After pressure from business groups, downsized Santa Rosa business tax proposal heads to council

About 20 of the highest grossing businesses — including large medical care providers, big box retailers and some contractors — would’ve seen their taxes increase to $100,000 or more.

For example, a medical office whose gross receipts total $167.6 million annually would have paid $586,500, under the proposal, a more than 19,000% jump, according to city figures.

“To go from $3,000 to half a million by January 2026 is crazy,” said Joanne Webster, president and CEO of the North Bay Leadership Council.

Business groups call for collaboration

Business representatives quickly mobilized as the plan was publicly released.

They pushed back on the proposal in public comments during a July 9 study session where the proposal was first presented to the full council, requesting the city pump the brakes and instead work with them on an update.

Rumble and Webster said neither of their groups were consulted as the original proposal was crafted at City Hall.

A split council also raised questions about the increase and said it went against a recently approved blueprint to promote economic development in the city. They directed staff to meet with business groups before returning.

Mayor Natalie Rogers and Council members Eddie Alvarez and Victoria Fleming have recused themselves, citing personal financial implications related to the update. Council member Chris Rogers and Okrepkie said in the meeting they were unlikely to support the measure as written, while Vice Mayor Mark Stapp and Council member Dianna MacDonald, part of a council subcommittee where the tax had been discussed earlier, appeared more supportive.

Webster said removing the cap would eat away at businesses’ profit margins and such an aggressive increase for high grossing companies would be tough to absorb under a short timeline.

“We acknowledge that the city of Santa Rosa is having financial trouble and that they should look at ways to increase revenues,” she said. “But we have hardships, too, and we’re faced with the same costs.”

Webster said the impact to the wide range of businesses across 27 industries that her organization represents, including leading employers in the North Bay, was unclear. City officials didn’t share specifically with the group who would be most impacted and the Leadership Council was considering hiring a consultant to analyze the impacts on its members, she said.

But she worried it would discourage growth and potentially force companies to downsize or relocate to other cities with more favorable taxes, she said.

Webster didn’t say who in the group’s ranks was most vocal in pushing back against the measure, but generally, national chains, big box stores, health care providers and dealerships stood to face the biggest jumps.

New proposal keeps cap

City Manager Maraskeshia Smith, finance staff and council members have spent the past three weeks discussing the tax with business groups, auto dealerships, contractors and hospitality groups.

“They started off a little adversarial,” Okrepkie said of the meetings, acknowledging that the city’s outreach should have started earlier. “I think some were surprised by what was being considered initially but they’ve become far more collaborative as they’ve gone on.”

Staff analyzed several options centered around keeping a tax cap but potentially raising it to as much as $50,000. They also looked at raising the base tax fee in response to feedback from stakeholders.

Rumble, who said the chamber hasn’t taken an official position on the revised proposal, said keeping the cap ensures the tax liability doesn’t escalate infinitely for high-grossing companies. The $10,000 max is likely close to what the cap would’ve been if the existing $3,000 would have been adjusted for inflation over the last 30 years.

The city also plans to implement a tiered minimum tax that is based on gross receipts.

Businesses that generate $100,000 or less in gross receipts would pay a minimum of $200, while businesses that report between $100,000 and $500,000 would pay $500 and those that earn up to $1 million would pay $800.

Companies whose annual gross receipts hit $1 million would pay a minimum of $1,000, plus an additional amount for any revenue above $1 million, up to the new cap.

That means that the same medical office that would have paid more than $500,000 under the original proposal would pay the maximum $10,000 under the new structure.

Webster said the revisions are a good compromise.

“We wanted to come to the table and be a partner in creating solutions and I think that’s where we landed,” she said, adding that the Leadership Council is supportive of the measure.

Smaller boost for city coffers

The revised measure, which will take effect in January if approved, is expected to generate an additional $3 million a year to help fund daily operations at City Hall. The lodging tax increase is estimated to bring in an extra $1.2 million a year.

Combined, it’s a sharply smaller amount than first projected and means additional cuts will be required to balance the budget.

The city implemented a hiring freeze July 1 and administrators are looking at other ways to make operations more efficient. Staff anticipates returning to the council in October to discuss proposed cuts, according to a staff report.

Okrepkie said the additional tax revenue, while important, was never intended to be a cure for the city’s financial problems. Expiring federal funds that pay for critical programs and labor contracts approved with all but one of the city’s bargaining units, with up to 15% pay hikes over three years and additional benefits, are the primary factors behind rising costs.

Beyond boosting revenues, the city needs to take a close look at its operations, too, Stapp said.

“We can’t expect to balance our budget on the backs of local businesses,” he said. “City staff have spent all their time and attention on reaching a compromise and crafting an ordinance that everyone can agree on and I think we’ve achieved that.”

You can reach Staff Writer Paulina Pineda at 707-521-5268 or paulina.pineda@pressdemocrat.com. On X (Twitter) @paulinapineda22.