L.A.'s much-touted business tax overhaul approved by the City Council last fall will have only a negligible effect on the already high cost of doing business in the city, according to a study being released this week.
What's more, despite their improved financial condition, cities throughout Los Angeles County have continued to tack on new taxes on business, especially easy-to-pass ones like hotel bed taxes and utility taxes.
These and other findings are contained in a study on business costs prepared by Kosmont Cos., an L.A.-based economic development consulting firm, and the Rose Institute of State and Local Government at Claremont McKenna College. The annual study compares various taxes levied on business in 368 cities nationwide, including dozens of cities in L.A. County. It is widely used as a benchmarking tool by companies seeking to locate new or consolidated facilities.
The study only looks at taxes; it does not consider other major business costs such as workers' compensation premiums or facility leases.
As has been the case for the last decade, Los Angeles is the most expensive city for business in L.A. County and second most expensive in the state behind San Francisco. Its business tax is 5.5 times the national average.
But despite frequent complaints about Los Angeles being inhospitable to business, it ranks only 16th among the major cities surveyed behind Philadelphia, New York, San Francisco, Minneapolis and Nashville, Tenn. Many of the more expensive cities are on the East Coast and have older infrastructure that needs more maintenance; those cities have long had higher property taxes.
Nonetheless, city officials have cited previous Kosmont surveys in making their argument that L.A. needed to pass business tax reform in order to make the city a more attractive place to do business. After 11 years of effort, the council passed a new system that will lower rates by 15 percent over five years, starting next year.
If the 15 percent reduction were fully factored in, L.A. would drop one spot to the 17th most expensive city in the nation. "It's a cosmetic change," said Larry Kosmont, chief executive and president of Kosmont Cos. "In essence, we went through 11 years of nothing. The reduction in the business tax will have a non-detectable impact in L.A.'s ranking."
City Councilwoman Wendy Greuel, one of the chief architects of last year's business tax reform package, said the biggest benefit was that it "eliminated the business tax for the 60 percent of ratepayers" with less than $100,000 in revenues. (The Kosmont study took as its base a business reporting $10 million in gross receipts.)
Greuel acknowledged that the city needed to do more, especially in reducing red tape. "Business tax reform is a first step," she said.
Kosmont agreed that passage of business tax reform at least sent a message that the cost of doing business wasn't going to go up in L.A. But he said the city still lags behind in efforts to attract new businesses.
"Other cities focus far more on the economic development side than L.A. has in the last few years," he said. "They use subsidies to bring in new businesses to help grow the tax base."
'Nickel-and-dime' The Kosmont survey notes that despite stabilizing finances, other cities continue to hit up businesses for more taxes.
Last year, L.A. Mayor James Hahn and elected officials from other cities, fed up with repeated state raids on their coffers, put forward an initiative to prevent the state from taking more of their property tax dollars. The threat of this measure forced the Schwarzenegger administration to cut a deal where the state would take $1.5 billion in 2004-05 and again in 2005-06 but would be banned from further raids on local government property tax dollars. Voters overwhelmingly approved this compromise last November.
Many cities are also seeing increased revenues, thanks to rapidly rising property values.
But Kosmont said cities are reeling from steep increases in pension costs and aging infrastructure, forcing them to seek additional revenues.
In the last year, seven L.A. County communities tried to enact tax increases. Three were successful: Santa Monica and Redondo Beach increased their hotel bed taxes while South Gate enacted a new utility tax. Other efforts failed, including an L.A. County proposition to raise the sales tax a half-cent to fund the hiring of more public safety officers and a measure to increase the business license tax in Redondo Beach.
"Local cities still see business as a cash cow," Kosmont said. "They are looking to nickel-and-dime businesses because that's where the money is."
The most popular tax is the transient occupancy tax, commonly known as the hotel bed tax. "It's a tax paid by visitors to the community, so it's the easiest to pass," Kosmont said.
As a result, L.A. and many other cities in the county have hotel bed taxes of 14 percent, among the highest rates in the nation. Only San Francisco's 16 percent hotel bed tax is higher.
A recent hike in the hotel bed tax helped push Santa Monica closer to Los Angeles as the most expensive place to do business in L.A. County. Among the other cities classified as "most expensive": Culver City, Inglewood, Compton, Bell, Pomona, Pico Rivera and Beverly Hills.
Glendora was the only L.A. County city to qualify for the "least expensive" category.
Falling workers' compensation premiums, one piece of good news for L.A. and California businesses in recent months, is not reflected in the survey, which only looks at taxes on business. Likewise, skyrocketing land and leasing costs are also not reflected.
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