If you read about Rocky Delgadillo’s call to axe the city’s business tax, you may have brushed it off as silly. After all, the business tax is supposed to raise more than $420 million this year, which is about 10 percent of the city’s general-fund budget. Imagine whacking 10 percent off your income and trying to manage your household. Silly.
But upon second look, it’s an inspired proposal.
Delgadillo, the city attorney and former deputy mayor for economic development, makes an argument that rests largely on a simple principle: Give businesses a tax break, and you’ll encourage businesses to stay in L.A., move to L.A., or expand in L.A.
My old economics professor once scrawled this on the chalkboard: “Tax something more; you get less of it. Tax something less; you get more.”
Delgadillo is arguing that Los Angeles has taxed its businesses so heavily that L.A. is getting less of it; businesses are migrating out of the city. By giving businesses a tax break, L.A. would give businesses an incentive to stay in or move to L.A.
Delgadillo made his tax-cut pitch at the Los Angeles Area Chamber of Commerce’s annual city lobbying day a couple weeks ago, and the Business Journal asked him to expand on the topic in an op-ed piece that appears on the opposite page.
Fine, you might say, but what about the lost revenue to the city?
Well, Delgadillo argues, a tax cut that’s truly deep may well encourage businesses to such a degree that the city would enjoy a bump in tax revenue because more businesses and more income earners would pay other taxes.
While that’s counterintuitive, it’s not silly, either. It’s been demonstrated many times.
In an article by Arthur B. Laffer, the father of the so-called Laffer Curve, the top marginal personal income tax rates exceeded 90 percent for years following World War II. President Kennedy cut the top rate to 70 percent. In the four years prior to 1965, when the tax cuts took full effect, federal income tax revenue increased at an average annual rate of 2.1 percent, adjusted for inflation. After the tax cut, they increased by 8.6 percent annually.
Of course, President Reagan did the same; he cut tax rates in the 1980s and tax revenues took off afterwards.
Another example: Six states, including Texas and Nevada, have no personal income tax. As a result, they attract plenty of businesses. All those businesses and all those people pay plenty of other taxes.
Granted, the examples from Laffer deal with personal income taxes while Delgadillo is talking about business taxes. While the types of taxes are different, the principle is the same. Tax something less, you get more of it.
One issue with Delgadillo’s proposal is the trickiness of getting from here to there. The city could eliminate the tax today, but it may take years before business activity increased to where overall taxes bumped up enough to offset the 10 percent loss from the city’s general-fund budget.
But there again, Delgadillo has a simple and sound argument: Phase it in. A little cut here, a little there, and pretty soon you’re done.
Delgadillo’s proposal is serious, not silly. The only real issue is whether the city will accept the counsel of its city attorney and act on it.
Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].
