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By HOWARD FINE

Staff Reporter

A new business tax proposal by Mayor Richard Riordan, part of the long-delayed tax equity study, now includes a $20 million tax cut that could mean a 7 percent tax reduction for most businesses.

Previous versions of the plan, in the works for about two years, would have focused more on simplifying the system and involved only minor cuts in business taxes.

The proposal would reduce the number of tax categories from the current 64 to eight and eliminate multiple categories for individual businesses. Officials with the mayor’s office say that the changes along with a possible one-time tax amnesty might prompt more businesses to pay their taxes. That would help lessen the impact of the cuts on the city’s general fund.

Current estimates are that up to 30 percent of all businesses in L.A. pay no business gross receipts tax, or pay less than they should.

“The tax relief will be significant and the simplification will make it a more business-friendly system,” said Rocky Delgadillo, deputy mayor for economic development. “We believe that when it is released, the tax-equity proposal will be viewed so positively by the business community that it could even bring business-people out to vote.”

The tax equity proposal has been tied up for months as the city has tried to collect data and run computer models to figure out how city revenues would be affected by changes in the tax system. Also, previous proposals met with only lukewarm reception from the business community, as they did not contain significant tax cuts.

The delays in preparing the proposal mean it probably will not be ready in time to win City Council approval to put it on the April 1999 ballot. It would most likely appear on the June 1999 runoff ballot, which typically has a lower voter turnout.

The fact that some companies will actually see a tax increase is the reason the measure must be placed on the ballot. Proposition 218, passed in 1996, dictates that any tax increase must be approved by the voters.

Delgadillo would not release details on how big the tax cut would be. However, Beverly Burr, the economic consultant who is running many of the computer models for the proposal, said the city is “playing with about $20 million in tax relief.” If that figure sticks during the next few weeks of fine-tuning, it would represent a 6.7 percent cut in total business tax revenues, which are estimated at about $300 million for the current fiscal year.

Overall, Burr said, the current proposal calls for a drop in the average business gross receipts tax rate from the current $2.52 per $1,000 in receipts to $2.35 per $1,000 in receipts. In the current system, the lowest rate is $1.18 per $1,000 in receipts; the highest is $5.91. In general, professional services firms like lawyers and accountants pay at the high end of the scale, and manufacturers, distributors and construction firms are at the low end.

Not every business in the city will see a tax cut. Under the earlier proposal, anywhere from 300 to 500 companies faced increases of $20,000 or more in the amount of business receipts taxes they would pay, Burr said. Only about five “very large” companies face such significant increases in the current proposal, she said, while perhaps 5 percent to 10 percent of the city’s businesses will face some increase.

Perhaps just as important as the tax cuts is the fact that under the proposal, there would be just one gross receipts tax rate for all types of businesses. The rate would be determined by the Standard Industrial Classification code reported by companies to the Internal Revenue Service, Delgadillo said.

Currently, Burr said, about 20 percent of businesses are taxed at two or more different rates, with some 90 businesses that offer a variety of services in the city paying more than five separate rates.

At a bowling alley, for instance, revenue from bowling fees is taxed at one rate, shoe-rental revenues at another rate, snacks sold out of a machine at still another rate, and food sold at a bar at another rate.

“You’ve got 211,000 businesses in the city, most of which are too small to hire tax preparers to sort through all these different rates,” Burr said. “I would expect compliance to go up if businesses only have to pay one rate and know from the outset exactly what that rate will be.”

The idea of simplifying the business tax structure also seems to have broad appeal from the City Council, which must approve the proposal in order to place it on the ballot.

“I strongly believe that we should reduce the number of tax categories,” said City Councilman Mike Feuer, who sits on the council’s Budget Committee. “It would make it so much easier for business.”

But Feuer said getting a net reduction in business taxes through the Council might be more problematic.

“There will come a point where increased tax collection will not make up a huge shortfall in revenue from lower tax rates,” Feuer said. “I don’t know where that point is, but we need to see some hard data that such a tax cut would have the intended effect of spurring business and not merely reducing revenue to the city.”