SOLANA BEACH — A nine-month effort to implement a business tax failed to move forward after a City Council vote at the Feb. 10 meeting to include the measure in the June 8 election failed 2-3.
At issue was adding a new level to the existing five-tier model that would result in businesses making more than $5 million paying a higher tax.
Council members have two scheduled meetings — Feb. 24 and March 10 — to reach a compromise and meet the March 12 deadline to submit measures for the June ballot.
Faced with declining sales and occupancy tax revenue, the city began discussing the potential business tax last year as one way to address a growing budget gap. Council members, city staff and the business community worked together for months to develop a plan that would be acceptable to all parties.
The five-tier model created allowed businesses to pay either a flat rate or a percentage of their gross receipts. On the lowest level, or tier one, those making up to $66,499 would pay a flat rate of $50. Tier five businesses, defined as having gross receipts of $2.5 million or more, could pay $1,150 or .0004 percent.
During the Jan. 27 meeting, as directed by council members, City Manager David Ott presented a sixth tier that would apply to businesses making more than $5 million.
According to Ott’s estimates, the additional tier could potentially add between $12,000 and $30,000 to city coffers. Peter House, president of the Highway 101 Village Walk Association who has been working as the liaison between business leaders and the city, said the sixth tier is more likely to raise an additional $3,000 and $4,000.
He said according to 2008 numbers, there were about 45 businesses — mostly manufacturing, wholesale or construction — with gross receipts of $5 million or more. Some are no longer in Solana Beach, others have fallen out of the category because of the poor economy, and most do some or all of their business outside the city so they wouldn’t be taxed on those sales.
The difference in the tax payment between the fifth and sixth tier is about $600 annually. House said there are currently only about five companies that would fall into that category.
“Adding a tier on here is exactly what the business community asked you please not to do,” House told council members at the Jan. 27 meeting.
“If what we need to do to keep the business community on board is stick with the five tiers, I’ll support that,” Mayor Tom Campbell said. Council members Dave Roberts, Joe Kellejian and Lesa Heebner agreed and staff was directed to bring back a final resolution with five tiers.
Before the end of the discussion on Jan. 27, Roberts asked House if the additional tier would essentially be a deal breaker for business leaders.
“That’s an interesting question,” House said. “I don’t want to go back and ask them.” But that’s exactly what House found himself doing after the Feb. 10 meeting, during which Councilman Mike Nichols asked his colleagues to reconsider adding the sixth tier.
“The goal here is to try to increase revenues wherever possible,” Nichols said. “This extra tier … really only addresses businesses that gross more than $5 million. It doesn’t change any of the lower tiers.
“It’s really trying to level out the playing field and make it a little bit more fair,” he said.
Heebner said since the Jan. 27 meeting she had given the matter a lot of thought and talked to shopkeepers and other business owners who are in the lower tiers.
“They’re felling a little bit like they’re carrying the burden,” she said. “It’s more fair to have the tiers. … I don’t think we would lose the support of the business community with this.”
Campbell agreed, saying that if people don’t support the plan because of the additional tier, “they weren’t going to support it anyway.”
Roberts, who serves on the business liaison committee with Campbell, felt differently. “I spent a great deal of time talking to people in the business community,” he said. “They wanted this as simple as possible, (with) as few tiers as possible.
“I don’t think losing the support of the business community for a couple of thousand dollars is worth it at this time.”
Before the split decision, House thanked council members for working with business leaders.
“I promised the 23 people that signed the compromise (petition) that I would look at the ordinance as it came through,” he said. “I want for the record to say the ordinance that’s on the books today does meet the compromise.”
House said he was “absolutely baffled” by the council’s action. “There was no warning this was going to happen,” he said. “If I had known, I would have given a different presentation. We’re all one city, and the city is in trouble. We said we’d step up to the plate to help. Now I feel like there’s no ground under me.”
House said he was coordinating a meeting with business leaders. Nichols suggested they provide input at the next council meeting.
A four-fifths vote is required for the measure to pass.