Palo Alto's elected leaders have yet to finalize the details of the city's proposed business tax, but the campaigns for and against the measure are already in full swing.

On the one side are City Council members who say the measure is necessary to restore services and make inroads on major transportation projects and on constructing affordable housing. On the other side are business leaders who assert that the new tax would hurt the local economy and drive some local companies out of town or, worse yet, out of business.

Representatives from the two sides held meetings last month in hopes of hashing out the differences, according to Mayor Pat Burt, who along with council member Tom DuBois represented the city in the negotiations with a new group that calls itself the Palo Alto Community and Business Alliance. The group includes the Silicon Valley Leadership Group, the Palo Alto Chamber of Commerce and NAIOP Silicon Valley, which represents commercial developers.

Neither side walked away entirely satisfied. In recapping the negotiations at the June 20 council meeting, Burt said that the business group proposed a list of demands, including a far lower tax rate, and refused to consider any alternatives from the city.

"They declined to accept any changes other than what they had put as their demands the week before," Burt said.

Burt said he was "shocked" that the group had not moved an inch from their initial positions and that it had "basically put out an edict and a demand that if we didn't do what they demand, they would exercise their power to use almost unlimited resources to defeat what we believe is in the interests of our community, and our residents and our businesses."

Business leaders, for their part, indicated they remain firmly opposed to the city's effort. When asked this week about the recent negotiations, the Silicon Valley Leadership Group and the Palo Alto Chamber of Commerce issued a joint statement in which they called the business tax "an unfortunate example of the wrong policy and the wrong time."

"While we support the ultimate objective of ensuring a better future for Palo Alto, the current proposed tax would have a chilling effect on the local economy by making Palo Alto a much more expensive place to do business," the June 6 statement reads.

But even despite the adversarial postures, the gap between the two sides has narrowed. In a concession to the business community, the council agreed last month to revise its proposal and create a lower rate of 6 cents per square foot for businesses between 5,000 square feet and 20,000 square feet while exempting those under 5,000 square feet entirely. That's a marked change from earlier this year, when the council was considering a rate of 15 cents per square foot for all businesses with more than 5,000 square feet of space.

Council members also agreed last month to apply only half of this tax rate for the first 24 months, thus giving businesses time to adjust. And in another reversal, the council agreed to accept a a 35-year sunset date and to remove a prior provision that would have allowed the tax rate from the consumer price index increase to roll over from one year to another.

The measures aim to quell some of the business group's opposition and to counteract some of its campaign claims. Even with the addition of the sunset date, the group's website, Bad4PA.org, continues to characterize Palo Alto's proposal as a "forever tax."

The business coalition has consistently argued that this is the wrong time for a business tax — a point that critics of the proposed business tax have been making regularly for more than five years but that has taken on a particular relevance during the economic downtown that accompanied the COVID-19 pandemic. Charlie Weidanz, CEO of the Palo Alto Chamber of Commerce, argued at a June 13 discussion that the local business community is "still feeling the effects of the pandemic and has not restored to pre-pandemic level."

"Business owners still find it hard to make ends meet and they simply can't afford a business tax at this time," Weidanz told the council.

Yet in recent talks with the city, business leaders also made it clear that their opposition to the tax is not unconditional. The Silicon Valley Leadership Group and the Chamber of Commerce noted in their joint statement this week that the business coalition has "presented a credible alternative that would protect small and medium-sized businesses, provide stability so businesses could forecast future payments, and make larger businesses pay a greater share, comparable to rates in most neighboring communities throughout Silicon Valley."

"The credible alternative includes a lower monthly rate per square foot, increased square foot exemption, a cap on the payment by any one company and a reduced escalation scale," the group stated.

Some of these proposals had been previously floated in public meetings by group members. Dan Kostenbauder, vice president for tax policy for the Silicon Valley Leadership Group, urged the council at the June 13 meeting to consider exempting the first 20,000 square feet of any business. Though he said his group is opposed to the tax, it believes the exemption would bring the local measure more in line with taxes in other cities in the region.

"We wished that we had been approached earlier in your process and wanted to share our ideas for parameters of a business tax that would create a thriving and competitive Palo Alto whose tax burdens are aligned with other communities on the Peninsula," Kostenbauder said.

The group's most substantive suggestions are unlikely to end up in the measure, which the council plans to formally place on the ballot on Aug. 1, its first meeting after the summer break. Burt noted at the June 20 council meeting that under the tax rate it has suggested, the measure "would've fallen far short of what we have identified as our needs and what we have discussed as what we believe would be a fair and appropriate tax."

DuBois concurred and attributed the business group's failure to entertain any alternative proposals from the city to the diversity of interests that the alliance represents. Some members, he said, didn't want to accept any tax. Other members had different views about what parameters they could support for a new tax.

"I think it was kind of a flawed process in many ways and that really hindered our ability to get answers," DuBois said during the council's June 20 discussion. "And they did not move from their initial offer."

Yet despite the impasse, the council made some modifications based on input from the business group. This includes the proposal made by DuBois to create a smaller rate for businesses with less than 20,000 square feet of space. This change, he said, would result in the majority of the tax being paid by the city's larger companies.

The council voted 5-2, with council members Alison Cormack and Greg Tanaka dissenting, to support the new parameters for the tax measure. Council member Eric Filseth noted at the June 20 discussion that some of the proceeds from the tax would be devoted to public safety and rejected the notion floated by the business coalition that asking local companies to contribute to reducing crime is "bad for Palo Alto." Most companies that belong to the Silicon Valley Leadership Group are not in Palo Alto, he noted, which helps explain why they don't particularly care about addressing local crime.

"I'd suspect most Palo Altans don't share that view and I think it's our responsibility as council to get them a sensible and balanced measure promptly so that they have the opportunity to fund all this," Filseth said.