L.A. Looking to Business to Ease Budget Crunch

By HOWARD FINE
Staff Reporter

To close part of a looming budget gap now estimated at $90 million, L.A. city officials are contemplating raising or instituting new fees or taxes, many of them to be paid by businesses.

On the table for discussion are hikes in sewer service charges, real estate transaction taxes, building permit fees, steep hikes in business permit fees administered by the L.A. Police Department, and various inspection fees.

Before deciding what fees to raise, city officials are waiting for Gov. Gray Davis to release details this week of how he intends to close a $35 billion state budget gap.

Also, city officials are waiting for the release later this month of an update on the city's revenue picture. A November report by City Administrative Officer Bill Fujioka showed that the city was facing a projected $90 million shortfall in the 2003-04 budget year.

The shortfall arose out of a combination of overspending and revenues coming in below forecast. On the spending side, for example, the Police Department went $31 million over budget, mostly to hire and train an unexpected increase of new recruits. On the revenue side, sales, business and utility taxes are coming in short of expectations.

"We know we now have a shortfall estimated at $90 million, but we won't really know the full extent of the problem until we see the Governor's budget on Jan. 10," said Deputy Mayor Matt Middlebrook.

After the extent of the state cutbacks can be factored in, city departments will submit their budgets to the mayor in time for the mid-April release of the city budget.

The shortfall comes at an awkward time for city officials just months after the anti-secession effort that focused in part on providing more city services. "In order to even contemplate raising service levels in this austere budget environment, we're going to have to at least look at additional revenue streams," said David Gershwin, spokesman for City Council President Alex Padilla.

What's more, with the recent jump in violent crime, public sentiment has now shifted toward increased police protection. "Public safety and other basic services come first," said City Councilwoman Wendy Greuel.

Costly reputation

City officials acknowledge, however, that any hikes in existing fees or taxes or any new fees imposed on business would increase L.A.'s reputation as one of the nation's costliest places to do business.

The city has been able to get by during the current budget year without tax hikes, the one exception being a raft of permit fee increases for 15 types of businesses including pawnbroker shops, firearms vendors and towing operators for which the L.A. Police Department administers permit programs. The L.A. City Council had approved the fee hikes nearly two years ago, ostensibly to offset increased costs of administering the permits.

But in some cases, the fee increases exceeded 1,000 percent, prompting an outcry from the impacted businesses. As a result, the City Council last month delayed the fee increases for 90 days in order to re-examine the need for such steep raises.

At that same Council meeting, though, the Bureau of Sanitation said it was proposing to Mayor James Hahn a 3 percent hike in the annual sewer service charge levied on all business properties and residences within the city to cover increased maintenance costs. For the average homeowner, that translates into an increase of $7 on a $240 bill. For owners of large commercial buildings or major industrial facilities, the increases would be many times larger.

That, in the eyes of many City Hall observers, is just the beginning of the rate hikes to be considered. Other targets:

- The documentary transfer tax on real estate transactions, which would require a citywide two-thirds vote.

- Building permit fees.

- L.A. Department of Water & Power water rates, (especially with the federal government cutting off much of the region's Colorado River water supply due to the collapse of an agreement to transfer water from Imperial Valley farms).

- A bond measure for added police services, which could be assessed as an increased parcel tax.

Hikes in administrative fees could proliferate, especially as city departments feel more pressure to cut their budgets.

As of last week, the Hahn administration said it was "premature" to consider any such fee hikes.

"It's a nickel and diming process," said Fred Gaines, chairman of the Valley Industry and Commerce Association. "When you increase these fees, it puts that much more strain on businesses and makes L.A. that much less attractive."

Other cities impacted

Other cities across the region are also confronting declining or flat revenues and the prospect of steep cutbacks in state funding. Just last week, Long Beach city officials said they were considering a tax on entertainment-related tickets sold in the city and a parking tax to close an estimated $50 million budget hole in that city. Under state Proposition 218, both of those measures would need two-thirds voter approval.

But L.A.'s cost of doing business is consistently the highest in the region. "L.A. is handicapped when it comes to fees and taxes because it starts out as already the most expensive city," said consultant Larry Kosmont. "Thus, even though other cities will also raise fees and taxes, L.A.'s relative position will not change and it may even worsen."

Kosmont said that as leases within L.A. come up for renewal, companies already are more inclined to look at cheaper nearby locations. Any increases in fees in L.A. will only increase that motivation, he said.

"We don't want to see the city's budget balanced on the backs of businesses," said L.A. Area Chamber of Commerce President and Chief Executive Rusty Hammer. "Before the city goes and increases every fee and tax in the book, the city needs to look at little things it can do to save costs.

The city should also go through a zero-based budgeting process, where each program is weighed on its merits and a decision is made on whether it is necessary at all, Hammer said. "That mindset just doesn't exist right now in the city," he said.

Tax reform pushed

More important, said Hammer and Gaines, is to enact substantial business tax reform.

"The biggest problem by far is the gross receipts tax," Gaines said. "If you didn't have that kind of huge disparity between L.A. and surrounding cities, then raising the sewer service fee 3 percent or a building permit fee 5 percent wouldn't be that big a deal. The gross receipts tax is the big fish here."

Later this month, the city's Office of Finance is expected to select a consultant to evaluate alternatives to the gross receipts tax, a process that is expected to take several months.

Meanwhile, progress on reforming the existing gross receipts tax is moving very slowly. Last August, Hahn and the Business Tax Advisory Committee introduced a package of reforms that included eliminating taxes businesses pay on money passed through to subcontractors and expanding the small business exemption.

"The mayor is very concerned about making sure we create a business-friendly atmosphere," Middlebrook said. "That's why he put such a high priority on reforming the business tax."

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