francisco. That said, he urged the committee not to rush to adopt a tax but to make sure it has all the information it needs to make an informed decision.

"If this tax doesn't pass, it will likely be five to 10 years before the city can go back to voters and reconsider a tax so you need to make sure you've done it right — not only have the right info but the time is right. ... Great if it's ready and aligned with grade separation alternatives by 2020," Burt said. "That may not be the case. The wish to get it there may not be a reality and frankly competing tax measures can be a consideration."

Chairman Tom DuBois agreed that the city will need more data, including polls, to inform the details of the new tax. But he also pushed back against the idea the new tax would necessarily hurt the business environment and cited the business tax measure that East Palo Alto passed in 2018.

"There was a pretty big outcry from businesses in East Palo Alto, but since then we've seen a lot of large projects go in. ... We know other cities are using these methods so we are not inventing the wheel here." DuBois said.

Even if the council opts to go with an employee count tax, several details remain hazy. The committee did not decide whether the tax would be a general or a special tax, a decision that will be informed by polling. The City Council expects to see the results of the initial poll on a potential tax measure in late January, at which time it will consider the committee's recommendation.

The council will also consider whether the tax should include an escalator provision (which the Finance Committee generally supported) and a sunset provision (which the committee opposed). Perhaps the most critical decision — and one most crucial to voter support — will pertain to how the funding is spent. While transportation is the main focus, Fine stressed the importance of being more specific in defining what that means.

"When we talk about transportation projects, some mention the south Palo Alto shuttle, others are interested in a bike bridge or bike lane projects, or folks have other mobility options that they want to pursue," Fine said. "I don't think we have a menu of what that looks like in the city and what we can potentially fund from a tax like this."