With Palo Alto preparing to place a business tax on the 2022 ballot, city officials on Monday agreed to consider exemptions for grocery stores and small retailers.

The City Council largely reaffirmed on Monday the recommendations from its Finance Committee, which concluded after numerous meetings that the city's new revenue source should be a business tax based on square footage. By a 6-1 vote, with council member Greg Tanaka dissenting, the council agreed on the basic contours of the new tax, including exemptions for retailers below a certain sized threshold.

The council's recommendation builds on and slightly strays from the Finance Committee's recommendation, which had suggested a general exemption for retail. On Monday, Mayor Tom DuBois suggested that he would prefer to limit it to "small retail," even though the city has yet to determine what the size threshold will be.

Another modification that was proposed by DuBois and accepted by his colleagues is exempting grocery stores, which DuBois noted "tend to be very low margin, hard to keep in our city and (have) large square footage." The council also agreed that the tax should be as simple as possible, with few or no other exemptions.

The exact parameters of the tax measure will be informed by polls that the council also authorized during Monday's discussion. Performed by FM3 Research, the company that has worked with the city on prior ballot measures, the poll will be based on interviews with between 400 and 800 likely voters. In addition to asking voters about the new business tax, the survey will also gauge their interests about a utility tax that would replenish revenues that the city stands to lose as a result of recent litigation, which challenged Palo Alto's historic practice of transferring revenues from its gas utility to the general fund.

In supporting the Finance Committee's direction on the proposed business tax, the council effectively pulled the plug on another option that the committee had previously considered: a parcel tax. Unlike the business tax, which requires a simple majority to pass, a parcel tax would need to get support from more than two-thirds of voters before it is adopted.

One critical question that the council has yet to answer is: How will the tax money be spent? The answer to the question has evolved over the years, with the council initially viewing the measure as a way to raise money for grade separation — the realignment of rail crossings so that local streets would not intersect with the railroad tracks. More recently, council members have talked about dedicating some of tax revenues to affordable housing or even using it to pay for basic city services — a prospect that has gained some prominence during the COVID-19 pandemic as sales- and hotel-tax revenues plummeted.

The poll that the council approved will explore voters' spending priorities, with the menu of options including infrastructure, street maintenance, traffic and parking management, public safety, libraries, climate action and services to assist unhoused residents.

Vice Mayor Pat Burt, who served on the council during its failed attempt to enact a business license tax in 2009, acknowledged that whatever tax measure the city proposes will likely encounter opposition from the business community. There is no such a thing as a "perfect tax," he said.

"We'll hear from opponents that whatever tax we form … it has imperfections and should therefore not go forward," Burt said. "What we need to do is try to figure out the best we can, the correct balance and what would be supported and be able to address the needs and uses that we have tremendous need for."

The council has also yet to decide whether the utilities tax should accompany the business tax on the 2022 ballot or deferred to a later year. Council member Alison Cormack, who chairs the Finance Committee, suggested that it's possible that voters will support both efforts, particularly if they aim to address different needs. The utility tax, for example, has been highlighted by the Finance Committee as a possible vehicle for launching new sustainability initiatives such as converting residents from natural gas to electrification — a key component of the city's plan to cut greenhouse-gas emissions by 80% by 2030, with 1990 as the baseline.

"I have a lot of faith in the people of Palo Alto," Cormack said. "They're pretty smart and I think if we have two different situations, we might be able to accomplish two things at the same time."

Tanaka, who has consistently opposed the council's prior attempts to enact a business tax, once again made his case against moving ahead with the effort. A tax on business, he argued, would bring down commercial property values and encourage businesses to leave Palo Alto. He urged the pollster to ask residents about how they feel about being "uprooted from their homes" if their companies leave town and whether they believe a public entity is better at allocating resources than a private one.

"I think we've been fortunate to have innovation in Palo Alto and having a somewhat business-friendly environment has been key to that … And we've seen companies like Tesla move out and we've seen startups no longer starting in the city," Tanaka said.