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Eliminating business tax would be bad public policy, report says

November 8, 2011 |  9:29 am

Photo: City Administrative Officer Miguel Santana. Credit: Don Bartletti / Los Angeles Times Two top Los Angeles officials warn the City Council in a new report that eliminating the business tax without cutting services or finding new revenues would amount to faith-based budgeting, advising against it at a time when the city faces a deficit that could be as much as $250 million.

The city is under pressure to end its tax on gross receipts from business leaders who argue that it would spur existing companies to expand and encourage new ones to move into the city, eventually bringing more revenues from other types of taxes. L.A.'s business taxes are among the highest in the county.

"Complete elimination of the business tax would be poor public policy," conclude City Administrative Officer Miguel Santana and Chief Legislative Analyst Gerry Miller in a nine-page analysis released Tuesday. "This would increase the tax burden on residents or result in decreased city services which would make Los Angeles a less desirable place to do business."

Mayor Antonio Villaraigosa and some council members, including President Eric Garcetti, have called for the tax to be eliminated, saying that it has contributed to the city's reputation as a tough place to do business.

The mayor was not dissuaded by the report, although he agreed that any loss in business tax revenue would have to be offset. "We will work with the CAO and council as we put together our budget to develop a fiscally responsible, long-term approach to business tax reform," he said in a statement.

Garcetti, who is running to replace Villaraigosa as mayor in 2013, insisted the tax must end. "L.A.'s costly and cumbersome tax scheme is one that taxes businesses even when they lose money," he said in a statement. "If we're going to get our economy back on track, it's simply got to go."

He plans to bring up the report on Wednesday in a meeting of the Jobs and Business Development Committee, which he heads. The committee will also consider extending the three-year exemption from the business tax for new business, which is set to expire at the end of next year.

The city's tax on gross receipts is projected to raise $439 million this fiscal year, making up about 10% of the general fund and 6% of the total budget. Santana and Miller note that it has grown more steadily than other revenues and provided a "stable source of revenue."

"The crux of our recommendation," Santana said, "is that the elimination of this revenue source should be treated no different than any other budgetary priority."

In their report, Santana and Miller note that the city's Business Tax Advisory Committee has recommended cutting the business tax by 25% each year for four years. That proposal was based in part on a report from Charles Swenson, a USC business professor who concluded that the plan might bring in substantial additional revenue by encouraging new economic activity.

Christopher Thornberg with Beacon Economics, a research and consulting firm in Los Angeles, reviewed Swenson's study and concluded it was "so flawed as to really provide no guidance on this issue," according to the report. The assessment that eliminating the business tax would increase overall tax revenues was "improbable at best," he said.

The possibility of a future increase is not enough to "bet the budget on," Santana said.

The report also looks at the projected increases in other taxes -- such as those on property, utilities and retail sales -- that Business Tax Advisory Committee said would come by ending the business tax. Santana and Miller conclude that those projections are far-fetched.

The two officials suggest the mayor and the council could focus on other ways to improve the city's business climate, including addressing the "sometimes unpredictable approval process" and "perceived hostility to 'big box' retailers and auto dealers."

Santana and Miller offer a number of alternatives to eliminating the tax, such as extending the tax holiday for new businesses, freezing taxes for all business at their current gross receipts level, reducing the rate by 25% over five years or enacting a rate that puts L.A. below the highest rates in the region.


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-- John Hoeffel

Photo: City Administrative Officer Miguel Santana. Credit: Don Bartletti / Los Angeles Times