As Palo Alto marches toward placing a business tax on the November ballot, city leaders are bracing for an onslaught of opposition from local corporations, developers and regional organizations such as the Silicon Valley Leadership group.

The anti-tax campaign has already begun with flyers and social media ads, some of which quote local business executives and argue that this is not the right time for a new tax. But while this message has been a mantra of sorts for opponents over the past five years, it has taken on increasing resonance at a time of rising inflation and a shaky economy.

A new survey from the city's polling firm FM3 Research captures the public's growing feeling of pessimism and uncertainty. Conducted between May 22 and May 26, the survey shows that for the first time in recent years, a plurality of responders — 39% — said they believe things in Palo Alto are going in the wrong direction, while 36% believe they are going in the right direction. That's a far cry from 2016, when 61% reported that they considered the city was going in the right direction, while 25% took the opposite stance.

The combination of economic uncertainty and fierce opposition from the business community may make the business tax a tough sell in November. While the survey suggests that the business tax has a good chance of passing, the existing level of support remains soft and residents remain very open to persuasion. Of the 58% of the voters who voiced support for a business tax based on a rate of 10 cents per square foot, just 21% were characterized as "definite yes" while 37% said they were "probably yes." Meanwhile, 38% of the respondents said they would oppose the tax, with 24% classified as "definitely no" and 14% as "probably no." The remaining 3% were undecided.

Dave Metz, president of FM3 Research, warned the council Monday that after negative messaging from opponents, the support for the business measure could drop to a dead heat.

"That's an indication that there's just a lot of hesitancy among voters to commit to a vote on the yes side, as much as it's their general instinct," Metz told the council. "That's an indication that the nature of campaigns that might be waged for or against the measure in the community are likely to have some impact."

Both the business tax and a separate measure that would affirm the city's practice of transferring funds from the gas utility to the general fund start from a position of being "viable from the perspective of voters' initial support," Metz said. That, however, can easily change.

"A lot will really hinge on the nature of the pro and con campaigns that community groups may wage if the measures are put forward, given the degree to which voters do seem to be open to changing their minds," Metz said.

The uncertainty has not, however, deterred the council. On Monday, the council voted 5-1, with Greg Tanaka dissenting and Greer Stone absent, to proceed with the plan after further refinements. The tax measure, which the council expects to formally finalize next week, will be based on square footage and will exempt from the tax all grocery stores, hotels and businesses with less than 5,000 square feet.

The tax would bring in an estimated $20 million in annual revenues. Though the council will have broad discretion on how to spend the proceeds, members indicated Monday that they would like to devote $10 million to public safety, $5 million to affordable housing and $5 million to transportation, primarily to advance grade separation at rail crossings.

Council members have been plotting the tax for more than five years and were preparing to place the measure on the 2020 ballot before the COVID-19 pandemic prompted them to reconsider. Even before the pandemic walloped the local economy in 2020, business leaders have steadfastly opposed the measure, arguing that it would deter some businesses from coming to Palo Alto and prompt others to leave.

Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce, reiterated this argument Monday when he told the council that many local businesses cannot afford the new tax.

"This proposed business licenses tax is bad for Palo Alto and could kill the downtown we hope to see thrive," Weidanz said.

Dan Kostenbauder, vice president of tax policy at the Silicon Valley Leadership Group, has also consistently opposed all of Palo Alto's prior efforts to enact a business tax. In recent months, his organization joined the city's Chamber of Commerce and the Silicon Valley Chapter of NAIOP, a commercial real estate development association, to take out ads against the new tax. The new group, known as the Palo Alto Community and Business Alliance, has launched a website to target the new tax. Its slogan is "Now is not the time."

Kostenbauder suggested Monday that the business community would be more likely to back the business tax if the council made it a "special tax" that is dedicated to a particular project or funding area as opposed to a "general tax," which gives the council broad discretion to spend the funding.

"A special tax with legally binding commitments to fund specific objectives would have been much more likely to gain broader support," Kostenbauder said.

Council members, however, showed little appetite for pursuing a special tax, which would need support from two-thirds of the voters to pass. Instead, they favored a general tax, which could be enacted with a simple majority. In doing so, however, they made it clear that public safety, affordable housing and transportation will be the three focus areas. Council member Eric Filseth focused on affordable housing and argued that a business tax is crucial to making progress in this area.

"The only sustainable funding is a tax," Filseth said. "A large business tax makes sense, especially in an area where so many large corporations have thrived, including during the pandemic. Without the tax, we'll never build housing."

Holding up an anti-tax flyer from the business groups, Filseth lamented their aggressive position against the measure and questioned their decision to spend money on an advertising campaign against the city's tax measure.

"Some regional folks feel so strongly about not spending money on affordable housing that they're spending money on not spending money on affordable housing," he said.

Much like at prior discussions of the business tax, every council member except Tanaka voted to advance the measure. But more so than in the past, the council acknowledged the increasingly difficult political climate.

"The current political situation and state of the economy and apprehension about inflation and recession makes this not a highly favorable time to put a tax revenue through," Mayor Pat Burt said. "We've got to be conscious of that."

He suggested having council members talk to business leaders in the next week, before the business measure returns to the council for final approval and goes on the ballot. Among the factors the council is still trying to hash out is whether to set the rate at 10 cents or 12 cents per square foot.

Tanaka, who has been against all prior attempts to enact a business tax, reiterated his opposition Monday and pointed to the economic challenges that both the city and the nation are now experiencing.

"What we should be doing during a time of need, when things are really difficult is we should be making it easier to do business, we should be encouraging business formation, we should be trying to bootstrap the economy," Tanaka said. "If the economy was red-hot and we didn't have these massive storm clouds right above us maybe it would make sense, but right now it's just the opposite — it has never been worse."

Several residents, meanwhile, spoke in favor of staying the course and observed that Palo Alto is the only city in the region that doesn't have a business tax. Bob Moss, a longtime council watchdog, said it is overdue for the city to tax its businesses.

"The impact that businesses have — the requirement for city services and the jobs-housing imbalance — are significant and we should be addressing that," Moss said.

Proponents of the two proposed revenue measures can also point to the economic downturn to bolster their arguments. With revenues dropping over the course of the pandemic, the city has cut spending in the Police and Fire departments as well as on libraries and community services. In the past, the city transferred about $7 million from the gas utility to the general fund to support these services. A recent lawsuit from resident Miriam Green halted this practice, with the court finding that the transfer amounted to an "illegal tax." By having voters reaffirm the practice at the polls, the city is hoping to restore the transfers and, hence, the services.

Christine Paras, assistant director of the Administrative Services Department, noted that while staff has recommended restoring these services in the budget, maintaining them would require additional revenues.

"These services will most likely be cut if this transfer is not affirmed," Paras said.

Hamilton Hitchings, a local resident who supports the business tax, observed that the city also lacks funding for grade separation and for affordable housing — areas that could be addressed if the measure passes.

"Despite what the optimists say, there's not enough funding for the rail crossings in the city without it," Hitchings said. "Likewise, to help keep our city socioeconomically diverse by providing housing opportunities to low-income workers and residents, the city needs to do its fair share and this tax is one of the core pillars of funding that is necessary."