Community & Economic Development Committee
June 28, 2022
RECOMMENDATIONS
AGENDA REPORT
Staff Recommends That The City Council Receive A Report and Recommendations From the Finance Department On Ordinance No. 13579 C.M.S., Which Provides A Provisional Tax Exemption Or Tax Reduction For Certain Owner-Occupied Residential Rental Properties Under Certain Conditions, Including Information On Outreach And Implementation.
EXECUTIVE SUMMARY
This report is being provided to update the City Council on the topics of implementation, outreach and fiscal impact of the small landlord exemption (“Oakland Municipal Code Section
5.04.420.D) that became effective January 2020, fully or partially exempting the payment of Business Tax for certain owner-occupied residential rental properties. The small landlord exemption applies to eligible property owners who engage in renting properties of up to three rooms in an owner-occupied residential single family residence, townhouse or condominium or the rental of up to two Accessory Dwelling Units (“ADUs") in an owner-occupied single family residence or a duplex.
To be eligible for full or partial exemption from the payment of Business Tax, City Council listed five criteria that must be met by the property owner: the owner lives in the property as his or her principal place of residence, has received a homeowner property tax exemption under the California Revenue and Taxation Code Section 218, has owned the property for at least one year immediately preceding the application of this exemption, meets the household income threshold and has no ownership in any other residential rental property in the City of Oakland.
In order to notify property owners about this exemption, staff used the eligibility criteria set forth to identify only the property owners that were eligible to receive the exemption and notified them via email.
In addition, staff has identified potential impacts to the City’s revenues if any changes were to be made to the current residential property owner tax rates. Table 1 presents the financial impacts from lowering the existing Residential tax rates of $13.95 per $1,000 to a set of tax TO: Edward D. Reiskin FROM: Erin Roseman
City Administrator Director of Finance
SUBJECT: Owner-Occupied Business Tax
Exemption & Possible Changes of
Tax Rates on Residential Rental
DATE: June 21, 2022
City Administrator Approval Date: Jun 23, 2022
Edward D. Reiskin, City Administrator
Subject: Owner-Occupied Business Tax Exemption & Possible Changes of Tax Rates on Residential Rental
Date: June 21, 2022 Page 2
Community & Economic Development Committee
June 28, 2022
rates under Business and Personal Services (Class E) and Miscellaneous (Class N), as approved by the City Council on May 26, 2022. The approved Progressive and Equitable Business Tax ballot measure tax rates for Class E and N are:
Classification Proposal Tax Rates per $1,000 by Bracket (Gross Receipts, mil $) Min
Payment
$0 -
$1M
$1M -
$2.5M
$2.5M -
$20M
$20M -
$50M
Above
$50M
Class E: Business & Personal Svcs $60 $1.40 $2.10 $2.80 $4.00 $4.50 Class N: Miscellaneous $60 $1.20 $1.50 $2.40 $3.90 $5.50
Table 1 presents the financial impact of lowering tax rates for property owners, which would result in the City foregoing approximately $5.2 million up to $8.2 million in business tax revenues.
Table 1: Financial Impact from Possible Changes to Tax Rates on Residential Rentals
Exemption
Scenarios
New Ballot
Measure Rates
No. of
Affected
Taxpayers
No. of
Affected
Units
Current
Revenue
(in millions)
New
Revenue
(in millions)
Difference
(in millions)
1 5 or Less Units Same as Class E 15,879 30,829 $8.59 $1.2 ($7.4) 2 $150,000 GR or
Less Same as Class E 16,830 47,545 $9.49 $1.3 ($8.2)
3 3 or Less Units
and $150K GR
or less
Same as Class E
13,484
20,613
$6.10
$0.9
($5.2)
4 5 or Less Units Same as Class N (*) 15,879 30,829 $8.59 $1.1 ($7.5) (*) Class N of the adopted ballot measure is set to be based on payroll; this scenario uses the same set of rates under Class N, but the tax rates are to be based on gross receipts.
BACKGROUND / LEGISLATIVE HISTORY
Oakland Municipal Code (“OMC”) Section 5.04.420 requires that “every person engaged in the business of conducting or letting rooms, and/or any building structure, for dwelling, sleeping or lodging, including, and not limited to, a single-family house, duplex, townhouse, condominium or co-operative, shall pay a business tax of thirteen dollars and ninety-five cents ($13.95) for each one thousand dollars ($1,000.00) of gross receipts or fractional part thereof.”
The last increases of the tax rates applicable to the gross receipts generated from the rental of residential and commercial property occurred 44 and 40 years ago, respectively. This is summarized in Table 2.
Table 2: History Business Tax Rates on Rental of Properties:
Business Tax Rates on Rental Properties per $1,000 of Gross Receipts Ordinance No. Property Type Adopted Date Effective Date Tax Rate 9177 CMS Residential & Commercial 6/26/1975 1/1/1976 $0.90 9623 CMS Commercial 6/29/1978 7/1/1978 $1.80
Edward D. Reiskin, City Administrator
Subject: Owner-Occupied Business Tax Exemption & Possible Changes of Tax Rates on Residential Rental
Date: June 21, 2022 Page 3
Community & Economic Development Committee
June 28, 2022
Business Tax Rates on Rental Properties per $1,000 of Gross Receipts Ordinance No. Property Type Adopted Date Effective Date Tax Rate 9625 CMS Residential 6/29/1978 6/29/19781 $13.95
10088 CMS Commercial & Industrial 6/30/1981 1/1/1982 $13.95
Exemptions from the Business Tax Ordinance:
Oakland Municipal Code (OMC) Sections 5.04.620 and 630 grant business tax exemptions to:
1. small businesses whose annual gross receipts do not exceed $3,300;
2. “every institution, corporation, organization or association that qualifies for nonprofit tax-exempt status under either state or federal law,” and
3. “the owner of an affordable housing project that has received federal and/or state low- income housing tax credits in connection with the affordable housing ownership.”
On January 21, 2020, the City Council adopted Ordinance No. 13579 C.M.S amending OMC Section 5.04.420 to fully or partially exempt the required payment of business tax for owner- occupied residential rental properties that meet certain conditions. The adopted Ordinance is in effect from January 2020 through December 2030 unless further extended by the City Council and summarized as follows in Table 3:
Table 3: Owner-Occupied Exemption Criteria
Number of Rooms Rented Property Type Owner
Occupied
Fully
Exempt
Partially
Exempt
% of
Exemption
1 SFH, Townhouse,
Condo
Yes Yes 100%
2 SFH, Townhouse,
Condo
Yes Yes 100%
3 SFH, Townhouse,
Condo
Yes Yes 67%
1 ADU SFH & Duplex Yes Yes 100%
2 ADUs SFH & Duplex Yes Yes 100%
To be eligible for full or partial exemption from the payment of Business Tax, the property owner must meet ALL of the following criteria:
1. Lives in the single-family house, townhouse or condominium as his or her principal place of residence; and,
2. Receives a homeowner property tax exemption on their County property assessment under California Revenue and Taxation Code Section 218; and,
3. Has owned and lived in the house, townhouse or condominium as his or her principal place of residence for at least one year immediately preceding the application of this exemption; and,
1 Emergency Ordinance - Proposition 13 passed on 6/6/1978 Edward D. Reiskin, City Administrator
Subject: Owner-Occupied Business Tax Exemption & Possible Changes of Tax Rates on Residential Rental
Date: June 21, 2022 Page 4
Community & Economic Development Committee
June 28, 2022
4. Has a total household income2 from all sources of less than or equal to 150% of the Area Median Income ($149,925 for 2022); and,
5. Has no ownership interest in any other residential rental property in the City of Oakland.
Impact of the current Small Landlord Business Exemption:
Table 4 summarizes the financial impact for each of the first three years following the implementation of the small landlord business tax exemption.
Table 4: Summary of the Current Home Owner-Occupied Exemption
Tax Year No. of
Request
No. of Approved
Exemption
No. of Denied
Exemption
Average Annual
Gross Rent Amount
2020 47 22 25 $21,635 $8,125.17
2021 28 23 5 $23,414 $6,031.65
2022 38 23 15 $19,354 $5,783.40
Total 113 68 45 $21,468 $19,940.22
As a note, the Council’s adoption of the Progressive and Equitable Business Tax Ballot Measure for the November 2022 election on May 26, 2022 does not include changes to the tax rates that affect small landlord businesses under classes M and O.
ANALYSIS AND POLICY ALTERNATIVES
Impact of the Possible Changes to Business Tax Rates for Residential Property Owners:
In response to City Council’s requests, staff developed four different scenarios that would change the tax rate of $13.95 per $1,000 to a new set of tax rates classified as Business and Personal Services (Class E) or Miscellaneous (Class N) under the adopted Progressive and Equitable Business Tax Ballot Measure. The approved ballot measure tax rates for these two classifications are:
Classification Proposal Tax Rates per $1,000 by Bracket (Gross Receipts, mil $) Min
Payment
$0 -
$1M
$1M -
$2.5M
$2.5M -
$20M
$20M -
$50M
Above
$50M
E: Business & Personal Svcs $60 $1.40 $2.10 $2.80 $4.00 $4.50 N: Miscellaneous $60 $1.20 $1.50 $2.40 $3.90 $5.50
The four scenarios analyzed are as follows:
1. Owners with 5 or fewer rental units: the rate would change from $13.95 per $1,000 to a new rate of $1.40 per $1,000 in annual gross receipts (Class E rates).
2. Owners with annual gross receipts of $150,000 or less: the rate would change from $13.95 per $1,000 to a new rate of $1.40 per $1,000 in annual gross receipts (Class E rates).
2 Household income does not include the income of a person renting a room in a single-family house, townhouse or condominium unless the person is a family member.
Edward D. Reiskin, City Administrator
Subject: Owner-Occupied Business Tax Exemption & Possible Changes of Tax Rates on Residential Rental
Date: June 21, 2022 Page 5
Community & Economic Development Committee
June 28, 2022
3. Owners with 3 rental units or fewer AND annual gross receipts of $150,000 or less: the rate would change from $13.95 per $1,000 to a rate of $1.40 per $1,000 in annual gross receipts (Class E rates).
4. Owners with 5 or fewer rental units: the rate would change from $13.95 per $1,000 to a rate of $1.20 per $1,000 in annual gross receipts (Class N rates).
Financial impact of the scenarios:
Under the current tax rate, the four scenarios generate approximately $6.10 – $9.5 million:
Class Change Scenarios No. of Affected
Taxpayers
Current Revenue
(in millions)
Average Annual
Gross Rent
per Taxpayer
Average Payment
per Taxpayer
1 5 or Less Units 15,879 $8.59 $38,778 $541
2 $150,000 GR or Less 16,830 $9.49 $40,421 $564
3 3 or Less Units and $150K
GR or less 13,484 $6.10 $32,429 $452
4 5 or Less Units 15,879 $8.59 $38,778 $541
Under the proposed tax rate, the four scenarios would generate approximately $0.90 - $1.30 million:
Class Change Scenarios No. of Affected
Taxpayers
New Revenue3
(in millions)
Average Annual
Gross Rent
per Taxpayer4
Average Payment
per Taxpayer
1 5 or Less Units 15,879 $1.20 $38,778 $54.29
2 $150,000 GR or Less 16,830 $1.30 $40,421 $56.59
3 3 or Less Units and $150K
GR or less 13,484 $0.90 $32,429 $45.57
4 5 or Less Units 15,879 $1.10 $38,778 $46.53
Table 5 shows that the average annual decrease per landlord would range from $387 to $488 which translates into a decrease in Business Tax revenue ranging from $5.2 million to $8.2 million.
Table 5: Estimated Change in Business Tax Revenue
Scenario 1 Scenario 2 Scenario 3 Scenario 4
≤ 5 Units
to Class E
≤ $150k
to Class E
≤ 3 Units &
>=$150K
to Class E
≤ 5 Units
to Class N
Below Threshold:
Number of Taxpayers 15,879 16,830 13,434 15,879
Number of Rental Units 30,829 47,545 20,613 30,829
Total Gross Receipts ($M) $616.0 $680.1 $437.5 $616.0
Revenue at Current Rate ($M) $8.59 $9.49 $6.10 $8.59
3 Potential Revenues under the proposed rates have been adjusted for inflation 4 The Average Annual Gross Rent is based on the assumption that rents charged by landlords do not change.
Edward D. Reiskin, City Administrator
Subject: Owner-Occupied Business Tax Exemption & Possible Changes of Tax Rates on Residential Rental
Date: June 21, 2022 Page 6
Community & Economic Development Committee
June 28, 2022
Revenue at Proposed Rate ($M) $1.2 $1.3 $0.9 $1.1
Change in BLT Revenue ($M) ($7.4) ($8.2) ($5.2) ($7.5)
Avg Change per Taxpayer ($) ($468) ($488) ($387) ($472) Above Threshold:
Number of Taxpayers 2,508 1,557 4,953 2,508
Number of Rental Units 57,386 40,670 67,602 57,386
Total Gross Receipts ($M) $922.1 $858.1 $1,100.7 $922.1 Revenue at Current Rate ($M) $12.9 $12.0 $15.4 $12.9
Revenue at Proposed Rate ($M) $12.9 $12.0 $15.4 $12.9
Change in BLT Revenue ($M) $0 $0 $0 $0
TOTAL CHANGE ($M) ($7.4) ($8.2) ($5.2) ($7.5)
Staff recommends that City Council keep the current residential tax structure and defer any possible changes until a comprehensive implementation of the current owner-occupied exemption has been fully effectuated. Staff further recommends a provision to the ballot measure that allows City Council to adjust the existing residential tax rate or adopt additional categories of exemptions at a later date without voter approval.
Implementation of Ordinance No. 13579 and Outreach to Affected Property Owners:
The five criteria outlined in the Background section specified that the owner had to meet all the conditions stated under Section 5.04.420 in order to qualify for the exemption. This allowed staff to identify only the property owners who could qualify for the exemption, and subsequently contact them. After performing an analysis of the internal business tax data and running it against the Alameda County property tax data, staff identified 786 property owners who could be eligible for the exemption out of the approximately 30,000 registered rental businesses.
The identification was based on three criteria, and they were:
1. Homeowners had an active business tax account.
2. Mailing address and physical address was associated with the same parcel and;
3. The owner must have received a homeowner’s property tax exemption.
Staff sent eligible property owners direct notices using their email on file (which they have previously identified as their preferred choice of receiving communication) with information on the approved ordinance, and instructions for applying for the exemption. It also included a web link to the relevant Frequently Asked Questions (FAQ) page and information on how to contact the City with additional questions. All property owners that qualify for the exemption are required to recertify on an annual basis to continue receiving the exemption. The existing statue allows homeowners to apply for a refund of taxes paid if they did not receive an exemption notice from the City or have not requested for refund.
Staff acknowledges that the outreach efforts could have been more robust at the outset. The outreach was muted, partially due to the timing in which the outreach was to be accomplished.
The ordinance went into effect on January 21, 2020 and the City transitioned to telecommuting and providing essential services shortly thereafter.
Edward D. Reiskin, City Administrator
Subject: Owner-Occupied Business Tax Exemption & Possible Changes of Tax Rates on Residential Rental
Date: June 21, 2022 Page 7
Community & Economic Development Committee
June 28, 2022
To enhance the initial implementation, staff will carry out additional outreach to further educate property owners who may have not been aware of the exemption. Additional considerations to be taken into account for the next phase of implementation include, notifying eligible property owners in multiple languages by mail and by email in Spanish, Cantonese, and Vietnamese, expanding the notification to all residential taxpayers that could potentially qualify for the exemption including those that use PO Box as a their mailing address and conducting townhall meetings to further educate taxpayers about the exemption.
With the public safety orders being modified, daily in person appointments are now available to the public with a modified working schedule, and staff is available to address additional exemption inquiries.
Based on the foregoing analysis, staff recommends that the City Council not recommend further changes to business license tax rates at this time, but rather provide an opportunity for improved implementation and subsequent analysis of the changes adopted by the City Council in 2019.
FISCAL IMPACT
Under the current small property owner exemption, the City has issued refunds of $19,940.22, and if any of the above-mentioned scenarios were to be approved by the City Council, the City would forego $5.2 million to $8.2 million in Business Tax revenues.
Table 6: Impact of the Current Owner-Occupied Exemption
Tax Year No. of Request No. of Approved
Exemption
No. of Denied
Exemption
Average Annual
Gross Rent Amount
2020 47 22 25 $21,635 $8,125.17
2021 28 23 5 $23,414 $6,031.65
2022 38 23 15 $19,354 $5,783.40
Total 113 68 45 $21,468 $19,940.22
Given that it has been almost three years since staff did the initial outreach, it is likely that there are more property owners who could qualify for the exemption program. The expanded outreach could potentially increase the financial impact by a range of $260,000 to $400,000.
Table 7: Estimated Impact of Scenario 1 through 4
Estimated Impact of Scenarios
Scenario 1 Scenario 2 Scenario 3 Scenario 4
≤ 5 Units
to Class E
≤ $150k
to Class E
≤ 3 Units &
≤ $150K
to Class E
≤ 5 Units
to Class N
Change in BLT Revenue ($M) ($7.4) ($8.2) ($5.2) ($7.5)
Avg Change per Affected Taxpayer ($) ($468) ($488) ($387) ($472) Edward D. Reiskin, City Administrator
Subject: Owner-Occupied Business Tax Exemption & Possible Changes of Tax Rates on Residential Rental
Date: June 21, 2022 Page 8
Community & Economic Development Committee
June 28, 2022
PUBLIC OUTREACH / INTEREST
No outreach was deemed necessary for this informational report beyond the standard Council agenda noticing procedures.
COORDINATION
This report has been coordinated with the Budget Bureau of the Finance Department and Office of the City Attorney.
SUSTAINABLE OPPORTUNITES
Economic: The existing owner-occupied exemption provides financial relief to low income homeowners who provide rentals in their primary residence. The alternative scenarios could extend the financial relief to those property owners who are renting up to five rental units or generate up to $150,000 in total gross receipts.
Environmental: There are no environmental opportunities.
Race & Equity: The existing owner-occupied exemption eliminates or reduces the amount of business tax for low income property owners who are renting up to three rooms or two ADUs in their primary residence.
Edward D. Reiskin, City Administrator
Subject: Owner-Occupied Business Tax Exemption & Possible Changes of Tax Rates on Residential Rental
Date: June 21, 2022 Page 9
Community & Economic Development Committee
June 28, 2022
ACTION REQUESTED OF THE CITY COUNCIL
Staff recommends that the City Council receive this Informational Report regarding 1) the implementation and outreach to property owners and fiscal impacts to the City following the adoption of Ordinance No. 13579 C.M.S that amended the Oakland Municipal Code Section
5.04.420 to fully or partially exempt the required payment of Business Tax for owner-occupied residential rental property; and 2) the potential financial impact from possible changes to the Business Tax rates on residential rental properties.
For questions regarding this report, please contact Rogers Agaba, Acting Revenue & Tax Administrator, (510) 238-7009.
Respectfully submitted,
Erin Roseman
Director of Finance
Finance Department
Prepared by:
Rogers Agaba
Acting Revenue and Tax Administrator
Finance Department