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Elimination of LA’s Business Tax: A Distant Second Best Choice

PERSPECTIVE - Rick Orlov of the Daily News cited a study by a USC Business School professor that recommends the elimination of the business tax. [link]

Professor Charles Swenson claims that businesses will flock to Los Angeles if the tax were either cut substantially or eliminated, and existing companies would expand.

I can’t argue with the logic - lower taxes should induce some firms to relocate here.  Certainly, a business tax free environment would be enough to discourage some existing  companies from moving, but don’t expect a surge in business activity when other taxes in the state are among the highest in the nation.

It is difficult to change a tax out of context and expect it to have the desired impact, especially when our sales and income tax rates are among the highest in the nation.

If we really want to reform taxes and improve economic activity - therefore, create more revenue for the state – we need to develop a predictable, understandable system that is easy to enforce and creates a broader tax base. Oh, and one that helps encourage private sector job growth.

Here’s my proposal:

Implement a flat income tax.  Everything above the poverty level would be taxed at the same rate.  There would be no deductions, credits, adjustments or exemptions.  Because of the poverty level threshold and the elimination of deductions, which would tend to impact the higher earning individuals, there would be a progressive slant to the structure.

Not allowing personal exemptions will certainly be unpopular among large families, but in this era, where demand for cleaner energy will drive up utility costs, it is time to stop subsidizing the Brady Bunch set.  Perhaps this might encourage family planning.  It will discourage the Duggars from ever considering relocation to California and might even encourage Octomom to abandon the state.

Eliminate the sales tax (except for taxes on gasoline).  Sales tax is the most regressive tax imaginable and California has the highest rate in the country.  Eliminating it would not only encourage consumer spending, but would benefit businesses that purchase supplies and other materials not used in the production of finished goods.

Impose a gross receipts tax instead of an income tax on businesses.  However, offer credits against the tax for companies that exceed hiring thresholds.  Companies that create jobs should get a break.


Real and personal property taxes would remain, including the car tax.

California ranks 49th in business friendliness. [link]   If we want to increase employment, we have to overhaul our tax structure.

My outline is just that – an outline.  The devil is in the details.  What rate should we use for the flat income tax?  What hiring thresholds should we set to reduce the gross receipts tax?

This is a discussion that needs to start soon or we may never pull out of the trough.

(Paul Hatfield is a CPA and serves as Treasurer for the Neighborhood Council Valley Village.  He blogs at Village to Village and can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it. ) –cw

Tags: business tax, Charles Swenson, sales tax, gross receipts tax, California, flat income tax






CityWatch
Vol 9 Issue 60
Pub: July 29, 2011

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