By HOWARD FINE

Staff Reporter

Six months after the Los Angeles City Council approved in concept a sweeping business tax overhaul, a vastly scaled-down version is on its way back to the council for final approval.

The meat of the proposal reducing the number of tax categories from the current 64 to eight and lowering tax rates for most businesses has been cut out of what the council will consider. Those meatier provisions, or watered-down versions of them, will not come before the City Council until well into next year.

What the council will be looking at in the next few weeks are a few minor provisions of the original plan that were unanimously approved last week by a council committee. They would provide tax exemptions for start-ups with less than $500,000 in first-year revenues and micro businesses with gross receipts of less than $5,000 a year. Three weeks earlier, the same committee approved a measure that, if approved by the full council, would give employers the option to file their business taxes on their own fiscal year, if it differs from the calendar year.

The delays in implementing a more-comprehensive business tax reform package are a source of considerable frustration for Mayor Richard Riordan, who put forward the original reform proposal last December.

“It will be up to the business community to put the pressure on City Hall to get a full business tax reform measure to the council as soon as possible,” said Deborah LaFranchi, assistant deputy mayor for economic development in Riordan’s office. “The business community needs to get a full package; they should not be satisfied with this small step, which is a minor component.”

So how did a tax reform proposal that seemed so close to reality six months ago get whittled down to such a modest measure?

City Hall observers point to three major developments: the departure of the council’s chief business tax reform champion, Richard Alatorre; the failure of legislation in Sacramento that would have allowed the city to tap into more revenues to help pay for the tax cuts; and, above all, the lack of a sense of urgency, both in the council and among thriving local businesses.

“The momentum for tax reform has definitely faded,” said one lobbyist.

Last spring, after the council approved the tax reform plan in concept, the plan stalled while the City Attorney’s Office and Chief Legislative Analyst Ron Deaton were trying to draft implementing ordinances. The chief holdup was the council’s instruction that no business face a tax increase, which meant keeping the old tax system along with the new one.

Meanwhile, updated business tax data became available, which forced city officials back to their computer models. By the time the bureaucrats were ready to move forward on the plan, Alatorre was on the verge of leaving office and did not devote the energy necessary to push the plan.

Then came Council President John Ferraro’s reshuffling of the budget committee, which put Councilman Mike Feuer in charge and brought two new council members on: Cindy Miscikowski and Mike Hernandez.

“Right there was a delay of several months as these new members had to get up to speed,” said Jerry Jeffe, a lobbyist for the Los Angeles Area Chamber of Commerce.

But one of the biggest blows came from Sacramento when the city last month failed in its attempt to force the state Franchise Tax Board to open up its tax files to allow cities to identify business license tax scofflaws.

The failure of that legislation means that the city now would have to look elsewhere for the revenues to offset the estimated $29 million in business tax cuts that the original reform proposal called for. This, in turn, has made several council members especially Jackie Goldberg and Rita Walters more reluctant to pass the tax cuts.

The task of coming up with a new business tax overhaul now falls to a 19-member blue-ribbon committee appointed by both Mayor Riordan and each of the council members. The panel, which was initially conceived as a way to monitor the implementation of a business tax reform plan, is expected to take at least four to six months to come up with a new proposal to present to the council’s business tax reform committee.