Want to start or expand a business in L.A.?
No problem, you might think after perusing the city of L.A.’s laundry list of business-incentive programs.
If you locate in the city’s empowerment zone, you could qualify for numerous low-interest loans through the Los Angeles Community Development Bank. The city’s five enterprise zones offer sales-tax credits, wage credits, and business expense deduction on tangible person property, among other incentives.
If you locate in a redevelopment project area, the city can give you tax breaks and help assemble land using its power of eminent domain.
Just ask DreamWorks SKG. Public subsidies are considered critical for the 1,000-acre project that will be DreamWorks’ corporate center. More than $70 million in subsidies have been promised to support the project, which will also include additional office development and affordable housing.
The city even has its own business-assistance division with the snazzy name “L.A.’s Business Team.” A key part of this strategy is linking businesses to dozens of financial and tax incentive programs. The city routinely kicks in with public dollars for infrastructure, tax incentives and other subsidies in the name of economic development.
But despite the extraordinary visibility these projects receive, their economic development impacts are modest; the marketing hype often exceeds the reality.
In fact, extensive research into the effects of incentive programs on economic development has failed to find consistent positive impacts on citywide job creation and investment. While a small positive impact is sometimes detectable in enterprise zones, business-assistance programs tend to reshuffle jobs and investment within a region, not create new wealth.
In part, this is because most small-business owners, particularly new startups, never tap into these resources. Indeed, trying to reach the lion’s share of businesses with these programs would be a daunting task. South Central and East Los Angeles alone are home to 15,000 businesses and 360,000 jobs. Moreover, these areas are built largely on an immigrant population base that tends to be less knowledgeable (and often suspicious) of government programs.
Take the case of Toytown. Asian immigrant entrepreneurs turned a derelict warehouse district into a thriving economic center that houses about 500 businesses, employs more than 4,000 people, and generates $1 billion in annual sales all with minimal public involvement. L.A.’s redevelopment agency didn’t even know about Toytown until it was well on its way to becoming an inner-city commercial center.
Toytown is more than just an economic success story. It is a dramatic example of why programs targeted toward individual businesses fail to revitalize cities. Business-assistance programs simply cannot reach enough companies to be effective on a broad basis, particularly in entrepreneurial economies that depend on a nimble small-business sector.
Another problem these programs run into is finding the right entrepreneurs to fund. Agencies such as the Los Angeles Community Development Bank are expected to finance budding enterprises to jump-start new businesses. But their lending standards mirror banks, whose conservative lending strategies attempt to minimize risk.
Often, start-up businesses and their owners don’t have the track record in the industry or the credit history to meet these eligibility criteria. As a result, few loans are actually made overall. The loans that are processed often go to established firms already committed to expansion, or to firms that already have a toehold in the market.
In fact, these programs are even less likely to be effective in Southern California and Los Angeles than in other regions. L.A.’s economic growth has been driven in large part by an intensely competitive entertainment industry anchored in very small businesses: 85 percent have fewer than 10 workers each.
Even large companies are not immune to the industry’s dynamism. Digital Domain employed 900 people at the height of its production schedule, but cut its core staff down to 250 after its major projects were completed.
This dynamism is driven by the competitive nature of the entertainment industry which, much like Silicon Valley, rides on a base of highly skilled workers who move from company to company and project to project.
For larger employers, such as DreamWorks, the need to provide public assistance says more about a city’s business climate than the success of its economic development programs. Business-assistance programs tend to offset a punitive tax system and regulatory climate rather than induce wealth creation.
A Milken Institute analysis of L.A.’s tax structure found that Angelenos paid more taxes than many of their neighbors, and L.A.’s businesses shouldered a larger part of the tax burden. Combined with rolls of red tape, the city becomes a very inhospitable place to do business. These problems exist for all businesses in Los Angeles.
The key to Los Angeles economic vitality is providing an entrepreneur-friendly environment for all businesses. New and innovative businesses need space to grow and a local regulatory and tax system that facilitates wealth creation.
Mayor Richard Riordan’s business tax reform plan is a promising start, with its recommendations to simplify the city’s tax system, reduce uncertainty, and exempt very small and start-up companies. Reducing the crime rate and prodding the city’s bureaucracy to be more responsive are also solid steps in the right direction.
The real test will be whether Los Angeles can lower its overall tax burden, reform the city’s tax structure, and eliminate regulatory obstacles to business formation and expansion. These are the reforms that can impact all businesses, not just the savvy few who can tap into business-assistance programs.
Sam Staley directs the Urban Futures Program (www.urbanfutures.org) for the Reason Public Policy Institute (www.rppi.org) in Los Angeles. He has authored more than 50 articles and studies on urban development issues and policy, including two books.