Los Angeles is "marching toward the end of the plank" as the city considers adding taxes and fees on businesses, according to the author of an annual business cost survey scheduled for release Monday.

Larry Kosmont, an L.A. economic development consultant who co-authors the Cost of Doing Business Survey, blasted the city's mentality toward business. He singled out efforts to move media businesses into a more expensive tax category and to impose steep new fees, saying they send the wrong signal at the wrong time.

"This feels like a tax grab from business and it sends a very, very negative message to companies doing business in the city," Kosmont said. "Businesses are not only leaving, they are leaving angrily."

He called on city officials to immediately halt any further business tax reclassifications and new fees until a more comprehensive business retention strategy can be worked out.

"This is the kiss of death for L.A., I think," Kosmont said. "They are marching really close to the end of the plank in the deep ocean. If these decisions prevail, the city might as well start sending out notices to controllers of all these media companies to start searching for space in Burbank, Culver City and Santa Monica."

Kosmont has long been critical of both the city and the state, saying they overtax business to the point where they have to consider moving. Now, with the budget crisis hitting California and Los Angeles, he believes the situation could move from serious to critical.

His key concerns are twofold: First, the city has audited hundreds of businesses, and in some cases is reclassifying them, thereby revoking tax advantages that have long been in effect. Second, the city is raising developers' fees amid a severe downturn in real estate.

While the City Council has told the Planning Department to pare back planned increases in developer fees, Kosmont said they never should've been considered, given the economic climate.

Robert "Bud" Ovrom, L.A.'s deputy mayor for economic development, said that reclassifications are rare and that the city wants to improve efforts to attract and retain businesses. City officials have said that higher planning fees were designed in response to developers' wishes for speedier approvals.



Comparing cities

Kosmont made his comments in conjunction with his annual Cost of Doing Business Survey, in which Los Angeles retains its long-term ranking as one of the 10 most expensive cities for business in the nation. The survey, which Kosmont co-authored with the Rose Institute for State and Local Government at Claremont McKenna College, compares various government-imposed taxes and fees on business in scores of cities throughout the region and the nation. It does not, however, factor in two of the biggest business costs: labor and space.

The survey noted that California cities today are less competitive with cities in other states in part because of a 1 percentage point hike in the state sales tax that took effect this spring.

"The gap between California and the rest of the nation has widened," Kosmont said.

David Huntoon, advising fellow with the Rose Institute, said that the sales tax propelled El Segundo to join the ranks of the 20 most expensive cities for business in the United States. The other three Los Angeles County cities on the list are Culver City, Los Angeles and Santa Monica.

Other high-cost cities in the county include Bell, Beverly Hills, Compton, Hawthorne, Inglewood and Pomona.

On the other side of the spectrum, Agoura Hills, Cerritos, Diamond Bar, Glendora, Lancaster and Santa Clarita are among the lowest cost cities for business in the county.

Kosmont said that with cities facing loss of property tax and sales tax revenues and funding from the state, many cities are studying if they can capture more revenues by increasing fees and specific taxes, especially hotel bed taxes and utility taxes levied on businesses.

"Lots of cities are now doing fee studies to see if they can recover their costs," Kosmont said.

While businesses may like to see broader taxes, voters are more likely to favor fee increases, said Chris McKenzie, executive director of the California League of Cities. "Voters like the user-pays concept."

Reclassifying taxes

Thirty multimedia and Internet companies in Los Angeles have seen their business tax discounts challenged by the city over the past five years, forcing them to pay millions of dollars in current and back taxes.

Kosmont said this strategy is sending a chilling signal to businesses, and it threatens to undo the progress Los Angeles made with business tax reform earlier this decade.

"The city is now aggressively reclassifying businesses into more expensive categories and it's being done retroactively," Kosmont said. "The message being sent to businesses is that they are not safe."

City officials dispute this, saying that fewer than 1 percent of companies are being audited. The audit includes checking whether the businesses are in the correct category.

"Out of more than 400,000 businesses in this city, only 150 are in the appeals stage where the city is actively challenging their classification," said Ovrom, the deputy mayor. "That's hardly walking off the plank."

Companies self-select their tax categories, and Ovrom said that some have inaccurately classified themselves as Internet and media companies in order to claim an 80 percent tax discount.

"If someone does underclassify themselves, then we have an obligation to everyone else who properly classified themselves to make sure they pay their fair share," he said.

Two examples of companies in conflict with city tax policies:

Shopzilla.com, a comparison shopping Internet site headquartered in West Los Angeles, got hit with $2.7 million in current and back taxes, and is now threatening to move to nearby Santa Monica.

The president of another media company, Creators Syndicate, wrote recently in a Wall Street Journal column that his company faces a tax bill of several hundred thousand dollars because the city reclassified it, quintupling its tax rate. Creators hadn't self-selected, however: The city had classified it as wholesale/retail 15 years ago, and is now changing that position.

"This is the only case we're aware of where the city set the rate and is now reconsidering that," Ovrom acknowledged. "We're talking with the company and trying to come to a mutually satisfactory resolution."

Ovrom added that Mayor Antonio Villaraigosa wants to emphasize business friendliness.

"Our main goal is to help existing businesses grow," Ovrom said.

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