Santa Monica now has the unwanted distinction of being the costliest L.A. County city to do business in, knocking Los Angeles off its long-held perch.

The bayside city, which had been a perennial runner-up for the costliest title, finally overtook Los Angeles last year, thanks in part to a slight decline in L.A.’s business taxes, according to the annual Kosmont-Rose Institute Cost of Doing Business Survey to be released today.

It’s the first time in the survey’s 13-year history that L.A. is not the costliest city in the county.

“Santa Monica’s overtaking Los Angeles is not the result of any dramatic increase in its own tax structure, though its costs are high,” said Larry Kosmont, president and founder of the Kosmont Cos., an L.A.-based economic development consulting firm. “Rather, it reflects the fact that L.A.’s costs have finally come down a bit as the business tax cuts enacted two years ago have started to take effect.”

The Kosmont-Rose Institute survey

compares more than 400 cities in California and across the nation on the basis of government-imposed costs on business. The major factors are business tax rates, utility taxes, sales taxes, property taxes and state corporate income taxes. The survey does not take into account market variables such as the cost of land, lease rates or prevailing wage rates.

Business relocation specialists use the survey to size up how cities compare, especially when trying to decide between otherwise desirable locations. Economic development officials also use the survey to determine where to focus their limited resources to bring down the cost of doing business.

Besides the switching of Santa Monica and Los Angeles, the list of five most expensive cities for business in L.A. County was unchanged from 2005, with Culver City, Compton and Inglewood rounding out the top five.

The least expensive cities were Westlake Village, Agoura Hills, Cerritos, Signal Hill and Temple City.

But the most dramatic change from previous years was the improvement in L.A.’s standing, both within the county and nationwide. L.A.’s expense ranking among nationwide cities fell to 29 from 16, behind such cities as Philadelphia, Cincinnati and Newark.

Kosmont said cities in other parts of the country have been increasing fees and taxes on business to pay for escalating service costs. Statewide, L.A. fell to third from second, with San Francisco keeping the crown as the state’s most expensive city in which to do business and Santa Monica taking second.

Bud Ovrom, L.A.’s Deputy Mayor for Economic Development, said he believes that the city is even more competitive than the survey indicates, noting its Department of Water and Power charges less than other utilities.

“The Kosmont-Rose Institute survey doesn’t really take into account the cost of utilities, especially the cost of power. The city of Los Angeles has the least expensive power in the whole state. We’re easily 10 percent and maybe even 20 percent cheaper than Edison,” said Ovrom. “That more than offsets the high business tax costs, especially in past years.”

Targeted mandates

Santa Monica’s cost of doing business has continued to escalate, thanks in part to one of the higher utility tax rates in L.A. County at 10 percent.

Also, over the years, various sectors of the city’s business community have been targeted for mandates and regulations, including an ultimately futile attempt five years ago to impose a coastal zone living wage aimed at the big beachfront hotels and increased regulations on auto-related businesses.

Adding to the business costs, though not factored into the Kosmont survey, are the highest office lease rates in the county. In the first quarter, the asking rent for Class A office space in Santa Monica was $5.17 per square foot, up from $3.94 per square foot a year earlier, according to Grubb & Ellis Co. By comparison, lease rates in downtown L.A. were $2.89 per square foot in the first quarter.

Santa Monica officials defended the city’s costs, noting that it has a burgeoning local economy.

“Santa Monica remains a great place to do business because of our location, top notch services, and vibrant neighborhoods. The cost of doing business is evidently not as powerful a factor as our community’s high quality of life,” said Carol Swindell, the city’s Director of Finance.

She added that the city in 2005 restructured its business license tax to reduce costs to small businesses. “Our business taxes are competitive with other communities,” she said.

However, Santa Monica’s reputation as a high-cost place to do business extends beyond local circles.

“Santa Monica is very pricey with an anti-business reputation,” said Dennis Donovan, principal of Wadley-Donovan-Gutshaw Consulting LLC, a corporate location consulting firm based in Bridgewater, N.J.

Donovan added that the entire L.A. County region was not competitive in terms of the cost of doing business. “The total tax burden is high in Southern California. When you combine all the local taxes with state taxes, Los Angeles and San Francisco are consistently near the top. The only companies we recommend moving to L.A. are those that must have a physical presence in Southern California.”

Given that reputation, in late 2004 Los Angeles also restructured its business gross receipts tax, after a 10-year effort that saw two previous reform packages collapse. Business taxes were eliminated for small businesses while most remaining businesses were granted a phased-in cut in their tax rates. The first 4 percent cut took effect in 2006; another 4 percent cut took effect this past January.

Still, despite these cuts and its slippage in the expense rankings, Kosmont said Los Angeles is not nearly as competitive on business costs as it could be. “L.A. still remains a very, very costly city to do business in and, thanks to recent City Council actions, it retains its reputation as a city unfriendly to business.”

Kosmont was referring to several ordinances the City Council has passed during the last couple years, including a living wage ordinance aimed at hotels around Los Angeles International Airport and a grocery worker retention ordinance. Both measures are facing court challenges.

Christopher Steele, director of location advisory services for ADP Mintax Inc. in Newton Highlands, Mass., said that perhaps as important as the costs of doing business is whether those costs are consistent and certain.

“It’s not necessarily the total amount of the tax package that makes people worry. Much more of a concern is whether these costs are predictable. They wonder, ‘Will I understand what I have to pay and will I be able to figure that out in advance?'” Steele said.