June 7, 2005

SUBJECT:  Potential Increase to the Business License Tax – Proposed Tax Structure, Call for November 2005 Municipal Election Regarding the Business License Tax, and Examination of Related Ballot Measure Language

REPORT IN BRIEF

With the adoption of the FY 2004/2005 Budget, the City Council approved for study a broad array of fiscal strategies to achieve cost savings or enhance revenues.  These strategies are the continuation of a multi-year effort to address an on-going, structural gap in the City’s budget that emerged with the economic recession in late 2001.  Through a series of carefully planned actions including expenditure/service level reductions, cost saving measures and fee increases to more fully recover cost of service, the structural gap has been significantly reduced.  In keeping with prudent fiscal policy, additional strategies, including potential tax increases, must be considered to ensure that ongoing and long-term structural integrity of the City’s General Fund is secured and maintained.      

Among the opportunities for revenue generation is the potential to increase the Business License Tax (BLT). The BLT, which generates approximately $240,000 annually, is among the lowest in the area and is by far the General Fund’s lowest revenue generating tax.  Any proposed increase to the BLT would need voter approval.  Since the BLT is a general tax, the election must be held with a regularly scheduled election of City Councilmembers.    

Staff recommends that the Council move forward with a November 8, 2005 ballot measure to increase the Business License Tax in a phased, two-step approach to a minimum of $20 in year one and $30 in year two, and a maximum of $4,750 in year one and $9,500 in year two.  Due to the recent implementation of the two-year processing cycle, staff proposes that year one commences for the taxes due on January 1, 2007, should the voters approve an increase to the BLT.  Staff also recommends that the tax and cap be indexed to inflation beginning in year three.  These recommendations are more fully outlined in the Discussion section of this report. 

Should the Council decide to propose a ballot measure to the Sunnyvale voters, State election law requires that steps be taken to call an Election to be held in conjunction with the General Municipal Election scheduled for November 8, 2005.  The required Council actions consist of: calling the election; accepting or modifying the wording of the ballot question and proposed amendments to the Sunnyvale Municipal Code; deciding on the preparation of the ballot argument for the measure; and authorizing the City Attorney to prepare the impartial analysis.  As required by the County Registrar of Voters, these actions must be taken by August 12, 2005.  Attached for Council consideration is a proposed resolution (Attachment A) to call the election.

A more detailed discussion of the election requirements, as well as the proposed ballot language, appears in the Discussion section of this report.  

BACKGROUND

Just four years ago, Sunnyvale experienced the worst fiscal crisis in its history.  The City Council responded through a series of actions to reduce expenditures and enhance revenues.  The structural budget gap in the General Fund was approximately $15 million during FY 2002/2003.  Beginning in FY 2004/2005, the gap had been narrowed to approximately $5 million on an annualized basis.  (See RTC No. 05-038, January 31, 2005)  Though the structural budget gap has been significantly narrowed (mainly through service level and other expenditure reductions), additional corrective action is needed.   

As Council is aware, the recommended FY 2005/2006 Budget, though in balance, is based on a “bare bones” approach that will require a $1.1 million ongoing decrease in expenditures or increase in revenue beginning in FY 2006/2007.  In addition, some $444 million in unfunded capital projects has been identified.  The recommended FY 2005/2006 Budget includes a number of fiscal strategies from the current fiscal year to address the structural deficit in the General Fund.  These strategies are based on a three-pronged approach: continuous improvements within the organization, expenditure reductions and revenue enhancements.  The latter includes the potential to increase the Business License Tax by presenting a ballot measure to Sunnyvale voters.

As a general tax, an increase to the Sunnyvale BLT would require a majority public vote (50%, plus one) for passage in a general municipal election of City Councilmembers.  For Sunnyvale, these elections are held in November of odd-numbered years.  Should the Council wish to pursue this option, the earliest opportunity to present such a measure for voter approval would be the next regularly scheduled general election for City Councilmembers on November 8, 2005.  Additional special election dates are possible, but this would require designation of the BLT as a special tax, which carries greater restrictions, mainly in terms of voter requirements (2/3 v. majority vote).  Costs are also substantially higher for a separate special election, but there is much greater flexibility for election dates.    

In late FY 2002/2003, the Council created an Ad Hoc Advisory Committee to study potential tax increases for voter approval.  The Committee was comprised of business and other community members, including three Councilmembers (See Attachment C for the full list of Committee members).  While the Committee recommended against tax increases at that time, it indicated that the Business License Tax was one of the best options to present to the voters. The Ad Hoc Committee’s final report was presented to Council at the July 15, 2003 meeting (RTC No. 03-239).  Council accepted the report, then approved in concept the placement of two measures regarding increases to the Business License Tax and the Transient Occupancy Tax on the November 4, 2003 ballot.  After further deliberation at a Special Meeting dated August 6, 2003, the Council ultimately decided not to pursue ballot measures. 

During March 2005, the Mayor held two roundtable meetings with business community representatives and former members of the Ad Hoc Revenue Committee.  The roundtable meetings were held as a first step in the outreach process to discuss this potential tax increase proposal.  These meetings were meant to not only hear the issues/concerns of business and industry professionals, but to discuss the City’s general financial condition and the need to examine all available strategies to close the structural budget gap.

The Mayor and City Manager have also been conducting site visits to specific businesses to further discuss potential tax increase measures for the BLT and the Transient Occupancy Tax.  Additionally, the City’s Economic Development staff included information on the potential tax increase/roundtable meetings in the Winter 2005 Edition of the Business Page Newsletter, which was sent to all Sunnyvale businesses.  Email notification was also sent to those businesses on the City’s email distribution list.  The Spring 2005 Newsletter was similarly mailed to all Sunnyvale businesses (and emailed to the distribution list), specifically to ensure that all current licensees were notified of this public hearing item, as well as a proposed increase to the Transient Occupancy Tax (TOT), which will be considered at the June 21 Council meeting.  

As the Council considers proposing a Business License Tax increase to the voters, other important factors should be taken into consideration, such as historical information on the BLT, and the various State laws that have placed restrictions on municipal revenue raising authority.

Historical Information on Sunnyvale Business License Tax

The Business License Tax was adopted by ordinance in 1968.  The tax is assessed on businesses based on the number of employees or rental units, whichever is higher.  The current BLT ranges from $10 for a one-person business to $300 for businesses with 146 or more employees for business located in Sunnyvale, and $35 to $325 for businesses located outside of Sunnyvale.  Sunnyvale’s BLT is considered a general purpose revenue that helps support General Fund services.  As such it is defined as a general tax, which has important distinctions for potential tax increases that are more fully discussed below.  The BLT was last increased in 1976, when the cap was raised from $100 to $300-$325.  At that time a rate schedule was also introduced.  Approximately 75%-80% of taxpayers fall into the lowest chargeable category, e.g., $10 or $35.

In FY 2003/2004 a processing fee for new businesses and business renewals was enacted to recover the full cost of service.  The fee was established by majority vote of the City Council and did not require a public vote, as allowable under Article XI of the California Constitution.  (For a comprehensive description of the distinction between fees and taxes, see RTC No. 03-154.)  The processing fee was adopted at $27 for new businesses and $17 for renewals (RTC No. 03-203).  In FY 2004/2005 the City converted from an annual cycle to a 2-year processing cycle for new and renewing businesses, and the fee was modified to $54 for new businesses and $23 for renewals. (RTC No. 04-375)  These modifications were implemented as part of the ongoing efforts to recover full costs of service, achieve cost savings, and implement process improvements, all in response to the City’s unprecedented budget crisis.  When the two-year cycle is fully implemented in FY 2005/2006, it is expected that the processing fee will recover $160,000 in costs.  

Given that the BLT has not been increased since 1976, its ability to generate revenue to support city services has substantially eroded over time.  The BLT generates approximately $240,000, or 0.25%, of total annual General Fund revenue, making it by far the lowest Sunnyvale tax revenue source. 

State Laws Affecting Local Taxes

Over time the relative ability of cities to levy taxes has been significantly restricted through the passage of state laws, most notably the voter-approved initiatives of Proposition 13 in 1978, Proposition 62 in 1986, and Proposition 218 in 1996.  While many other state laws have been enacted that impact local government revenue raising authority, these three initiatives have produced the most substantive changes relative to new tax levies. 

Differences Between General and Special Taxes

The passage of Propositions 13, 62 and 218 created important distinctions between types of taxes and the voter approval needed to enact such taxes, and imposed additional procedural requirements.  The first major change created the distinction between general and special taxes.  Since 1978, all local taxes fall into either one of these categories.  A general tax refers to any tax imposed for general governmental purposes.  Some examples of this tax include the Business License Tax, Sales and Use Tax, Property Tax, Transient Occupancy Tax and Utility Users Tax. 

A special tax is any tax imposed for specific purposes.  Examples of special taxes include Benefit Assessments, Special Taxes or Parcel Taxes for Library or Public Safety Services, Paramedic Taxes, and Mello-Roos Community Facilities Districts.

Voter Requirements for General and Special Taxes

This distinction between general and special taxes also created specific voter requirements needed to enact either type of tax.  To enact a general tax, a majority vote (50%, plus one) is required.  The vote on general taxes must be consolidated with a regularly scheduled general election of City Councilmembers.  The Council election requirement may be suspended in emergency situations declared by a unanimous vote of the City Council, although this has rarely occurred.  Most of Sunnyvale’s existing taxes are general taxes.  To enact a special tax, a 2/3 majority (66.7%) is required. The vote on a special tax may be held either in conjunction with or outside of the regular Council general election process at a special election.

EXISTING POLICY

The Fiscal Management Sub-Element of Sunnyvale’s General Plan contains several goals, policies and action statements that address the City’s revenue base, including, but not limited to the following:

Goal 7.1A – Maintain and enhance the City’s revenue base

Policy 7.1A.1 – Maintain a diversified and stable revenue base for the City

DISCUSSION

As Council and staff continue to closely monitor the City’s structural fiscal condition, it is essential that all available strategies are reviewed, including potential tax increases.  In considering this particular option, it would be appropriate to outline the relative pros and cons of proposing an increase to the BLT, as defined and discussed by the 2003 Ad Hoc Revenue Committee, the 2005 Mayor’s Roundtable meeting participants, and the Mayor’s recent business visits.  While staff is recommending a ballot measure to increase the BLT, it is important to outline for Council consideration both the positive and negative aspects to tax increases as identified by the participants involved in the various outreach efforts over the past two years.                

Advantages of BLT Increase

As the cost of service provision has increased for Sunnyvale, taxes such as the BLT have not been increased to keep pace.  Because of this, the revenue generation potential for many of Sunnyvale’s taxes has eroded over time.  This is particularly true for the BLT, as it accounts for only 0.25% of all General Fund revenues and generates approximately $240,000 annually.  Increasing the BLT would bring the tax into parity with surrounding cities and help ensure its viability as a General Fund revenue generator.  This point was highlighted by the Ad Hoc Revenue Committee.  The Committee also felt that the BLT was undervalued, and even doubling or tripling the tax would still leave it undervalued.   

As an example, a large company with several thousand employees, if located in San Jose, would pay up to $25,000 annually in Business Tax.  If the same company was located in Sunnyvale, it would pay $300.  To better put this into perspective, San Jose’s maximum tax is 8,233% more than Sunnyvale’s maximum tax.  Similarly, the maximum tax in Cupertino for the same company would be $11,000 annually; $8,000 annually in Menlo Park; and in Los Altos the amount would be $3,000 annually.  Conversely, the cities of Mountain View and Santa Clara charge $100 and $500 respectively.  Palo Alto, by comparison, does not assess a Business License Tax (See Attachment D, Comparison of Maximum Tax Amounts).     

An increase to the BLT was also cited by the Revenue Committee as the most likely to gain a majority vote and the most palatable to Sunnyvale voters, as the tax would be assessed on entities conducting business in the City, and would not affect all residents.  This assertion is supported by the historical voting record for ballot measures to increase local taxes, where general taxes such as the BLT and the TOT (that do not affect every city resident) have higher approval records than taxes assessed on all residents such as the Utility Users Tax (UUT).  For example, in local elections statewide since 2002, at least 50% of BLT/TOT tax measures passed, while only 0%-15% of UUT measures passed.[1] 

Another positive indicator to increasing the BLT pertains to Resident Satisfaction Surveys conducted by the City from 2000-2002, where residents preferred to increase taxes rather than reduce services, by a slim majority over the three-year period, as identified in the table below.

Survey Question: "All local governments are receiving less state and federal funding these days. To make up for the shortage of funds, what action should the City take?"

In April 2003, the City conducted an additional survey to gauge resident preferences on potential service level reductions for 45 existing services.  This particular survey was conducted in direct response to the City’s unprecedented budget crisis in order to identify the degree to which residents would favor either substantially or moderately reducing City services, maintaining service levels and raising fees, or dropping services altogether.  In addition, the survey contained a question about the degree to which residents would support raising fees, charges, or local taxes.

The results of the 2003 survey indicated that, when faced with an array of potential service cuts, 73% of residents would support an increase to fees, charges, or local taxes in order to maintain services and service levels.  Significantly, these results represented a marked shift in support for increasing fees/taxes over the 2000-2002 survey results.  Of the 73%, 42% of respondents supported a minor increase (<5%), 26% supported a moderate increase (5-10%), and 5% supported a significant increase (>10%).  Conversely, 27% of respondents did not support any increase in fees/taxes.      

Another Resident Satisfaction Survey will be conducted in June or July 2005 that will include questions similar to those used in the 2000, 2001 and 2002 surveys.

In May 2005, the Mayor and City Manager conducted specific business visits with representatives from Sunnyvale’s auto dealers and some of Sunnyvale’s largest employers including Advanced Micro Devices, Applied Materials, Juniper Networks, and Lockheed Martin. Generally, the representatives felt that an increase to the BLT would not significantly impact their companies in that the tax is not a main factor in business location decisions.  The business representatives also felt that a BLT increase could be absorbed such that it would not affect their bottom line.  Significantly, some business representatives felt that an increase to the BLT was preferable to additional service cuts. 

At the May 2005 meeting with Sunnyvale auto dealers it was suggested that the BLT should be indexed to inflation so that the tax remained a viable source of General Fund revenue for the City.  If the City had indexed the tax to inflation in 1976 (when the rate schedule was introduced), the base amount of $10 would have grown to $36, and the maximum tax of $325 would have increased to $1,184.        

Additional visits are planned in the near future with Network Appliance, Northrup Grumman and Trimble Navigation, and staff will update the Council as to positive or negative comments that result from these meetings.

Summary of Advantages to BLT Increase

Ø       Bring tax rate into parity with neighboring jurisdictions

Ø       Restore viability as a General Fund revenue generator

Ø       More palatable to voters than other taxes such as UUT

Ø       Residents support tax increase over further cuts

Ø       Does not appear to have major impacts on some larger businesses

Disadvantages to BLT Increase

While Sunnyvale’s BLT may be among the lowest in the area, several concerns have been raised by the business community representatives since the City began deliberating potential tax increase in 2003 as to why a tax increase should not be pursued.  A major theme discussed by the Ad Hoc Revenue Committee, as well as business and industry representatives at the recent Roundtable meetings, centers on equity/fairness, e.g., an increase to the BLT would affect only businesses operating in Sunnyvale as opposed to including all residents in the City. 

Another major theme that has consistently been echoed by business and industry representatives is that, while acknowledging that an increase in the BLT is not unreasonable given its current status, higher taxes and fees add to the total cost of doing business, which can impact overall competitiveness.  Given the City’s low tax and fee rates (such as those for city-operated utilities) relative to surrounding communities, it is likely that many Sunnyvale businesses would be less competitive if located in other area jurisdictions in terms of total taxes and fees paid. 

At meetings with participants, an additional concern relates to the potential base amount of tax for the City’s smallest businesses, which comprise more than 75% of all entities operating within the City.  While the amount is now extremely low at $10 for zero to five employees, should the City propose a significant increase in the base amount it may prove to be an undue burden on small businesses.  The City’s processing fee was also cited as adding to the tax structure as an increased cost to small businesses.

Summary Disadvantages to BLT Increase

Ø       Affects only the business community

Ø       Increased taxes add to total cost of doing business; lessens competitiveness

Ø       Substantial increase could excessively burden small businesses

Ø       New processing fee already adds to tax structure

Principles for Evaluating Need for Tax Increase Measure

As the 2003 Ad Hoc Revenue Committee began to consider potential tax increases, they developed a set of seven criteria to frame their discussion, as identified in the table below.  The Committee then numerically determined whether the tax options as identified Met or Did Not Meet the criteria.

While the Committee ultimately recommended the Council not pursue tax increases at the time, using the above criteria they ranked the Business License Tax as the most likely option to increase through a proposed ballot measure.

Structure of Proposed Business License Tax Increase

The Business License Tax in Sunnyvale is paid according to a rate schedule based on the number of employees or rental units, whichever is higher.  Businesses physically located in Sunnyvale pay less tax than those located outside of the City who conduct business here.  The lowest tax amount is $10 for zero to five employees for businesses located within Sunnyvale and $35 for businesses located outside of the City.  The highest amount is $300 for businesses with 146 or more employees located inside Sunnyvale and $325 for business located outside of the City.  Approximately 75%-80% of all businesses fall within the lowest chargeable category. 

Should the Council decide to pursue a ballot measure to increase the Business License Tax, staff recommends that an incremental two-step increase be proposed to the voters, as identified in the table below.  Though more difficult from an implementation standpoint, a phased approach would allow businesses to absorb the increase over a period of two years, thus lessening the immediate impact of a substantial rise in business taxes.

The smallest businesses in Sunnyvale would see an increase in their BLT from $10 to $30 over a two-year period.  For those businesses with two to five employees, their tax would increase from $10 to $50 over a two-year period.  Sunnyvale’s largest businesses of 946 or more employees would pay a capped, maximum amount of $4,750 in year one and $9,500 in year two.

Because the two-year processing cycle has already begun, staff proposes that any voter-approved increase to the BLT be implemented commencing with taxes due on January 1, 2007.  This will minimize the payment of differential rates, e.g., new and renewing businesses that pay the two-year tax beginning on January 1, 2006 will pay one year of tax (through December 31, 2006) based on the current rate structure, and one year based on the new structure.  For the tax year beginning on January 1, 2007, new and renewing businesses will pay the tax based wholly upon the new structure.        

Staff proposes that the tax and the cap be adjusted annually for inflation using the Consumer Price Index (CPI), in year three after the two-step increase has taken effect.  To better allow for consistency and ease of administration, staff also recommends elimination of the cost distinction between businesses located inside and outside of Sunnyvale, e.g., all one-person businesses would be assessed a tax of $30 under the proposed structure.  Staff further recommends that the newly enacted processing fee remain in place to fully recover the cost of service. 

The proposed tax structure would generate estimated annual revenue of approximately $570,000 in year one, for a net of $330,000, and approximately $1.1 million in year two, for a net of $840,000.  The lower amount in year one (less than half of the estimated revenue for year two) is mainly due to the fact that the proposed increases are slightly less for the two lowest categories of businesses (1 employee and 2-5 employees, which account for more than 75% of all Sunnyvale businesses) than those for Sunnyvale’s larger businesses.  Depending on economic and other factors that influence business growth, tax revenue should modestly increase beginning in year three as the CPI inflator becomes operative.

The proposed rate structure was developed by staff in conjunction with a subcommittee of several members of the Ad Hoc Revenue Committee in 2003.  Staff’s efforts were guided by a set of parameters/principles created by the subcommittee which first sought to minimize the impact of a tax increase on Sunnyvale’s one person businesses, and also included increasing the existing cap, utilizing a standard, uniform multiplier based on the number of employees or rental units, and generating approximately $1 million in total annual tax revenue.  

Timetables for Tax Measures

Should Council wish to pursue increasing the BLT, there are a number of procedural requirements set in State law and by City Charter that specify timetables (among other things) for elections held in Santa Clara County.  As noted earlier, modifications to any existing general taxes are restricted to a regularly scheduled general election of City Councilmembers.  This means that November 2005 is the City’s first and only opportunity until November 2007 to propose a ballot measure to increase a general tax before the voters.

Sunnyvale’s next general municipal election will be held on November 8, 2005.  This election must be consolidated with Foothill-DeAnza Community College District, Sunnyvale School District and Cupertino Union School District.  Should Council wish to pursue a tax increase measure on the November 8, 2005 ballot, the deadline to file the appropriate information with the County to “call” the election is August 12, 2005.  This means that the Council must call the election prior to August 12^th at a regular or special meeting.  The process would also require Council to approve the ballot measure wording and proposed amendments to the Sunnyvale Municipal Code, and to decide who will prepare the ballot argument for the measure (as more fully described at the end of this report).  These are the actions proposed at this meeting.  Given the summer recess schedule, additional opportunities for Council action are limited to the regularly scheduled meetings of June 14 and 21, July 12 and 19, or August 9.  A special meeting could also be scheduled prior to the August 12 County filing deadline.    

Election Requirements and Ballot Language

The attached resolution calls an Election to be held in conjunction with the General Municipal Election on November 8, 2005, to vote on a ballot measure which would amend the Sunnyvale Municipal Code to increase the City’s Business License Tax.  In addition to calling the election, a series of actions must be taken prior to the election.  First, the City Council must approve the ballot question that will be presented to Sunnyvale voters.  Second, Council must consider amendments to the Municipal Code to incorporate the proposed tax structure changes.  Third, Council must decide who will draft the ballot argument for the measure.  Fourth, the Council may authorize the City Attorney to prepare the impartial analysis. 

The proposed ballot question and summary of Municipal Code amendment are outlined below.  The last subsection discusses the Council options for preparing the ballot arguments.

Business License Tax – Ballot Question

Working in conjunction with City staff, the City Attorney has prepared the following ballot question relating to the Business License Tax.  The ballot question may not exceed 75 words, and should be presented to the voters in clear and concise fashion so that it is clearly understandable: 

CITY OF SUNNYVALE MEASURE _____

Shall the Sunnyvale Municipal Code be amended to increase the business license tax, which supports basic City services, from its current amount of $10 for every 5 employees/rental units, to $30 for 1, $50 for 2-5, and $50 for each additional group of 5 employees/rental units, up to a maximum of $9,500, with the increases phased over 2 years and both tax/cap adjusted annually for inflation?

Business License Tax – Municipal Code Amendments

The proposed increase to the Business License Tax (for the tax year beginning January 1, 2007) would require modifications to the Sunnyvale Municipal Code as summarized below and further detailed in Attachment C:

·         Eliminate the cost distinction between businesses located in Sunnyvale and those located outside of Sunnyvale – Currently there are two rate schedules for the Business License Tax.  A base charge of $10 is assessed on businesses located in Sunnyvale with 0-5 employees or rental units.  In the case of a business having both employees and rental units, the tax is assessed on the higher of the two.  For those companies that transact business in Sunnyvale but are physically located outside of the City, a base charge of $35 applies.  The tax for both categories of businesses increases in $10 increments for every 5 employees or rental units and caps at $300 for businesses located inside the City and $325 for businesses located outside of the City.  The proposed tax structure would eliminate the cost distinction between businesses located inside and outside of Sunnyvale.  This would allow for consistency and ease of administration.

·         Increase the base and cap amounts – The proposed tax structure increases the base tax amount from $10 to $20 in year one (tax due January 1, 2007) and to $30 in year two (tax due January 1, 2008) for businesses with 1 employee, from $10 to $30 in year one and to $50 in year two for businesses with 2-5 employees or rental units (or portion thereof), then increases in $25 increments in year one and $50 increments in year two for every 5 employees or rental units (or portion thereof), to a capped amount of $4,750 in year one and $9,500 in year two.  Beginning in year three, the amount of tax and cap is proposed to be adjusted annually for inflation by the San Jose-San Francisco-Oakland MSA Consumer Price Index, and set forth each year in the City’s Master Fee Resolution.

·         Clarify that business cannot have zero employees – The current ordinance categorizes the lowest chargeable category as 0-5 (zero to five) employees.  The definition of employee in the ordinance, however, states that the business owner counts as an employee.  This proposed change clarifies that the lowest chargeable category would be 1 employee, as opposed to 0 (zero).

It is further recommended that the newly enacted processing fee remain in place so that we can recover the administrative cost of collecting the tax.  The processing fee can be amended at any time.

Ballot Arguments For and Against

The State elections code provides for the filing of arguments for or against each ballot measure.  If submitted, one argument “For” and one argument “Against” the measure will be printed with the sample ballot.

Ballot arguments may be filed with the City Clerk by the City Council, by any member or members authorized by the City Council, or any combination of voters or associations.  Rebuttal arguments are allowed only if expressly authorized by the City Council.  In previous elections the City Council has not authorized rebuttal arguments and, consistent with that policy, the attached resolution does not authorize the filing of rebuttal arguments.

Arguments for or against may not exceed 300 words in length.  The form of ballot arguments and certain restrictions on the content are set forth in State Elections Code Section 9282.  No more than five signatures appear on the argument.  If any argument is signed by more than five persons, the signatures of the first five are used.

Elections Code Section 9286 requires that the City Clerk fix a date for the submittal of ballot arguments for or against, based on the time reasonably necessary to prepare and print the arguments and sample ballots and to permit the required public examination period.  According to the election calendar produced by the County of Santa Clara, the date for submittal of ballot arguments is August 17, 2005, no later than 5:00 PM.  Arguments already filed may be changed or withdrawn by their proponents up until the filing deadline. 

If more than one argument for or against any measure is submitted, the City Clerk is required to select one of the arguments for printing.  Preference is given to arguments submitted in the following order:

1.      Argument submitted by the City Council or members of the City Council authorized by the Council;

2.      The individual voter or bona fide association of citizens who are the bona fide sponsors or proponents of the measure;

3.      Bona fide associations of citizens;

4.      Individual voters.

If the City Council desires to submit an argument on the proposed measure, it may so indicate or provide authorization to one or more of its members to prepare the argument either for or against the measure.  The City Council may wish to do that at this time or simply to give notice of its intent to do so to avoid unwarranted effort on the part of other persons who may wish to prepare such an argument. 

Elections Code Section 9280 provides that the City Attorney may be directed to prepare an impartial analysis of the measure, which is not to exceed 500 words.  The impartial analysis is due August 24, 2005.  Direction to prepare such an analysis is included in the resolution.

Outreach Efforts to Date

To date, staff has conducted two roundtable meetings with business and industry members, and the Mayor/City Manager have made several additional business visits to discuss the potential tax increase measures.  At least two additional site visits are planned.  These meetings are being held to discuss business and industry concerns related to increased taxes and to review the City’s financial condition, including the need to examine all available strategies to ensure the ongoing and long-term structural integrity of the City’s General Fund.      

The City’s Economic Development staff also included information on the potential tax increase/roundtable meetings in the Winter 2005 Edition of the Business Page Newsletter, which was sent to all Sunnyvale businesses, and also sent email notification to those businesses on email distribution.  Additional information on the potential tax increase was also included in the Spring 2005 newsletter.    

Other Options

Alternatively, if the Council desired to change the nature of the BLT from a general tax supporting general services to a special tax to fund all or a portion of a specific purpose, then a public vote could take place at any established election.  As discussed, special taxes carry a 2/3 voter threshold and are inherently more difficult to pass.  The costs of a special election are significantly higher as well, estimated at approximately $150,000 for a special primary election, and potentially up to $450,000 for a stand-alone election to consider a ballot question.

FISCAL IMPACT

Staff estimates that enactment of an increase in Business License Tax as proposed would net approximately $330,000 in revenue in the first year the increase becomes effective and $840,000 in the second year.  The lower amount in year one (less than half of the estimated revenue for year two) is mainly due to the fact that the proposed increases are slightly less for the two lowest categories of businesses (1 employee and 2-5 employees) than those for Sunnyvale’s larger businesses.  Projected revenues should modestly increase by the CPI, depending on economic and other factors that influence business growth.

The costs associated with a public vote on a ballot measure at the November 8^th Municipal Election are estimated to be $25,000-$30,000.

Conclusion

As Council and staff continue to closely monitor the City’s fiscal condition, it is appropriate to review all available strategies, including potential tax increases.  Absent corrective action, the structural imbalance in the City’s General Fund will continue to persist. 

Council has the opportunity to review the fiscal benefit of an increase to the Business License Tax to help ensure that the highest quality services continue to be provided to the residents of Sunnyvale.  In considering this option, the relative pros and cons should be carefully weighed so that the most informed decision can be made that is of maximum benefit to the Sunnyvale community. 

The Business License Tax was originally enacted to provide the City of Sunnyvale with revenue to fund city services, and was last increased in 1976.  The BLT is Sunnyvale’s lowest General Fund tax, generating approximately $240,000 annually.  Its viability as a tax revenue to support basic city services has significantly eroded over time.          

Attachment E (prepared by the Economic Development Division) shows a preliminary analysis of what a larger company would be assessed for city provided utilities and select taxes in 7 jurisdictions in the area, including Sunnyvale.  This cursory review shows that Sunnyvale competitively ranks with the other jurisdictions in terms of total taxes and utility rates paid.  It should be noted that a more thorough review would need to be undertaken to attempt to assess the total cost of taxes, rates and/or other charges that any given company remits to these jurisdictions to fully determine the cost of business.  

Acceptance of Staff’s recommendation will allow the voters to decide whether to increase to the Business License Tax to a level consistent with neighboring cities in order to generate needed revenues to support general city services. 

PUBLIC CONTACT

Public contact was made through posting of the Council agenda in public places, on the City’s web page, and the publication of the Council agenda in the San Jose Mercury News and the availability of the report in the Library and the City Clerk’s Office. 

ALTERNATIVES

There are several alternative actions that City Council could take at this time:

1. Approve the placement of a ballot measure on the November 8, 2005 ballot to propose to the voters an increase to the Business License Tax based on a two-year phased approach to a minimum of $20 in year one (for tax due January 1, 2007) and $30 in year two (for tax due January 1, 2008), to a maximum capped amount of $4,750 in year one and a maximum capped amount of $9,500 in year two, with the tax and cap adjusted annually for inflation using the Consumer Price Index (CPI), beginning in year three (for tax due January 1, 2009).

2.  Approve the placement of a ballot measure on the November 8 ,2005 ballot to propose to the voters an increase to the Business License Tax based on a minimum of $30 and a maximum capped amount of $9,500, with the tax and cap adjusted annually for inflation using the Consumer Price Index (CPI).

3.  Approve the placement of a ballot measure on the November 8, 2005 ballot to propose to the voters an increase to the Business License Tax with a maximum amount other than as stated.

4.  Direct staff to perform further study for future Council consideration. 

5.  Take no action.

6.