When Los Angeles City Council President Eric Garcetti said he wanted to offer tax credits for companies that make new hires, Mark Van Wye almost salivated. He co-owns a dog-training franchise operation in Hollywood and Culver City and wants to expand.
“The tax credits would help us get our new franchise outlets up and running with new jobs that much sooner,” Van Wye said.
But Van Wye and his business, called Zoom Room, are still waiting for the tax credits, and it looks like they won’t be as generous as planned.
When Garcetti proposed the tax credit plan in June, he wanted it to be up and running by now, and it was supposed to reduce a company’s business tax bill by up to $5,000 for each additional hire of a city resident.
But the plan has been pushed back a few months. The City Attorney’s Office has legal concerns over the local hiring provision. Also, a city panel has proposed smaller tax credits, topping out at $1,000 per employee hired. And any question of waiving taxes falls under the shadow of the city’s projected budget deficit of $350 million for the next fiscal year, which starts July 1.
In order to get hiring incentives passed amid these concerns, it was decided to fold them into a bigger proposal for business tax reform. In addition to the smaller tax credits for hiring, the new package includes tax breaks for big companies that move their headquarters to Los Angeles and reductions in the highest business tax rates. The omnibus plan could go to the City Council in March or April.
The new plan was crafted from recommendations of the Business Tax Advisory Committee, which is made up of business people and tax experts appointed by Mayor Antonio Villaraigosa and the council. The competing proposals on hiring credits will be worked out before the package comes to the council.
But Garcetti’s office is pushing for quick action on the hiring credits.
“The hiring tax credit will create more jobs in Los Angeles and those new hires will go out and spend more money at local stores and restaurants, which in turn will further boost the local economy and help the city budget,” said Sarah Dusseault, Garcetti’s policy director.
A key decision will be at what level to set the tax credit. Budget hawks are concerned that tax credits approaching $5,000 for each employee hired would only exacerbate the budget deficit. But business leaders fear that a tax credit in the range of $500 to $1,000 would be too small to prompt companies to hire additional employees.
“I’m skeptical that a tax credit of $500 will make a difference on whether a company hires someone,” said Leron Gubler, chief executive of the Hollywood Chamber of Commerce. “When you look at all the costs of bringing on a new employee, $500 or even $1,000 is really a marginal amount.”
Finding right level
And if the tax break isn’t big enough, it won’t be effective, said Gary Toebben, chief executive of the Los Angeles Area Chamber of Commerce.
“We need to find the right level that would encourage companies to pull the trigger and hire folks,” Toebben said.
Van Wye acknowledged that his decision to hire depends more on market conditions than a city tax credit.
“We aren’t going to manufacture a new position just to take advantage of a tax credit, no matter how high that tax credit is,” he said.
However, once the decision to hire has been made, Van Wye said the tax credit could speed up the process. That’s what he’s hoping will happen with his planned expansion in the southern San Fernando Valley, which he said would likely lead to the hiring of about four people. The company currently has a total of 18 employees at its three franchise locations, including one that recently opened in Austin, Texas.
When Garcetti proposed the city hiring tax credit, it was intended to complement federal and state hiring tax credits. The federal tax credit was in the form of a Social Security payroll tax exemption of up to $7,000 for each employee hired who had been out of work for at least 60 days. But that federal program expired last month as a proposed extension failed to make the tax cut compromise passed by Congress.
Meanwhile, in his drive to reduce the state budget deficit, Gov. Jerry Brown is reportedly proposing to kill a program that gives tax credits of up to $37,000 for each employee hired by a company in an enterprise zone. Los Angeles has two enterprise zones and part of a third. Much of the city does not have any enterprise zones.
If the state enterprise zone program is eliminated, then the city’s proposed hiring tax credit would be the only government incentive for hiring. In order to be effective, observers said, the tax break would have to be more generous.
Toebben said the tax credit would encourage expanding companies to hire L.A. residents as opposed to people who live in nearby cities.
When he introduced the proposal, Garcetti noted that L.A.’s unemployment rate was higher than surrounding cities and the Los Angeles County average. In November, the city’s unemployment rate was 14.3 percent; the countywide average was 12.9 percent.
After Garcetti’s proposal won council backing, Los Angeles City Attorney Carmen Trutanich raised some concern that the local hire provision might conflict with federal law; his office is studying that issue, which is one reason why the proposal has been delayed.
Also of concern is how the city can confirm that the jobs are new ones, not replacements of layoffs. In addition, questions remain about how the city would track hiring to make sure the new jobs go to workers who live in Los Angeles city limits. Those questions arose amid reports that companies got tax credits under the state enterprise zone program even though they did not hire local workers.
Garcetti’s policy director, Dusseault, said that city administrators will look at other cities, including Philadelphia and Cincinnati, which have tracked private-sector employees as part of their hiring tax credit programs.
Business leaders said that they hope these problems can be addressed quickly so that the hiring tax credit program can quickly go into effect.
“As long as they keep this program simple, this could really help small companies as they decide to hire people,” said Mel Kohn, a partner with the Encino accounting firm Kirsch Kohn & Bridge LLP and a board member of the Valley Industry and Commerce Association.
