Business Groups Say Proposed Tax Changes Fall Short
By HOWARD FINE
More than a year after he took office promising an overhaul of the city's business tax code, L.A. Mayor James Hahn is scheduled this week to release his blueprint for business tax reform.
The proposal is likely to include a trigger mechanism for rebates and a call for reduced business tax categories.
But Hahn's plan, which will be based on recommendations submitted by a business tax reform committee, is unlikely to include the immediate rollback of business taxes and the pruning of rate categories that many L.A. businesses have clamored for.
Los Angeles has the highest business taxes of any city in the region. They are often cited as the reason for moving to adjoining locales.
Upon taking office, Hahn signed two ordinances exempting very small businesses and start-ups from business taxes. At the time, he said those exemptions were just the first step in broader business tax reform.
Hahn's office would not comment last week on details of the business tax reform plan, saying that details were still being finalized. But sources close to the administration expect the proposals to closely parallel the 12 broad recommendations from the Business Tax Advisory Committee.
Hahn vows passage
Last week, at an anti-secession rally, Hahn said he intends to work hard to make sure his proposal passes.
"Mayor Riordan made the mistake of not getting City Council to buy in to his plan," Hahn said. "I intend to work very closely with (Budget and Finance Committee Chair) Nick Pacheco and all the other members of the council to get this plan passed."
In recent months, calls have grown louder for tax relief, especially in the San Fernando Valley, where business taxes have been an issue in the secession debate.
"There needs to be an across-the-board reduction in business taxes now," said Rusty Hammer, president and chief executive of the Los Angeles Area Chamber of Commerce.
But that's not what the business tax committee recommended to Hahn in its report. Rather, the committee made up of private sector appointees named by the mayor and City Council said any tax rollbacks should be conditional on the city bringing in more tax dollars through stepped up enforcement.
"The key here is that any rate rollbacks must be funded separately and not come out of the general fund," said Mel Kohn, the committee's co-chair and a Valley-based accountant. "Our plan has its own funding mechanism built in, and that's crucial."
In the last major attempt at business tax reform, three-and-a-half years ago under then-Mayor Richard Riordan, several City Council members expressed concern that reducing business taxes across the board would "blow a hole" in the city's budget. That was one of the reasons why the Riordan plan collapsed on the City Council floor in 1999.
This time, Kohn said the committee decided to include a minimum amount that must be collected through stepped up enforcement and compliance before business taxes could be reduced. The threshold is necessary, he said, because if only a small amount is collected from scofflaws, there may be better uses for it than cutting taxes at other businesses by $20 or $30 each.
Access to state records
City officials estimate that as much as $60 million a year is being lost as scofflaws elude detection. Last year, state legislation was passed that allows city officials to comb through state income tax records looking for noncompliant businesses.
Ensuring access to state records eliminated a major stumbling block to business tax reform and refocused attention on the long-stalled effort.
Besides the threshold for business tax rebates, the report calls for several reforms:
- Creating contracts with specific businesses for tax rate reductions tied to job creation goals.
- Stopping the arbitrary "dumping" of businesses in new industry classes (like Internet service providers) into the category with the highest business tax rate of $5.91 per $1,000 in gross receipts.
- Reducing the number of firms in the professions rate (which includes everything from gardeners to lawyers, all paying $5.91 per $1,000 in gross receipts) and reassign the companies to other rate groups based on their ability to pay.
- Eliminating multiple filing categories.
- Eliminating "double taxation" in which businesses pay taxes on monies they pass through to contractors.
The committee also called for continued study of alternatives to the current gross receipts system, which has been criticized as unfairly penalizing businesses. Most cities in the region have adopted a per-employee tax on businesses, which is generally lower.
Earlier this year, the Valley Industry and Commerce Association launched a campaign to "Ax the Tax," saying the gross receipts tax needs to be thrown out altogether and an alternative system of taxing businesses set up.
"We're disappointed in this proposal," said VICA chairman Fred Gaines. "It puts alternatives to the gross receipts tax on the back burner, not up front where it belongs."
But Kohn said an overhaul would take years of study and that action is needed now to make the business tax more palatable to business.
Meanwhile, Gaines said VICA had a more immediate concern: making sure the money flowing into a special business tax fund from stepped up enforcement is all accounted for. "This is the money that by city ordinance 25 percent must go to affordable housing and 75 percent to cutting taxes for business," Gaines said. "We want to make sure that the money is not used for other purposes."
Hahn last week reiterated his intention to ensure that all the money coming into this fund is used for affordable housing and for business tax reform.
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