Reduced Business Tax Rates Will Create Jobs, Enterprise

#21 BUSINESS TAX CUTS

The city of L.A.’s business tax is the most costly and complex of any city in the region.

With many Los Angeles businesses being taxed at nearly $6,000 for every million dollars in revenue, the gross receipts tax consistently ranks as the highest in Southern California in Kosmont Associates’ annual Cost of Doing Business survey. That has prompted scores of businesses to move across city lines into communities such as Burbank and Calabasas that have lower business taxes.

What’s more, with 64 separate tax categories that require several businesses to pay in multiple categories, it’s widely considered the most convoluted business tax in the state. Many companies find it so confusing that they simply don’t pay the tax; estimates of non-compliance have run as high as 25 percent.

With the backing of the business community, former L.A. Mayor Richard Riordan first sought to reform the system 10 years ago, but he faced a liberal City Council reluctant to lighten the load on business. Also, in order to reduce the tax categories to eight from 64, Riordan’s plan involved raising taxes for some industries, which struck many on the Council as inherently unfair. It also would have had to garner two-thirds support from L.A. voters. Riordan’s proposal imploded in the Council in March 1999.

When he took office, current L.A. Mayor James Hahn pledged to continue the fight. Within weeks he guided through exemptions for small businesses and other limited reductions. But he and the Council stopped short of broader business tax reforms until they secured passage of a bill in the state Legislature that allowed the city to search state income taxes for scofflaws. The city could then use revenues from those scofflaws to offset the revenue hit of reform. After three years of effort, the Legislature passed the law in 2002.

Then came multimillion-dollar budget deficits, which prompted Hahn to put broad business tax reform on hold. This, despite a campaign by the Valley Industry and Commerce Association to “ax the tax,” and the election of councilmembers who have made business tax reform a priority.

This year, several proposals have come forward from other quarters.

First was a long-awaited consultant study with a radical new plan for business tax reform combining reductions in the gross receipts tax with another tax based on the space a company uses. Those results were widely panned as unnecessarily burdensome and considered dead on arrival.

Meanwhile, a special panel formed to study the business tax issue called for a phased-in reduction of business taxes of 3 percent per year over five years starting in 2006. It would also cut the tax rate categories to five from the 64. Businesses with gross receipts of less than $50,000 would pay a flat fee of $147 per year.

Finally, City Councilmembers Wendy Greuel and Eric Garcetti came out with their own plan, similar to that of the special panel. The only major difference: It has deeper cuts of 5 percent a year, for a total reduction of 25 percent over five years.

The Greuel-Garcetti plan could offer the best course for real savings and simplification. Its 5 percent-per-year cut is substantial enough to send a signal to local businesses that L.A. is serious about keeping them here. Phasing the plan in over five years, starting in 2006, should alleviate concerns about dramatic budget hits, and streamlining the categories to five from 64 should eliminate much of the current confusion.

The flat fee for small businesses would likely be superceded by a proposal Hahn, Garcetti and Greuel unveiled last week to exempt companies with less than $100,000 in revenues from paying the business tax.

“In the 11 years since this business tax issue first came to the table, this is the best and most realistic proposal I’ve seen put forward,” said Larry Kosmont, president of Kosmont Associates. “If this passes, L.A. would still be one of the more costly places to do business. But I believe the gap would be narrowed enough so that companies won’t be tempted to relocate in neighboring cities.”

The City Council last month voted to restore a business tax reform fund that Hahn had zeroed out. That fund derived from dollars collected from business tax scofflaws stands at $11 million for the 2004-05 fiscal year. By the time the Greuel-Garcetti proposal kicks in, the fund is slated to grow to nearly $20 million, nearly the same amount of business tax revenues projected to be lost in the first year of the Greuel-Garcetti proposal.

BUSINESS TAX CUTS

Proposal: Cutting L.A.’s business tax 25 percent over five years and reducing the number of tax rate categories to five from the current 64. Needs to pass by the end of this year to send a message to the business community and to

prevent companies from fleeing to

surrounding cities.

Obstacles: Reluctance of city officials to give up a sizeable portion of a

lucrative revenue stream

Cost: Depending on exact details of proposal, up to $20 million a year in foregone city revenues for each of the next several years

Time Frame: Passage by end of this year; with reform kicking in over five years starting in 2006