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City Hall Stumper: How to Cut Biz Taxes without Hemorrhaging the City Treasury

BUSINESS POLITICS - For years, Los Angeles officials and the business community have held the common desire to eliminate the city's gross-receipts tax, long seen as the iconic symbol of LA's anti-business attitude.
The tax, executives argue, is driving businesses into nearby communities that had no tax. City officials agree in theory, but could not figure how to plug the $425 million hole in the city budget that scrapping the tax would create.

But now, even without having worked out the entire plan, city officials have been pushing a series of small steps to chip away at the tax, little-by-little.

The latest of them came last week, when the City Council called for extending a three-year tax holiday on new businesses until 2015, as well as phase out the tax for mutual fund agents.

Mayor Antonio Villaraigosa supports the proposals and also has proposed exempting new car dealers from business taxes in a bid to try to attract more of the firms -- and the big sales tax revenue they generate.

The progress is not nearly enough for critics who still want to see the tax scrapped altogether.

"There's no question there is a sense of urgency here," said Lloyd Greif, who chairs the city's Business Tax Advisory Committee, which has called for eliminating the gross-receipts tax.

"But they are taking baby steps at this point. The real question is what is their commitment to tax reform. A tax holiday is great, but what happens after it expires? The one thing businesses want is certainty as they plan ahead."

The tax holiday is designed to give a break to companies during their first three years of operation, when they are still struggling to become established.

The gross-receipts tax brings in about 10 percent of the city's general fund, or roughly equal to the budget of the entire Los Angeles Fire Department.

Councilman Bernard Parks, who chairs the Budget and Finance Committee, has been the most severe critic on the council of the new proposal, worrying about how the city will make up for the lost funds.

On the tax holiday for new businesses -- designed to exempt them from the gross-receipts tax for their first three years of operation -- Parks has asked for a report on how many new businesses have come to the city under the current tax holiday. He also wants to know how much has been lost to the city as a result of the tax holiday.

Villaraigosa has been moving on his own track to spur businesses, most recently calling for the new car dealer exemption and holding a series of business roundtables around the city.

"The mayor is continuing to work with the council and chief administrative officer to find a fiscally responsible way to make comprehensive reforms in Los Angeles' business taxes," Villaraigosa spokeswoman Sarah Sheahan said.

"While working with them, the mayor has also pursued steps to help local businesses, such as with the local preference ordinance and development reform."

During his roundtables, Villaraigosa has learned that the business tax is not the only issue of concern to local companies.

For example, the entertainment industry is concerned with continuing the state's tax incentive program for film production while those in the fashion industry are concerned with immigration reform and other companies are concerned with the how difficult it is to navigate the city bureaucracy to obtain permits.

"The mayor has been working on all these issues to keep businesses in Los Angeles and attract new ones," Sheahan said.

Nancy Sidhu, chief economist at the Los Angeles County Economic Development Corp., agreed that the business tax is just one part of the city's problems.

"To those who care about the business tax, this is the most important issue," Sidhu said. "Because the city's business tax is one of the highest in the county, it represents a deterrent to companies who are looking to locate here.

"But it's a hard thing to measure. And, you want to be careful that you don't alienate existing businesses by offering incentives to new companies. We are in a period where all revenues are down and it's a difficult thing to say to an existing business, we can't give you the tax break we are giving your competitor."

Larry Kosmont, the author of an annual report that evaluates the best cities in which to do business, said he sees the gross receipts tax as one of the critical points to improving the city's image.

"They are talking about auto dealers, mutual funds and the tax holiday, which looks like they are backing away from wholesale reform," Kosmont said.

"I think the most compelling thing they can do is get rid of the business tax entirely.

(Rick Orlov covers City Hall for the dailynews.com.  His Tipoff column appears Mondays. For a daily political fix, go to the Sausage Factory at insidesocal.com/politics. You can contact him at  rick.orlov@dailynews.com ) –cw

Tags: Los Angeles, City Hall, Mayor, Mayor Villaraigosa, BTAC, business tax, tax holiday, receipts tax

Vol 9 Issue 93
Pub: Nov 22, 2011