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As the city seeks to recover from a budgetary operating deficit, the Redwood City Council unanimously voted to continue studying two tax revenue options on Monday, one of which could be on the voters’ ballot in November.
More than 100 residents spoke during the public comment period, displeased with the council’s decision to propose a new tax, but council members stood firm, suggesting that studies and polling would further help voters understand the tax.
Council member Kaia Eakin acknowledged the roughly 118 speakers who either wrote in via email or attended the meeting in person, saying it was “fantastic that everyone commented.”
Yet, she used the opportunity to clarify her position on why she was voting to approve the study of the tax measures.
“There is nothing scary about studying things,” Eakin said.
The city, which operates on a $334 million budget and has forecasted a shortfall of $9.2 million for the next eight years, is exploring an overhaul of its business license tax, switching to a system based on the total sales of a business. The city is also considering raising the tax on property sales, aiming to match rates of similar cities. To do this, the city said it would need to hire consultants to conduct polls, conduct studies, and speak with stakeholders.
Like their colleague, council members Chris Sturken and Diane Howard echoed Eakin’s statement by encouraging residents to stay engaged in the process.
The business license tax could generate nearly $10 million in annual revenue. The city has almost 6,000 businesses paying the Business License Tax, which averaged $2.7 million over the last four years. According to an HdL Companies business license analysis report, rental and leasing, subcontractors, general contractors, and apartments contribute 36% of the business tax revenue combined.
The city’s model retains the five business types: contractor, general commerce and retail, rentals, service, and professional. It would charge a varying percentage of each business’s total gross receipts. According to the staff report, the gross receipts model could increase revenues by nearly $7 million and be flexible for specific business categories.
Yet, Council member Diane Howard suggested that the business license fee didn't appear equitable for small businesses, which are taking the brunt of the tax load.
As outlined in the report, 568 service businesses could pay a 784% tax increase. The city receives $164,677 in service business tax, which could jump to $1.45 million annually. Examples of service businesses include gardeners, nail salons, and hairstylists. According to the report, the industry also holds the least taxable gross receipts.
Comparatively, for the 1,624 contractor businesses in the city, it would mean a 509% tax increase, increasing the city’s revenue from $467,408 to $3,236,369 annually. General commerce and retail would see a 103% increase and commercial and residential rental tax would increase by 38%, according to the report.
Howard asked staff to study if taxing larger nonprofit organizations currently exempt from business license fees would be possible.
The other tax option would be to increase the rate of the city taxes on property sales. Assistant City Manager Michelle Poche Flaherty said the city’s transfer tax charges $.55 per $1,000 property value during the meeting.
Resident Chris Robell, who has been leading the charge against the tax increases, argued that the city’s presentation was misleading.
According to state law, the transfer tax is .55 per $500 property value, accrued by the county and split with the city at the county’s discretion.
The new transfer tax would be a city transfer tax that would be in addition to the county transfer tax.
According to the San Mateo County Association of Realtors, the average single-family residential home in Redwood City sold for $2,252,487 in the third fiscal quarter.
If voters approved a $5 tax per $1,000 property value, similar to a tax that exists in the city of San Mateo, a home that sells for $2,252,487 would be taxed $11,262.44.
The existing county transfer tax would be an additional $2,477.74, half of which would go toward the city. In total, it could cost $13,740.18 for a resident to sell a $2,25 million home.
This year, the city collected nearly $900,000 citywide in property transfer tax; however, the city could have collected around $8.1 million if the city implemented a transfer tax for $5 per $1,000 property value, the same as San Mateo, according to a study by financial consultants DTA, which are paid for by the city.
Robell said the property transfer tax presentation and staff report need to be more accurate because out of 482 cities in the state, only 36 have imposed a transfer tax.
“That’s 7% of California cities, and there are 125 charter cities, so that is less than a third of the charter cities,” Robell said, adding that Redwood City falls into that category. “I don’t think we want to be part of this unique club. Less than 7% of the cities do this, and no city in the county has a 9.875% sales tax and this property transfer tax. This is doubly punitive. …anybody who votes for this will not get their re-election supported.”
In 2023, more than 240,000 jobs were lost in the tech industry, resulting in 25% vacancy rates in the city’s commercial and office rental space, according to the staff report. Comparatively, vacancy rates were under 10% in 2019, before the COVID-19 pandemic. Property taxes fund 37% of the city’s operating budget, and sales taxes fund around 22%, all of which have declined.
While the city is looking to save money on police and fire services and the community development and transportation departments, it won’t be enough to overcome the deficit due to rising costs and a slow economy, according to the staff report.
Still, during the public comment duration of the meeting, dozens noted the city’s spending of up to $1 million on office furniture and the raising of City Manager Melissa Stevenson Diaz’s pay to more than $393,000, which included a base salary of $379,530 and an additional $14,321 or 4% added to her annual base salary beginning on Oct. 14, 2024.
Concerned local citizen M. Mackey, who did not want to disclose their full name, said the city doesn’t have a “revenue problem; it has a spending problem.”
“Please do your job and initiate a citywide cost reduction program. Get rid of as many consultants as you can, including any that are hired for the purpose of figuring out how to tax us more. See how you can leverage shared services with other cities or the county,” Mackey said.
Next steps
City staff and the two consultants, HdL Companies and DTA Finance, will continue researching both tax options to help clarify which option the city should approve, following community engagement and polling between December and April. In April, the City Council will return to decide if a ballot measure should be submitted to the general election in November for the voters to approve.
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