DANIEL TAUB Staff Reporter
With Los Angeles still recovering from recession, Mayor Richard Riordan and City Council members pledged to turn City Hall into a business-friendly environment and help L.A. regain its economic strength.
But despite those promises, a survey being released this week shows that Los Angeles is still the most expensive city in L.A. County to conduct business.
The “Kosmont Cost of Doing Business Survey,” now in its third year of publication, ranks L.A. at the bottom because of the city’s high gross receipts tax, its expensive planning fees and its 12.5 percent commercial utility tax the highest in the county.
The study by Los Angeles based Kosmont & Associates Inc. shows, for example, that a 30,000-square-foot law firm in Los Angeles County with $16 million in gross receipts would have to pay about $116,650 a year in business license, utility and property taxes.
By comparison, the same size firm located in Burbank would pay a fraction of that cost only about $12,730 in business license, utility and property taxes.
In Calabasas, the same firm would pay $8,520.
In Santa Clarita it would pay nothing.
The high cost of taxes in L.A., real estate developers say, is keeping a number of businesses from locating within city limits.
“If you compare L.A. city to a lot of other cities in the area, you don’t see a lot of companies moving in for a variety of reasons, including the cost of doing business, such as the gross receipts tax,” said Jerry Katell, president of Pacific Palisades-based Katell Properties.
Developers and others add that if L.A. does not perform a serious overhaul of its tax structure, it could face losing not only future businesses, but existing ones.
Already, a group of health maintenance organizations Blue Cross of California, CareAmerica Health Plans, Health Net, Prudential HealthCare and Maxicare Health Plans have threatened to pull up stakes and move out of the city of L.A. And all but Maxicare are located in Woodland Hills, just miles from the city limits.
Other companies including fast-growing Breath Asure Inc., now based in Calabasas have already moved out of the city, citing the high cost of gross receipts taxes.
“L.A. is getting picked apart at its fringes,” said Larry Kosmont, president of Kosmont & Associates.
Kosmont said that L.A. could easily lose more businesses to such competitive cities as Burbank and Glendale on the northeast, Calabasas and Westlake Village on the northwest, and Vernon and Commerce on the south.
“That’s what I would call the skirmish fronts, or the border fronts,” he said.
Many place the blame squarely in the mayor’s office for the city’s failure to make its business taxes lower and more equitable.
“The push for all of this was always expected to come from the mayor’s office, particularly since he was elected on a platform of making L.A. a better place for businesses to do business,” said L.A. City Councilwoman Laura Chick. “We haven’t made the progress we need to do, with once again Los Angeles being the most expensive place in town to do business.”
Four years ago, Riordan a millionaire businessman ran on a platform of putting more cops on the street and making the city friendlier to business.
Gary Mendoza, Riordan’s deputy mayor for economic development, contends that the mayor has proposed and the City Council has passed numerous pieces of pro-business legislation.
Mendoza cited a 66 percent reduction in sewer hook-up fees, a tax cap for entertainment and multimedia companies in the Hollywood and North Hollywood redevelopment areas, a telephone utility tax reduction for telemarketing companies and a business license tax reclassifcation for the printing industry.
In addition, Mendoza cited a Riordan-proposed business license tax reclassification currently before the city council. That reclassification would lower the cost of business license taxes for multimedia companies by 80 percent.
“There are things that have been done, but there is little doubt in our minds that more remains to be done,” Mendoza said.
Mendoza also said that a $70 million incentives package for DreamWorks SKG including a jobs-creation tax credit and a reduction of costs for installing electricity distribution facilities shows that the mayor is friendly to business.
Even so, the city’s elected officials have left themselves open to criticism that they are solving problems on a piecemeal basis the DreamWorks incentives being a case in point rather than dealing with the problem of L.A.’s tax structure on a large-scale basis.
“The reason L.A. is being forced to do piecemeal work is because they’re being beaten up by other cities,” Kosmont said. “A better approach in the long run is to step back and do it holistically.”
Mendoza and others in city government say they are waiting for a tax equity study, which has been in the works for several years, before they attempt any wide-ranging changes in the city’s tax structure.
A draft version of the study should be ready within two weeks, and a final version is expected by the summer. The study is supposed to show which industries in Los Angeles are being unfairly taxed, either by too much or too little.
But Chick said the study is not only long overdue, but likely incomplete, particularly in regard to HMOs. She added that it has also been used as an excuse for not making any large-scale changes since at least two years ago, when Chick herself proposed a wide-sweeping plan for easing business taxes.
“Even at that time, there wasn’t support for it from the mayor’s office because they were waiting for the tax equity study,” she said.
But some public policy analysts say that the Council is as much to blame as the mayor if not more so for high business taxes in L.A.
“What fundamentally has to change is the size of city government has to be cut back so that business taxes can be cut,” said Joel Kotkin, a senior fellow with the Pepperdine University Institute for Public Policy.
Kotkin said that the council historically has been unwilling to scale back the size of city government in order to give tax breaks to businesses. But he added that the city’s size serves as a roadblock to cutting taxes as fast as smaller cities.
“L.A. can never be as quick as Burbank or Glendale, that’s just the nature of it,” he said.
The Kosmont survey notes that the amount spent for each Los Angeles resident in the city budget is $513 a year, compared to $307 in Glendale and $432 in Long Beach.
In part, that’s due to the higher costs of running a major metropolitan city and all that goes with it a large police force and fire department, a full-time City Council with a professional staff and a huge City Hall bureaucracy dealing with everything from land planning to landlord-tenant relations.
Many say that the real cost of high business taxes in L.A. is not to companies like DreamWorks or the HMOs, which can handle the increased economic burden, but rather to small businesses, which make up most of the city’s business community.
“Probably our Los Angeles small business owners are the most discouraged in the United States, because they’re just getting it from all angles,” said Betty Jo Toccoli, president of the California Small Business Association, a small business advocacy group.
But the city is going to have to make changes if it wants to retain existing businesses, and attract new ones, Kosmont said. That may mean cutting the size of the bureaucracy.
“Corporate America has resized itself and made an investment in technology and shrunk,” he said. “I think the city of L.A., when it looks at its tax code, will have to do the same thing.
“Things in Los Angeles take a while to do,” Kosmont added, “(but) unless those things are fixed, we’ll never be competitive.”