Oakland's Business-Tax Dragnet

This week, I received a letter from the city of Oakland indicating that I had failed to register the business I apparently run out of my house. The letter claimed I owed the city more than $5,000 in back-taxes.

I've read about these shakedowns in the past, and given the city's well-publicized revenue shortfall, I'm not surprised they're up the their tricks again.

So, on Tuesday, I dutifully collected together my past 3 years of federal tax returns, drove downtown and took a number at the city's business tax office.

After an hour of waiting, I spoke with a very helpful lady who indicated that I did not, in fact, owe anything. When queried about the matter of the $5,000, she replied that sending out letters with large dollar amounts is "the only way we can get people to come in."

I still have no idea how I was selected to receive this letter. But, I did take this chance to educate myself about Oakland's business tax system.

Like most of the policies of Oakland's city government, the business tax appears designed to scare off legitimate businesses from locating in the city. As you can see from the tax table, the city specifically targets what they call "Professional/Semi-Professional" businesses, including lawyers, accountants, etc.

Importantly, the 0.36% tax rate charged to these companies is based on gross receipts, not profit. So, for a business that has a profit margin of 25%, that's effectively a business income tax of more than 1%.

Back in 2001, the city received an analysis (pdf) indicating that its business tax is dramatically higher than those of surrounding cities. Shockingly, our tax on professional services business is 20% higher than that in San Francisco. Emeryville scores better in every single area -- a fact which probably helps explain their relative success at attracting business.

It's always surprising to me how hard the city of Oakland works to scare off businesses, and I'm always surprised when I go downtown that I see as many companies there as I do.

I came across another interesting facet of this story in my evening of worry before I cleared the matter up. I took a look at the relevant section of the Oakland municipal code.

What I found is a definition of "business" which is almost comically vague: "any activity, enterprise, profession, trade or undertaking of any nature conducted or engaged in, with the object of gain, benefit or advantage, whether direct or indirect, to the taxpayer or to another or others...."

So, basically, the city can construe anything you do as a business activity and tax you on it.

The code's definition of "gross receipts" is also extremely liberal. I won't quote it here, as it's pretty long. But suffice it to say that I'm pretty sure the city could find a way to construe almost any financial activity by a citizen as a "business" and then tax whatever money changes hands at a rate of up to 0.36%.

Someone needs to explain to the city that economic development is a competitive situation, and it depends strongly on such factors as a city's climate toward business. Setting business taxes at the highest levels in the region will not attract businesses to Oakland, no matter how much haranguing our city leaders do.