Business license tax increase could bring in more than $1M

Los Gatos got one step closer to increasing its business license tax to help bring in more revenue to the town.

Town council has agreed on an amended tax plan that takes a more equitable approach and fixes the current tax's “regressive” structure. The group will meet again sometime next week for a special council meeting to officially vote and put the tax increase on the November ballot.

The proposed tax structure, which was amended by Councilmember Matthew Hudes, would increase annual tax revenue to an estimated $1 to 1.2 million by taxing higherearning businesses at a higher rate.

The town's business license tax had not been updated for 30 years, and under the old structure, small businesses with annual incomes of about $50,000 would pay more than double the tax rate compared to larger businesses with annual incomes of $1 million or more, with rates of 0.15% and 0.06%, respectively.

The previous tax structure also did not take into account new business models like e-commerce and delivery services.

Town staff proposed three models for council, one of which increased payments for companies earning more than $12 million. The five companies that fall into this category previously paid $75 per each increment of $550,000 they earned above $12 million. The proposed model bumped that amount by 300% to $300.

Netflix, the town's highest-earning company, was understanding of a tax increase, but felt this model targeted their company, assistant town manager Arn Andrews said. The streaming service said it felt the increase should be closer to 117%, according to a staff report.

Hudes' amendment knocked down the payments to a 100% increase, and he made up for the percentage lost with a 40% increase to the retail gross receipts rate and a 30% increase to the flat tax rate with a Consumer Price Index adjustment.

Council unanimously approved Hudes' recommendations, and staff will prepare ballot language for the council to vote on sometime next week to officially put the question before Los Gatos voters.

“We do need to increase our revenue, and our businesses do use our services, use our sidewalks, use our roads, etc.,” Councilmember Maria Ristow said.

Hudes also asked town staff to look into an amnesty program to identify businesses that have not been paying business license taxes.

“I think it's clear that Los Gatos is not collecting from certain businesses that are operating in town,” Hudes said.

Los Gatos' budget forecast projected a $10 million deficit over the next five years, and town council has been searching for a solution to the problem amid rising costs and inflation.

Council considered allowing cannabis dispensaries to set up shop in town, which could have brought in anywhere from $410,000 to $570,000 annually, but ultimately decided to maintain its local ban.

Businesses are still reeling from the pandemic, which forced many restaurants and retailers to close their doors. Andrews said this will have some bearing on the town's business licensing tax discussions. Andrews said the town has taken steps to boost revenue incrementally over the past few years, including a hotel tax in 2016 and district sales tax in 2018.