The Tracy City Council is in the process of implementing a new business tax to replace a voter-approved tax that sparked heated backlash after the tax burden on some businesses in the city increased dramatically.

A five-hour workshop that drew several dozen people to Tracy City Hall on Tuesday included a session where participants – including business owners and citizens – could identify the system they thought would work best.

Like the law voters passed in 2022 as Measure B, the new rule the council is developing would be based on revenue, not employees, as was the case before Measure B. Measure B proved unpopular because some businesses in the city have high gross receipts but low profit margins. The previous tax system also had a $2,018 cap on all businesses.

In the end, the Council unanimously approved a proposal that would tax companies based on a percentage of their turnover, between 0.05% and 0.15%, or between $5 and $15 per $10,000 of gross turnover, depending on the type of company, with a cap that would put a total tax at $65,000.

This would generate $3.07 million in annual benefits for the city, more than the $1.6 million the city received before Measure B, but less than the $4.8 million the city expected to receive after Measure B passed.

The council agreed on a compromise based on a desire to be business-friendly while maintaining revenue for the city budget.

“When businesses make more money, they can keep it and reinvest it. That’s my experience,” said City Councilman Dan Evans, adding that Tracy competes with other cities for businesses.

“In the long term, the model must be that we have lower taxation, good procedures and think ahead,” he said.

“Once that plan is in place, we can market the city differently and tell businesses what we have to offer. But we have to back that up with reality. And the reality will primarily be: ‘What does it cost to do business there?'”

Mayor Nancy Young also stressed the importance of retaining and attracting businesses.

“What we do now will make a difference in who we keep, what we keep and who we attract,” she said, adding that the city’s annual revenue of $1.6 million before Measure B is below the baseline the city should accept. “I don’t think any of us want to go that far.”

In the first tax assessments under the Measure B system, 88.5% of the city’s 4,479 businesses received bills of $1,000 or less, but 110 businesses received bills of $10,000 or more and 10 businesses received bills of $100,000 or more. This was based on a $50 fee on the first $500,000 of revenue and a tax of 0.1% to 0.3% on all revenue beyond that.

After the tax bills were sent out, the city’s revenue estimates rose to over $8 million, but the council also learned of businesses receiving much higher tax bills than before. The council imposed a moratorium on businesses having to pay these bills until a new system could be developed.

The council and workshop participants reviewed three options on Tuesday and considered the revenue the city would generate from each option.

Finance Director Sara Castro described the first option as a general revenue-based tax of 0.01% on all businesses, a 90% reduction with a $100,000 cap. This would generate about $872,000 in annual revenue for the city.

Another proposal would halve the Measure B tax rate to 0.05 to 0.15 percent for most business categories, with a cap of $20,000 per year. That would raise nearly $2.3 million per year.

A third option would be a 40 percent reduction in the Measure B rate to 0.06 to 0.18 percent for most categories with no cap, which would raise about $4.8 million annually.

As people marked their favorites among these options, Assistant City Manager Arturo Sanchez explained that the council could adjust the tax rates and caps. The most popular concept in public discussion was Proposition 2, a 50% reduction with a $20,000 cap.

When council members had to weigh their options, they also preferred Proposition 2, but wanted to make changes to the fees and cap to benefit as many businesses as possible and bring the city closer to meeting its expectations when Measure B came up for a vote.

To aid the discussion, senior accountant Michael Raithel showed a table that allowed him to adjust the percentages and caps for each business category to show the council how these adjustments would affect annual turnover. It also showed how changes in rates or caps would affect each business category – including retail, manufacturing and warehousing, contracting, and service and professional services.

Council also received an update on the gross receipts of local businesses. Of the 4,536 businesses in the city, 4,389 (97%) generate less than $5 million per year, including 3,575 (80.5%) generating less than $500,000 per year. In the city, there are 67 businesses that report gross receipts between $5 million and $10 million, 70 that generate between $10 million and $100 million, and 10 that report gross receipts in excess of $100 million.

Mayor pro tempore Eleassia Davis said she favors the lowest practical rate with no cap.

“When businesses do well, we encourage them and give them incentives to continue to be successful because they pay low taxes overall. We benefit because businesses stay and come here because of the low taxes, and I believe low taxes have benefits.”

Councilman Dan Arriola said the city’s revenue base should be closer to what voters expected when they passed Measure B.

“I don’t think I could support anything under $3.2 million,” he said, pointing out that Raithel’s spreadsheet included a column showing a 25 percent reduction in Measure B tax rates and a $25,000 cap would bring the city’s annual tax revenue to $3.2 million.

Council member Mateo Bedolla supported this concept and moved to adopt the plan, including a three-year sunset clause. However, the other council members saw room for adjustment.

Bedolla reiterated his position that the Measure B tax is what Tracy’s voters wanted. “To me, pro-business means working with businesses, not making businesses the de facto policymakers. To me, this is a compromise to show Tracy that we are willing to work together.”

In the end, the full council was open to a 50% reduction in Measure B fees with a cap of $65,000, increasing the city’s annual revenue to $3.07 million.

• Contact Bob Brownne at [email protected] or call 209-830-4227.