City Council Agenda Report
Meeting Date: October 20, 2026
From: Brian Saeki, City Administrator
Department: City Administration
Submitted by: Lilia Hernandez, Deputy City Administrator Subject
Business Tax Contribution Study
Recommendation
A. Receive and file a presentation on the findings of the Business Tax Contribution Study; and B. Provide direction to staff regarding desired modifications to the City’s Utility Users Tax, Warehouse Special Parcel Tax, and/or Public Safety Special Parcel Tax, and direct staff to develop applicable tax ballot measures, if any.
Background
The City’s Utility Users Tax (UUT) generates approximately $14.3 million each year, which represents more than 17% of the City’s total revenues, making it the City’s second largest revenue source. The UUT (Measure R) was passed by voters in 2018 and is scheduled to sunset in April 2028. The City’s Warehouse Special Parcel Tax (Warehouse Parcel Tax) generates approximately $16.1 million each year for the construction, improvement and maintenance of streets, bridges and other public rights-of-way, including the acquisition of land and for police and fire protection services. The Warehouse Parcel Tax does not have a sunset. The City’s Public Safety Special Parcel Tax (Safety Parcel Tax) generates approximately $2.5 million each year for City police services and projects, City health services and projects, and for contracted fire protection services and projects. Currently, the Safety Parcel Tax is levied on all parcels of taxable property, excluding square footage that has been apportioned a share of the Warehouse Parcel Tax for the applicable fiscal year. The Safety Parcel Tax is scheduled to sunset in June 2028.
In anticipation of the expiration of the UUT, on October 21, 2025, the City Council received a presentation on the potential of placing a measure on the April 2026 ballot to extend the UUT.
Subsequently, a presentation was also made to the Business and Industry Commission (BIC) and discussed at a Business Breakfast in late 2025. The business community expressed concerns regarding the parity, or lack thereof, in the tax contributions paid by different business sectors within the City, and it was suggested that the City undertake a study to evaluate whether different business types contribute their fair share in taxes for their use of City infrastructure and services.
Tax Contribution Study
The City engaged Kosmont & Associates, Inc. (Kosmont) to conduct a business tax contribution study to determine if tax contributions made by different business types are equitable. Kosmont conducted an analysis of municipal fees and taxes paid by the various types of businesses located in the City including Business License Tax, Warehouse Parcel Tax, Safety Parcel Tax, Sales Tax, UUT, etc., to determine whether adjustments were necessary to ensure parity. The goal for the study was to identify any disparity and determine whether there is a need to restructure the various taxes to balance out the overall tax burden carried by various industries and/or categories of business operations in the City.
The results of Kosmont’s analysis identified disparities in the tax contributions paid by different business types. The study concluded that the per square footage tax contribution of cold storage and higher value manufacturing facilities (large utility users) was nearly double that of the per square footage tax contributions paid by warehouse and hybrid/lower value manufacturing type businesses. The results further indicated that many high value manufacturers may be facing significant tax burdens unrelated to local City service impacts and that a reduction in UUT for high utility usage businesses may be warranted.
Proposed Modifications
Given the study results, staff developed potential options for restructuring the Warehouse Parcel Tax, Safety Parcel Tax, and UUT to achieve greater parity among different business types. The goal of extending and/or restructuring certain taxes is not to increase tax revenue overall, but rather to maintain approximately the same level of tax revenue while addressing identified disparities in the distribution of tax burden among different business sectors. The study results and Options 1 and 2 for restructuring these taxes were shared with the Vernon Chamber of Commerce and at a Business Breakfast on September 10, 2026. Based on feedback received and further examination by City Staff, Option 3 was subsequently developed for consideration.
The three options for restructuring the UUT, Warehouse Parcel Tax, and Public Safety Tax are as follows:
Option 1
• Reduce UUT by 1% to new rate of 5% - extend it for 10 years; and • Increase Warehouse Parcel Tax by $0.06236 to $0.48929; and • No rate increase to Safety Parcel Tax – extend it for 10 years Option 2
• Reduce UUT by 1% to new rate of 5% - extend it for 10 years; and • Increase Warehouse Parcel Tax by $0.04677 to $0.47370; and • Increase Safety Parcel Tax by $0.01 to $0.05066 – extend it for 10 years Option 3
• Reduce UUT by 1% to new rate of 5% - extend it for 10 years; and Increase Safety Parcel Tax by $0.00834 to $0.04915 and apply it to all parcels – extend it for 10 years
Rate basis: The rates shown are based on FY 2026-27 rates. Under the allowable existing Consumer Price Index (CPI) adjustment provision for the City’s Warehouse Parcel Tax and Safety Parcel Tax, rates will be adjusted for CPI in FY 2027-28. Rates in effect when the proposed measures are implemented in FY 2028-29 may therefore differ from those shown. The UUT is not impacted by CPI adjustments.
In evaluating the benefits and feasibility of each of the proposed options, staff assessed the financial impact of each option on a diverse sample of businesses considering the business use, size, and existing tax contributions. Based on the net impact on all business types, Option 3 is preferred, as it provides a balanced approach resulting in equitable increases for those business types whose tax contributions are set to increase while still providing savings to business types that currently carry a heavier tax burden. Additionally, Option 3 is also more practical, as it would require placing only two tax measures on the ballot instead of three. All three options were presented to the Business and Industry Commission for their feedback.
Recommendation from the Business and Industry Commission (BIC) Information regarding the Tax Contribution Study findings and options for restructuring the Warehouse Parcel Tax, Safety Parcel Tax, and UUT to achieve greater parity among different business types, was presented to the BIC at its Special Meeting on October 1, 2026. Members of the BIC discussed the options presented, the desire to achieve parity of tax contributions, and the City’s need for General Fund tax revenues. Ultimately, the BIC determined that Option 3 with an amendment to the sunset period for the UUT be recommended to the City Council as the path forward.
The BIC’s recommendation to the City Council is as follows and will be referred to as Option 3B for ease of reference:
Option 3B
• Reduce the UUT by 1% to a new rate of 5%, for a duration of five (5) years; and • Increase the Safety Parcel Tax by $0.00834 to $0.04915 and apply it to all parcels for a duration of ten (10) years.
Analysis
The City’s current general fund budget is $83 million, funding public safety (police, health, and fire), public works, capital improvements, and other essential services. Combined, the UUT and Safety Parcel Tax account for approximately $16.8 million of general fund (GF) revenue and support a wide range of essential services that keep the City functioning effectively. The $14.3 million in UUT revenue is a vital component, accounting for approximately 17% of the GF budget.
If the UUT and Safety Parcel Tax are not extended, the City would face a significant fiscal gap and budget shortfall in Fiscal Year (FY) 2028-29, making it difficult to provide vital services and programs for residents and businesses. The loss of UUT and Safety Parcel Tax revenue would necessitate significant reductions across-the-board for the GF.
City-wide budget reductions would significantly impair the City’s ability to provide essential public safety services and maintain critical infrastructure. Reduced revenues would adversely affect the timeliness and effectiveness of the City’s emergency response capability and health inspections, thereby diminishing the City’s capacity to safeguard public health on many fronts. Current revenue constraints have already resulted in deferred street maintenance, and any further reductions would exacerbate this situation and prove detrimental to overall infrastructure conditions.
The proposed Option 3 to reduce the UUT by 1% to a new rate of 5%; increase the Safety Parcel Tax by $0.00834 to $0.04915 and apply it to all parcels; and extend both the UUT and Safety Parcel Tax for an additional ten (10) years would ensure that the GF has the revenue needed to provide essential services for the public. This option would not increase the overall tax revenue collected by the City, but would more equitably distribute the tax burden among different business sectors. An earlier sunset for the UUT, such as the five (5) years recommended by the BIC, would not allow sufficient time to realize the fiscal impact of large development projects currently underway. Additional time is needed to collect pertinent data and conduct fiscal analysis and projections that take into account data-driven revenue expectations and budgetary needs. The proposed ten (10) year term would not preclude the City from reviewing the UUT rate at any time during that period. Based on updated revenue data and fiscal conditions, the City Council could consider maintaining or reducing the rate, subject to applicable legal requirements. Therefore, staff recommends that the City Council move forward with Option 3 as proposed with a ten (10) year sunset for both the UUT and Safety Parcel Tax.
Next steps
The proposed extensions and structural changes to the City’s Safety Parcel Tax and UUT can only be accomplished through a vote of the people. Accordingly, should the City Council desire to place any tax measures on the ballot for the April 2027 General Municipal Election, any applicable resolutions and ordinances would be presented to the City Council at the November 17, 2026 Council Meeting.
Strategic Plan Goals
Goal 2: Promote Economic Growth and Revenue Generation
Fiscal Impact
The UUT has an annual impact of approximately $14.3 million to the General Fund. The Public Safety Tax has an annual impact of approximately $2.5 million to the General Fund. Both taxes are set to sunset in 2028.
Attachments
None.