By HOWARD FINE
Mayor Richard Riordan's plan to cut and simplify L.A. business taxes, hailed by business leaders when it was announced last month, is suddenly in trouble.
Several City Council members are challenging the plan, which could result in delays sufficient to kill it. The proposal must be approved by March 5 to make it onto the June ballot. Otherwise, major business tax reform is dead until 2001.
That, in turn, could prompt businesses to leave or not come to Los Angeles. That very prospect is what caused the issue to gain momentum three years ago when five health maintenance organizations threatened to leave the city.
Among the concerns by some council members are whether the $23 million in reduced tax revenues could be offset by stepped-up collections, as Riordan asserts. They also contend that Riordan did not adequately consider other options that would involve smaller tax cuts.
"I really have to question how realistic these additional income projections are," said Councilwoman Rita Walters. "My concern is that the additional income will not materialize. If that happens, we could be falling off a cliff. We already face a $50 million deficit in our budget, and then you add to that a $23 million tax cut. If that is the case, then we ought not to do this."
Walters said she is waiting for further assurances from the Mayor's Office, Chief Administrative Officer Keith Comrie and Chief Legislative Analyst Ron Deaton before making up her mind on whether to support the proposal.
While many officials still believe the plan will pass in some form, it faces a tight timetable. Among other things, City Attorney Rick Tuttle would need at least a week or two to draft an ordinance that could withstand legal challenges. The ordinance would then have to go through a first and second reading before the council, taking at least another week. Only after the second reading could it be placed on the ballot.
"We're now past the 11th hour to move on tax reform," said Michael Gagan, a lobbyist with Los Angeles-based Rose & Kindel, who represented the five HMOs in their business tax negotiations with the city last year. "We're approaching midnight. If it doesn't get approved in the next six weeks, it's wait for another two years. And, given the level of concern, it's quite conceivable that the council could decide to ask for further study and have city officials report back in three or six months."
The plan's proponents including Riordan, Councilman Richard Alatorre and members of several major business associations say the concerns expressed by the council can be answered quickly and that the proposal should be approved with time to spare.
"I think they are going to try to make a big deal out of this proposal, but we'll get it through," said Alatorre. He chairs the ad hoc budget committee that is considering the proposal, and he has traditionally wielded considerable clout on budget issues.
However, Alatorre, beset with legal and personal problems, announced Jan. 15 that he is leaving office on June 30, before his term expires. His lame-duck status could limit his ability to shepherd the plan through.
A key test will come Tuesday, Jan. 26, when the five-member budget committee is set to take up the Riordan proposal once again. While that committee has no power to kill the plan, it will pass along a recommendation to the full council.
At the committee's first hearing on the proposal, held Jan. 12, council members Jackie Goldberg, Rita Walters and Mike Feuer all expressed skepticism about the city's ability to offset the $23 million tax cut with stepped-up collections.
Goldberg's objection is more philosophical. She questions the need to give an across-the-board tax cut to businesses in the first place.
"Look, everybody agrees that the current system makes absolutely no sense. There are way too many categories and it's way too complicated," Goldberg said. "But why should we go and give business a $23 million tax cut across the board? I believe that any tax breaks we give to business should be targeted to specific industries we want to attract, and have specific goals in mind, like the creation of a certain number of jobs."
At the Jan. 12 hearing, Goldberg asked Deaton to analyze the Riordan-Alatorre plan and compare it to four alternatives that were developed by Milken Institute consultant Beverly Burr last year, at the request of a task force on business tax reform. (Burr also developed the numbers behind the Riordan-Alatorre plan.) All four alternatives would be less generous, on average, to existing businesses than the current system. Three of the four would actually result in net tax increases ranging from 0.5 percent to 2 percent.
"The council had voted to require the Mayor's Office to come up with more than one scenario, to stress revenue neutrality and at my request to have at least one scenario where tax rates increase in proportion to the revenues," Goldberg said. "Mayor Riordan and his team ignored these scenarios in favor of its own proposal."
Riordan's deputy mayor for economic development, Rocky Delgadillo, said the alternatives developed by Burr were considered several months ago by a working group.
Delgadillo also addressed council members' concerns about the ability of the city to collect $23.7 million in revenues to offset the tax rate cuts.
"We passed those numbers by the CLA, the CAO, the City Clerk and our consultant Arthur Andersen. These are very conservative estimates. We actually think we will generate more than enough to offset the relief we are offering," he said.
Proponents say that winning voter approval of any tax reform measure will require active support from the business community. And business is not prepared to come on board without the prospect of significant tax relief. That is why, they say, the other alternatives were put aside in favor of one offering relief.
"All of those other alternatives have at least as many businesses facing tax increases as those facing decreases," one supporter said. "There's no way business would support something like that."
Indeed, business supporters of the Riordan plan say tax relief is essential to prevent more businesses from fleeing L.A. for lower-cost cities like Calabasas and Burbank.
"Los Angeles is a very expensive place to do business," said Carol Schatz, president of the Central City Association. "We have to address this. Otherwise, business will continue to vote with its feet and move into other neighboring cities with lower business tax rates. We simply cannot afford to lose any more businesses."
Goldberg countered that she doubts the city's business tax has been the reason many businesses moved.
"Our taxes are not that high, especially when you factor in property taxes," Goldberg said. "If someone can show me proof that a particular industry that we want to keep and grow here is leaving the city, then I'd be willing to consider a tax break for that industry. That is precisely what I did when I backed reducing the business tax for the multimedia industry two years ago."
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