L.A. Mayor Richard Riordan’s four-year effort to streamline the city’s business tax code and reduce taxes for most L.A. firms is dead in the water at least for the present.
The effort suffered a major blow when a state bill that would have allowed the city to finance the tax cuts died in the frenzied final minutes of the recently concluded legislative session in Sacramento.
The bill would have allowed the city to use state income tax files to go after business tax scofflaws and collect up to $60 million in unpaid taxes owed to the city. Those funds, in turn, would have been used to offset across-the-board tax cuts for tens of thousands of law-abiding businesses.
Without the additional funds, there is now little chance that the City Council will approve Riordan’s plan to simplify the city’s Byzantine business tax system and reduce taxes before he leaves office next June.
L.A. businesses have long complained that the city is out of step with simpler, less-costly business taxes in surrounding cities and is losing companies as a result. Mayor Riordan had made business tax reform one of the key goals of his second term.
Although there is talk of reintroducing the bill next year, City Hall officials concede developments in Sacramento will likely result in a more modest tax reform package.
Riordan was not available for comment. But Rocky Delgadillo, deputy mayor for economic development, said the push for reforms will continue.
“We will do our best to make sure the revenues are there for the tax cuts by improving our own ability to collect revenues,” he said. “That might mean using lists from the (L.A.) Department of Water & Power or internally generated lists to track down businesses that aren’t paying their taxes.”
One reform option being explored would allow businesses that now pay multiple tax rates to choose a single, lower tax rate. “The cost of this is minor compared to the original plan,” Delgadillo said.
City Councilman Mike Feuer, who chairs the council’s budget and finance committee, said he hopes to enact business tax reform proposals that an advisory committee of local business leaders is expected to put forth by year end. Feuer said he hopes to see those reforms enacted before he and Riordan leave office next June.
“Simplifying the tax code is the key here,” Feuer said. “If we can adopt some of these reform proposals before next June, that will continue the reform momentum for new council members.”
Worried about revenue
Members of the City Council have balked in the past at approving tax cuts proposed as part of the Riordan plan, for fear of losing revenues. And now that the city faces tens of millions of dollars in potential liability payments stemming from the Los Angeles Police Department’s Rampart scandal, such approval is even less likely.
Riordan first unveiled his business tax reform plan in December 1998. The revenue-neutral plan would have taken the current 64 business tax categories and reduced them to eight, while cutting taxes for two-thirds of the city’s businesses. Because some firms would have seen tax increases to offset the cuts, the plan would have had to be approved by voters.
But before the June 1999 ballot deadline, the plan crumbled in the City Council. The council ordered a new plan to be drawn up that would not impose any tax increases on local businesses. (Two small reform measures did pass: one exempting start-up firms from business taxes for the first year and the other exempting businesses with less than $5,000 in annual revenue.)
But it soon became clear that without the tax increases in the original Riordan plan, further reforms would have cost the city at least $25 million a year in revenues, if not more. That’s when city officials turned to Sacramento in hopes of securing permission to use state Franchise Tax Board data to go after business tax scofflaws. Collecting unpaid taxes would offset the costs of system reform, city officials concluded.
Despite intense negotiations that overcame much of the opposition to the legislation, AB 1992 sponsored by Assemblyman Gil Cedillo, D-Los Angeles, came up two votes short in the state Assembly just minutes before the midnight Aug. 31 adjournment deadline. The final vote was 39 to 21, with 41 votes needed for passage. The bill had cleared the state Senate earlier in the day.
“We just flat ran out of time,” Cedillo said, noting he had only about 10 minutes to try to lobby dozens of his colleagues once the bill came up for consideration. “Given just a few more minutes, we probably could have lined up the additional one or two votes for the bill.”
Lots of opposition
L.A. City Clerk Mike Carey has estimated that up to $60 million has been lost each year due to thousands of business owners failing to pay their business taxes. Some may have been put off by the incredibly complex system. For example, a single bowling alley must calculate its local taxes using four different brackets. Others firms simply chose to ignore the law because the city has had limited ability to enforce it.
The effort to gain access to state tax data has also had its share of trouble. First, the Writers Guild opposed the move, fearing that its members would be targeted by the city. Earlier this year, a compromise was worked out, with the Writers Guild removing its opposition and the bill clearing the state Assembly.
But it hit another snag in the Senate. Because the language of Cedillo’s bill was tailored to L.A., other cities saw it as an L.A. money grab and the powerful League of California Cities opposed the measure on grounds that it was unfair. After intense negotiations, the language was broadened to include all cities and the league dropped its opposition.
But since the bill passed by the Senate was substantially revised, it had to go back to the Assembly amid lingering concerns, including even some concern about privacy and the potential for misuse of the state data. And with some of those concerns still unresolved as the legislative session came to an end, the bill failed to pass.
