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Drawn-Out Death of Gross Receipts Tax Disappoints Business

When Pamela Berg heard about a proposal last year to eliminate L.A.’s much reviled business tax, she began making plans for the savings.

If the city tax on her Panorama City print shop’s gross receipts were to disappear, she could give her nine employees raises and more benefits.

But a city advisory committee now recommends getting rid of the business tax in a phase-out over 15 years instead of the original plan of five.

Berg, who owns the Minuteman Press International franchise for the Panorama City area, called the new proposal “a big disappointment.”

“While I think it’s great they want to eliminate the tax,” she added, “by the time they get done with that, I’ll likely be retired.”

The Business Tax Advisory Committee’s final report, issued last month, scrapped the five-year timetable after City Council members said they were concerned about replacing the $425 million the business tax brings in to city coffers each year.

The report also added a recommendation to cut 30 percent from the highest tax rate for professional and service firms during the first three years, with the promise of even steeper cuts in future years.

But some believe it will take too long to make much of a difference.

“This may not be enough to keep businesses here that are now leaning towards leaving the city,” said Stuart Waldman, chief executive of business advocacy group Valley Industry and Commerce Association.

Nevertheless, Waldman and leaders of at least two other major business groups in Los Angeles – the Los Angeles Area Chamber of Commerce and the Central City Association – say they will support the proposal.

“We are supporting this grudgingly,” Waldman said. “We would have liked to see a five year phase-out, but unfortunately, the City Council doesn’t have the stomach for such an aggressive phase-out.”

Carol Schatz, chief executive of the Central City Association, which primarily represents downtown L.A. business interests, characterized the proposal as “reasonable” and gradual enough to address City Council concerns about lost revenue.

“At least this will start to address the structural imbalance between Los Angeles and other cities when it comes to taxes,” Schatz said.

Gary Toebben, chief executive of the L.A.-area chamber, was more upbeat about the proposal, calling it a strong signal to the business community that the city is serious about keeping existing businesses here and attracting new ones.

The guaranteed 30 percent reduction will affect the highest-rate category: accountants, lawyers and other professional and service firms that now pay $5.07 for every $1,000 in gross receipts. The cut will make a huge difference, Toebben said.

“This proposal will have the most impact on decisions by companies already here, especially those companies in the higher brackets,” he said. “For a company in that highest category paying $100,000 in annual gross receipts tax, a $30,000 reduction is very significant.”

Toebben acknowledged that chamber members wanted a quicker phase-out of the tax, but they understand the city cannot scrap a tax that brings in $425 million a year in a time of budget challenges.

Dueling studies

Last summer, when an initial report from the Business Tax Advisory Committee called for wiping out the tax within five years, both Mayor Antonio Villaraigosa and then-City Council President Eric Garcetti, who’s now running for mayor, said they supported elimination of the tax.

That report based its conclusion on a study from USC professor Charles Swenson that eliminating the tax would prompt enough additional business activity to generate hundreds of millions of dollars in added sales and property taxes, more than offsetting the loss of revenue.

But the City Council commissioned its own study, hiring Blue Sky Consulting Group of Emeryville. Blue Sky’s report, released in March, concluded that eliminating the gross receipts tax would only generate about $25 million more in sales and property taxes, leaving the city with an annual gap of $400 million.

That prompted City Administrative Officer Miguel Santana to recommend that any cut in the gross receipts tax be offset with up to $400 million in annual budget cuts elsewhere, a political nonstarter given the city’s deficit, projected at $240 million for the next fiscal year.

As a result, Business Tax Advisory Committee members decided to extend the phase-out and add checkpoints to ensure that lost gross receipts tax revenue would be offset by revenue gains. If the revenue thresholds are not met, future tax reductions are to be placed on hold.

“While we disagreed with the Blue Sky report, we couldn’t ignore it or the political realities it raised,” said committee Chairman Lloyd Greif, chief executive of middle-market investment firm Greif & Co. in downtown.

Another committee member, Michael Banner, put it more succinctly: “We could see that the five-year elimination plan was not going to pass given today’s fiscal and political realities.”

To offset this disappointment for the business community, the committee decided to cut the top tax rate, with the first 30 percent reduction guaranteed. Future reductions to $1.27 for every $1,000 in receipts – a 75 percent cut from the current level – would depend on meeting the revenue offset thresholds.

Larry Kosmont, an economic and business location consultant, said that the first guaranteed 30 percent cut would move Los Angeles toward the middle of the pack of Los Angeles County cities in terms of taxes they levy on businesses. L.A. city now has the highest business tax rate in the county. (Santa Monica follows at $5 for every $1,000 in receipts.)

“It would make a dramatic difference, especially for the larger companies,” Kosmont said. “Los Angeles would become a discount when compared to neighboring high-cost cities like Culver City and Santa Monica.”

What’s more, he added, “if this passes, when businesses look at the longer-term trend line for business taxes in Los Angeles, that trend line will be in one direction: down.”

Howard Fine
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.
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