L.A. Mayor Richard Riordan's long-awaited plan to reform the city's business tax code, scheduled to be announced this week, calls for a 9 percent cut in the gross receipts tax and a one-year tax exemption for start-up businesses, according to City Hall insiders and others who have seen the plan.
It also cuts the number of tax categories from the current 64 down to eight.
"This proposal appears to be going in the right direction," said Larry Kosmont, an L.A.-based municipal tax consultant. "Any tax simplification will benefit L.A., which suffers a significant disadvantage just purely due to its complicated business tax code."
The proposal marks a significant shift from Riordan's initial promise to ensure that any business-tax plan be revenue neutral. The new plan would reduce the city's annual tax revenues by an estimated $27 million.
To offset that loss, the proposal calls for increased enforcement measures to improve the business-tax collection rate. Current estimates are that up to 30 percent of all businesses in L.A. either do not pay any city business tax or pay less than they should.
But Riordan and other tax-reform advocates hope that by reducing the number of tax categories and assessing every business at a single rate, more of them would pay up.
Currently, about 20 percent of all businesses in the city are taxed at two different rates or more. Some businesses, such as bowling alleys, are assessed at five or six different rates one rate for bowling fees, another for rental shoes, another for food, etc.
Riordan's plan also tries to address complaints from local businesses that city taxes are too high, especially when compared with those of surrounding regions, many of which have no gross receipts tax at all.
With the 64 existing tax rates being pared down to eight, some businesses would actually be bumped into a higher tax rate. But the overall effect would be a 9 percent reduction in gross receipts taxes. The highest tax rate would be reduced from $5.91 per $1,000 in gross receipts to $5.32.
The plan also would exempt all businesses in their first year of operation, as well as any company with less than $5,000 in annual gross receipts.
"If this is indeed the case, any amnesty that is provided to small or start-up businesses is a big plus to the business community," Kosmont said.
Riordan's proposal faces several hurdles before it could take effect. It must gain approval from the City Council, which will likely want assurances that increased collections would offset the estimated $27 million tax loss.
Then, because some companies would face tax increases, the plan would need to be put before voters, as required by Proposition 218. Getting council approval in time to qualify the plan for the April ballot is virtually impossible. Thus, if the proposal were to make it on the ballot at all next year, it would have to be in June, along with measures to reform the city's charter
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