If Palo Alto voters approve a new business tax in November, affordable housing and transportation improvements will likely absorb a large share of the revenues that the city collects, the City Council agreed on Monday.

The council is still refining the tax measure, which members have been discussing for years and which continues to face broad opposition from leaders of the business community. The effort further advanced on Monday, when the council reached broad consensus on some of the parameters of the new tax, including uses for the funding.

Over two public hearings and a long procession of votes, the council coalesced around a tax measure that roughly mirrors the one that was recommended last month by its Finance Committee. The tax would exempt all small businesses, defined as those with 5,000 square feet of space or less, as well as supermarkets, hotels and seasonal businesses that are in operation for less than 90 days.

The council also agreed that the tax rate would likely be either 10 cents per square foot or 12 cents per square foot, with the exact amount to be determined after the next round of polling. The rate would be phased in over two years, with the first half taking effect immediately upon the adoption of the tax and the second half kicking in a year later.

In most cases, the votes were 6-1, with council member Greg Tanaka as the lone dissenter. A key exception was on the question of how the funds should be used. On that question, the council voted 4-3, with council members Alison Cormack, Eric Filseth and Tanaka dissenting, to direct its polling firm, FM3, to specify in its next survey the four areas that the tax revenues would be devoted to: grade separation and rail safety; affordable housing and homelessness; public safety; and improvements to University and California avenues.

With the exception of Tanaka, a fervent opponent of the business tax, the council broadly agreed that housing and transportation should feature prominently in Palo Alto's funding plan. But both Cormack and Filseth voted against the motion because they felt it was premature to create a funding plan without further refining the city's priorities. Even Cormack, however, suggested that the city needs invest more in transportation projects such as reviving the city's shuttle program.

Mayor Pat Burt and council member Tom DuBois had no such reservations. DuBois proposed the four focus areas and both he and Burt noted that some of these issues had already been shown to be high community concerns in prior polls. Burt also made the case that dedicating local funds for grade separation — the redesign of rail crossings so that tracks and roads would no longer intersect — would allow the city to leverage the federal and state funding that would be needed to complete the complex and expensive projects.

"A lot of the criticism we've been hearing is that we haven't been clearer to date on the uses," Burt said. "With the exception of that last one (improvements on University and California avenues), these have been what we've been identifying as our highest priorities."

DuBois suggested that improving the two major thoroughfares is a particularly suitable use for the tax revenues because of the project's strong connections to the business community. All four focus areas, however, have been previously identified as important, he said.

"They have nexus with the business community and residents and we have large and unfunded activities in these areas," DuBois said,

The council discussion came a week after several members of the business community presented their concerns to the council about the proposed measure, which they argued would hurt local businesses and potentially drive some out of town. Dan Kostenbauder, vice president for tax policy at Silicon Valley Leadership Group, said that a business tax would "increase the cost of occupancy for a tenant and ultimately reduce rents that businesses would be willing to pay."

"This would reduce property values and cause future property revenue to be lower than it otherwise would be," said Kostenbauder, who also read a list of Palo Alto residents who he said agreed with his business group's position.

Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce, told the council that his organization is regularly "hearing from our business members how difficult it is to make ends meet here in Palo Alto" and said the community "simply can't afford a new business tax at this time." Tiffany Griego, managing director of Stanford Research Park, lamented the fact that the city has not conducted an analysis of economic impacts from a tax, which is something that other jurisdictions had traditionally done before adopting new taxes.

"From our experience, we know that demand in the research park is elastic. Businesses large and small weigh the cost of doing business and how business-friendly a city is before making decisions about whether to locate or to bring their point of sale to Palo Alto," Griego said.

Burt and Filseth both argued, however, that investing in housing and transportation is critical to sustain both the city and, more broadly, Silicon Valley. Filseth observed that Silicon Valley has seen an exodus of workers over the past decade, with many of those leaving listing the high cost housing and diminishing quality of life as the two main reasons. And Burt lamented the fact that two powerful industries — tech giants and commercial developers — had come out against the proposed tax before it was even formulated.

"The Silicon Valley Leadership Group that represents amongst the largest and most successful companies in the world has supported sales-tax increases, bridge-toll increases, gas tax increases — everything that is regressive and disproportionately taxes low- and modest-income people," Burt said. "We really shouldn't expect that they're going to support this measure, as moderate as it's likely to be when it finally hits the ballot.

"I still would hope that members of our community who had blindly allowed themselves to be used by these big business entities would reconsider."

Tanaka took the opposite position and argued that innovation has been leaving Palo Alto for years, a trend that has been further accelerated by COVID-19 and the rise of remote working. He cited companies like Tesla and Palantir, which in recent years had relocated their headquarters out of Palo Alto. He suggested that by introducing a business tax the city may be destroying its financial base.

"My big worry is as these companies move, what's going to happen to the taxes that they do pay and the jobs they will provide?" Tanaka said.

In a separate 6-1 vote, with Tanaka dissenting, the council also signaled support for a second measure that would reaffirm the city's historic practice of transferring funds from the gas utility. The city suspended the transfers in the last budget because of a legal challenge from resident Miriam Green and a court finding that the transfers constitute an illegal tax. By getting the voters' endorsement, the city hopes to overcome this legal setback and restore the roughly $7 million gap in the general fund that the court decision created.

"This is a crucial part of funding our services and it's been a double whammy during the pandemic to not be able to have access to these funds," Cormack said. "I think the community, based on polling results, understands this and is ready to … restore this revenue stream to our general fund."