BEN SULLIVAN Staff Reporter

The City of Los Angeles’ gross receipts tax is among the oldest taxes in Southern California, dating back to the 19th century.

And that, say its critics, is the whole problem.

“At a time when L.A. was the predominant location (for business), it made a lot of sense,” said Larry Kosmont, president of Sherman Oaks consulting firm Kosmont & Associates. “Back then, you could guarantee that city’s revenue would go up because the number of businesses here continued to grow.”

Today, with 88 cities in Los Angeles County alone competing for business, the gross receipts tax has hurt L.A.’s ability to attract companies, he said.

Kosmont’s firm just completed a comparative study of the costs of doing business in various California cities. The study found that Los Angeles remains among the most expensive places to do business, in large part due to its gross receipts tax.

The tax, which is also called the city business tax, charges companies about $1 to $6 for every $1,000 in revenues they generate beyond a base amount. The portion of a company’s revenues subject to the L.A. tax is roughly equivalent to the portion of the company’s overall operations that are in the city.

The tax brings in about $270 million annually for the city.

More than 90 percent of cities in L.A. County have some form of business tax, but fewer than half base such taxes on gross revenue. Of those that do, L.A.’s tax rate is the highest.

In addition, the gross receipts tax has evolved over the years into a confusing collection of categories and subcategories, as various industries have sought exemptions or special status.

“It’s simple in concept, but what constitutes taxable gross receipts is up for debate,” said Don DeBord, chief of the tax and permit division of the City Clerk’s office.

The city’s three-sentence, 311-word definition of its gross receipts tax covers just about all conceivable sources of revenue. But 18 separate industries, from advertising agencies to shoe shiners, have been granted special status over the years.

Indeed, the current tax debate between the city and five HMOs centers largely on which category the managed care industry should be placed in.

Given the headaches the gross receipts tax causes the city, why bother with it?

Revenue, says Jack Kaiser, chief economist at the Economic Development Corp. of Los Angeles County.

“What you have to look at is that the City of L.A. is unique locally in that it has a high population that uses a lot of public services,” Kyser explained. Paying for such services as police protection and fire fighting, road maintenance and garbage collection, as well as a large City Council to manage it all, takes lots of money, Kyser said.

“Other cities tend to run less expensively,” agreed Kosmont.

A citywide tax equity study commissioned by the City of L.A. is expected to be completed in the coming months. And L.A. city officials say, once that study is done, they can consider whether to modify the gross receipts tax or replace it with some other type of tax formula.

Until then, however, L.A. businesses must pay up or feel the heat from City Hall.

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