By DANIEL TAUB
When a respected survey last year named Los Angeles as the most expensive city in L.A. County to conduct business, City Hall promised to make changes.
The Riordan administration pledged that a tax equity study would be the catalyst for the sweeping changes needed to put L.A. on more competitive footing with nimbler locales like Burbank and Calabasas, which had been looting tax-weary L.A. companies for years.
But one year later, the Kosmont Cost of Doing Business Survey released this week shows once again that L.A. is the costliest business city in the county.
What’s more, the survey’s author and others are skeptical that City Hall has the will to do anything about it.
The tax equity study released last year, for example, turned out not to be a prescription for tax reform but a series of arcane options for eliminating disparities. Even then, the report has gained little attention and is in danger of becoming a “shelf study,” said Larry J. Kosmont, president of Kosmont & Associates Inc.
“There doesn’t seem to be anyone on the council willing to champion the effort,” said Kosmont, whose firm produces the annual comparison survey.
“I know the mayor wants to push the agenda forward, but when I look at the (tax equity) study, what’s missing is an articulation of what the key issues are and what the choices are in terms of how to get down the road and get things like business equity or tax equity and capture more revenues through collections.”
According to the latest Kosmont survey, the city of Los Angeles takes 0.33 percent of the average business’ total revenues in business taxes.
That’s better than 50 percent more than is paid in Southern California’s next most expensive city, Santa Monica, and more than twice as much as in Culver City.
The survey found, for example, that a 100,000-square-foot distribution facility in the city of L.A. would pay about $95,830 a year in local taxes. In Burbank, one of L.A.’s chief competitors, it would pay $50,340.
In Vernon, it would pay only $38,550.
Critics put much of the fault on the L.A. City Council. Most council members do not have business backgrounds. And they tend to be more responsive to social issues and narrow district concerns than the health of the business community, said Adrian Moore, director of economic studies at the West L.A.-based Reason Public Policy Institute.
“L.A. politics is dominated by a lot of social engineering,” he said.
Moore cited last year’s passage of the city’s “living wage” ordinance. The measure requires businesses that contract with or receive substantial economic benefits from the city to pay workers a minimum wage of $7.25 an hour with benefits, or $8.50 an hour without a boon for those workers, but bad for businesses, Moore said.
“No one’s really looking seriously at how jobs are created,” he said.
That’s not to say that all large cities are unable to change their business tax and permitting structures. For example, Indianapolis Mayor Stephen Goldsmith has restructured that city’s tax and permit codes to make them less onerous to businesses.
But, Moore said that will be harder in L.A., where Mayor Richard Riordan has a limited amount of legislative power. In Indianapolis, “the mayor was in a good position to do that, whereas Riordan has a major uphill battle,” Moore said.
But others assert that the city can become more business-friendly.
One of the groups that authored the tax equity study, the Milken Institute for Job and Capital Formation, is running out 25 different computer models for simplifying the city’s business tax code.
The code is a complicated system, with 64 different categories that are so archaic they still include a separate tax rate for a traveling circus.
Deputy Mayor Rocky Delgadillo said the study is likely to result in recommendations to the City Council that would indirectly lead to tax reductions through simplification of the tax structure.
Currently, an estimated 15 percent to 60 percent of business license taxes in the city are not collected each year. Delgadillo believes that by doing a better job of collecting taxes which would be possible under a simplified code the tax burden could be reduced.
“I remain optimistic,” Delgadillo said. “I continue to believe that our City Council has the vision to simplify our tax code and, from everyone I’ve discussed this with, I do believe that it would be a move in the positive direction.”
Others are less optimistic.
Councilwoman Laura Chick, who spent much of last year negotiating with five health maintenance organizations that argued they were being unfairly taxed, said she doesn’t expect to see results from the tax equity work soon.
“I’ve been frustrated, along with our business community, over how long it’s taking,” Chick said.
Kosmont is also pessimistic that the city can change its stripes.
“At best you’re going to have simplification; at best you’re going to have some parity formula,” he said. “L.A.’s a big city. Bigger cities have greater infrastructure requirements and more complicated politics, so it’s a harder challenge.”
Is that a death knell for the city’s efforts to attract and retain business? Not necessarily.
San Francisco has an even more onerous business tax its rate is nearly 0.63 percent, almost double the L.A. level and has very low vacancy rates throughout the city.
And Santa Monica and Culver City both have relatively high business tax rates 0.22 percent and 0.13 percent respectively and have thriving business communities, particularly in the multimedia industry.
“Not all businesses are really sensitive to local costs,” said Frank Taplin, senior vice president with Kosmont & Associates, which consults businesses considering relocation.
Taplin said that entertainment businesses such as the ones that have located in Santa Monica and Culver City over the last several years tend not to be as concerned about local taxes. Rather, he said, they tend to be more interested in “clustering” locating near other companies that do similar work.
“Businesses get some value just by locating near similar businesses, near vendors, near suppliers, and so on, which can make up for local costs,” Taplin said.
Jon P. Goodman, executive director of the EC2 Annenberg Center Incubator Project at USC, said that business taxes are just one factor among many when a company decides what city to locate in.
“Bottom line, business taxes don’t have much to do with the attractiveness of a city,” Goodman said. “You’re not dealing with absolute costs, you’re dealing with what you get for your money.”
John Rooney, president of the Valley Economic Development Center, agreed that business taxes are typically not at the top of business owners’ concerns.
“If you were to rank 20 items, I would guess that business taxes would be somewhere in the middle,” Rooney said, adding that such things as the availability of a diverse, talented labor pool is more important.
“The quality of the labor that’s available in the city of Los Angeles is tremendous, and it’s a huge advantage,” Rooney said. “That’s an advantage the city of L.A. enjoys, and that’s a big consideration.”
But while business taxes may be a minor consideration for some businesses, they may be more significant to others, such as assembly plants, that have more freedom on where to locate.
“For some companies, it can be a huge economic factor,” said Andrew Ratner, executive vice president and national director of real estate services at Cushman Realty Corp. “It’s basic industries that you’ve got to watch for.”
But Ratner said that while the city of Los Angeles should make its tax structure more competitive to compete with neighboring cities, he sees the chances of it happening as slim.
“The Los Angeles basin has so many things going for it, and the economy has strengthened so much over the past 24 months or more, I wonder how much pressure will be put on this issue?” Ratner said. “The economy’s good, companies are making money again. How important will this issue be?”