TAXES—L.A. Readies For New Run At Tax Cuts

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Stymied in their previous attempts to reform the city of L.A.’s Byzantine business tax code, city officials and a private-sector advisory task force are set to unveil a new set of proposals this week.

The proposals call for increased funding for improved collection of business taxes, the elimination of double taxation of companies that contract out work, and a new study to see if overall business tax rates can be simplified and reduced.

“We’re trying to create a system that is simple, fair and easy to understand for the business community,” said Rocky Delgadillo, deputy mayor for economic development.

Delgadillo, along with Councilman Mike Feuer and Councilwoman Laura Chick, has been working closely with the Business Tax Advisory Committee, a private-sector group composed of mayoral and City Council appointees to come up with this new set of proposals. The goal is to get City Council approval before Feuer, Chick and Mayor Richard Riordan are termed out of office in June.

But even before the ink is dry, the same concerns that sank previous attempts may haunt this one: namely a lack of offsetting revenues and the inability to track down scofflaws.

“I think it’s going to be a revenue issue with the City Council,” said Jerry Jeffe, legislative analyst with the Los Angeles Area Chamber of Commerce. “The key is to convince council members that the benefits of additional businesses paying their taxes because of a simpler system and beefed up enforcement will offset the cost.”

It was primarily the concern of losing revenues that caused the City Council to balk at passing a business tax package in March 1999. That package, developed primarily by Riordan and his staff, would have taken the city’s 64 business tax categories, cut them down to eight and assigned every business to a single tax category instead of the multiple categories many of them now face.

Most of the businesses would then have received a tax cut, which would have cost the city an estimated $27 million a year in revenues. At the time, Riordan said those losses would be more than offset by additional businesses paying their taxes, but the council did not buy that promise.

In the current proposal, the rate simplification and rate cuts have been put off, pending further study. Instead, a major focus is on eliminating so-called “double taxation” of companies. Currently, companies that merely pass on revenues to contractors get taxed on those revenues. At the same time, the contractors themselves pay taxes on those same revenues, meaning the same dollars get taxed twice at two different points in the chain.

An even greater problem for major companies is the taxation of monetary transfers between units of a corporation.

“This is a huge issue for large companies organized in multi-subsidiary fashion,” said Jack Walker, a partner in the downtown law firm of Latham & Watkins and co-chair of the BTAC. “It’s means millions of dollars for these companies. Often, when they find out, they find it is cheaper to move the subsidiary out of the city than pay the taxes. So the city loses jobs.”

But eliminating these tax revenues may prove even more difficult this time around. That’s because of the revelations of police corruption coming out of the Los Angeles Police Department’s Rampart Division. City officials estimate that it will cost more than $100 million to settle claims arising out of the scandal; last week alone the council approved a single $15 million settlement.

With the council having to set aside at least $30 million a year of general fund revenues for Rampart payments, many council members have said they simply can’t afford to forego millions of dollars in business tax revenues from rate cuts.

However, beefing up the city’s tax collection and enforcement system has proven an easier sell. Last year, the council allocated $4 million toward a new computer system to track down the estimated one-third of L.A. businesses that don’t pay their taxes. This year, the chamber and BTAC are pushing for the council to approve another $6 million for the new computers, arguing that the investment will more than pay for itself as the city pulls in more companies that pay their business taxes.

“The current tax collection system is terribly run within the city,” said Walker of Latham & Watkins. “You feel like an idiot when you pay the tax because you know that one-third of your fellow business owners don’t pay it at all. That’s why we need these new computers.”

The other part of the enforcement strategy has hinged upon getting state approval to access state income tax records to track down scofflaws.

Despite having failed in each of the last three legislative sessions to get such approval, Walker and city officials are prepared to try again. State Assemblyman Gil Cedillo, D-East Los Angeles, who carried the bill this last session, has promised to reintroduce it in January.

“Our goal is to get this bill passed by June,” Walker said.

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