Tax Windfall for L.A. Businesses Fails to Materialize

Staff Reporter

Hopes have dimmed for an across-the-board tax cut for L.A. businesses funded by a state law that makes it easier to track down tax scofflaws because funds being collected are lower than earlier projected.

City officials last week said that the new law is likely to bring in between $3 million and $9 million during its first year, nowhere near enough to offset a substantial tax cut for the 100,000-plus businesses.

Instead, L.A. Mayor James Hahn has proposed tax cuts for a select number of businesses in "targeted" growth industries to be identified later. He ruled out using general fund dollars or other funds to offset a tax cut.

After intense lobbying by the city, the state legislation passed last year allowing cities access to state income tax files. They can then compare the state's database with their own and track down businesses that aren't paying local business taxes.

Eagerly anticipating between $30 million and $60 million in new funds, the L.A. City Council last year ordered that 25 percent of those dollars go to the city's Affordable Housing Trust Fund, while the remaining 75 percent could be used for business tax reform in the highest tax city for businesses in Southern California.

But it appears that the promise of an across-the-board tax cut was oversold.

As of last week, city officials received the first batch of data from the state Franchise Tax Board and, according to city Finance Director Antoinette Christovale, there may not be as many scofflaw businesses as once believed.

As a result, the city has revised sharply downward its estimate of how much money it expects to take in. Instead of the $30 million to $60 million range first provided by the administration of former Mayor Richard Riordan, Christovale said the city is looking to collect up to $3 million from the first batch. A second, larger batch of data is expected on or around Jan. 1, which could net another $6 million.

After the first year or two, additional city revenues from AB 63 are expected to tail off as fewer businesses are left to discover, according to John Barrett, spokesman for the state Franchise Tax Board. That could be partially offset by what Barrett termed a deterrent effect: as more businesses learn they are likely to be tracked down, they may pay up on their own.

"It's easy to say 'Let's give a 5 percent tax cut for everyone,' but until we have some experience with how much additional revenue we bring in with AB 63, it would be irresponsible to promise such a tax cut," Hahn said last week.

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