Consultant Warns L.A. Of ‘Tax War’ Crossfire

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Two of the 20 most expensive cities in the nation for business are in Los Angeles County, according to the latest survey by Kosmont Cos. and the Rose Institute of State and Local Government at Claremont McKenna College.

Los Angeles and Santa Monica made the list of costliest.

And local businesses could be facing even higher costs as a “tax war” may break out. Local ballot measures will likely call for more taxes on businesses and a state measure may call for a state tax on services – making everything from hair cuts to lawyer bills more costly.

“It’s going to be the year of the tax war,” said Larry Kosmont, chief executive of L.A. economic development firm Kosmont Cos.

He said some cities in coming months will push for utility taxes on business or increases in hotel bed taxes paid by tourists.

“Anything that’s not a tax paid by residents, who are also voters,” Kosmont said.

Other cities, meanwhile, will lower business license taxes and fees to lure companies that pay more in other taxes, especially sales taxes.

Kosmont pointed to the business tax war between Beverly Hills and Los Angeles over luxury auto dealerships, as reported in the Nov. 21 edition of the Business Journal (headlined “Tax Relief Drives Dealership War”) as a prime example.

“Los Angeles is looking around at neighboring cities and seeing increases in sales taxes in those cities and is deciding it wants a piece of that action,” he said.

Tax elimination

One positive move: Mayor Antonio Villaraigosa and the Los Angeles City Council President Eric Garcetti have said they support a proposal to eliminate the business gross receipts tax. Local business groups have long called for elimination of the tax, which has the highest rates in the region and acts as a deterrent for businesses seeking to locate or expand in the city.

Last month, a panel led by L.A. investment banker Lloyd Greif recommended elimination of the tax. But that proposal has come under fire from city officials who dispute the notion that increases in other revenue sources – such as property and sales taxes – would offset the loss of $425 million a year in business taxes.

Kosmont said that if Los Angeles were to eliminate the gross receipts tax, it would drop to the middle of the pack or even slightly lower among Los Angeles County cities in terms of the cost of doing business.

“It’s that big of a tax on business,” he said.

Kosmont made his comments about the coming tax problems to the Business Journal while presenting the findings of this year’s survey. The study compares tax rates on businesses in hundreds of cities in California and across the nation.

Among the 20 most expensive cities in the country, Los Angeles was No. 14 and Santa Monica was No. 18. Philadelphia, New York, Chicago and San Francisco all placed in the top 10. Three Texas cities – Austin, Abilene and Fort Worth – topped the list of the least expensive cities.

Other high-cost cities for business in the county include Culver City, Beverly Hills, El Segundo, Bell, Huntington Park and Pomona. Agoura Hills and Westlake Village were the cheapest cities for business.

Kosmont praised Villaraigosa’s proposals to eliminate portions of the business tax and consider axing the whole tax.

“In the twilight of his last term, the mayor is making some truly encouraging overtures to business,” Kosmont said. “He commissioned the study on the business tax and the study is done and the verdict is in: The gross receipts tax is a dinosaur that survived too long. Rolling back L.A.’s onerous business tax is a vital step toward restoring business confidence in expanding local investment.”

Kosmont warned of ballot measures or legislative proposals at the state level that could also hit businesses. Earlier this month, a group of wealthy individuals – including L.A. billionaire philanthropist Eli Broad – proposed a $10 billion tax hike for next November’s ballot. The measure would include a new sales tax levy of at least 5 percent on most services.

“We’re a state of small businesses that survive largely on services, so the impact of this would be huge,” Kosmont said.

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