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L.A. councilman says business tax report had editorial spin

November 9, 2011 |  5:08 pm

Los Angeles City Councilman Eric Garcetti addresses the Los Angeles County Board of Supervisors at a meeting on redistricting in September. Credit: Irfan Khan / Los Angeles Times
The drive to dismantle -– and possibly scrap –- the business tax in Los Angeles moved forward Wednesday as a City Council committee called for an independent economic analysis of several proposals to cut it, including one that would phase it out over four years.

Council President Eric Garcetti, who has been pressing to find a way eliminate the tax to attract more businesses to L.A., also criticized the “tone” of the report released Tuesday by two top City Hall officials. It concluded that eliminating the tax would be “poor public policy.”

“It felt quite editorializing, not helpful to a policymaker on how we get someplace, but more like 'please don’t make us do this, this is terrible, it can never be done, we know better,' ” he said. “I know it’s scary. I think part of this was kind of like: Just don’t do it. It’s poor public policy.”

Miguel Santana, the city administrative officer, defended the report, saying it was analyzing a proposal that called for an end to the tax without accounting for the lost revenue.

He has insisted that the council would have to raise new revenue or cut services, not rely on the hope a tax cut would spark business growth and bring new tax revenues. The tax on gross receipts is projected to raise $439 million this fiscal year, or about 10% of the general fund budget.

The Jobs and Business Development Committee also sent to the council an ordinance to exempt mutual funds and firms that manage them from the business tax.

The levy, which raised $16.6 million in 2010, would be ratcheted down over three years. The committee also moved along a proposal to extend the current three-year tax break for new businesses.

Garcetti, who is running for mayor in 2013, criticized the city report as reflecting a play-it-safe approach that has kept the city from taking bold steps to revive its economy, create jobs and rebuild its tax revenues.

“We have been doing business the same way and wondering why our economic base is slowly eroding. We protect the pennies in our budget instead of looking at dollars of robust economic activity,” he said. “We won’t have a lot of money for libraries, we won’t have a lot of money for parks, if we don’t do this. But we want to do it carefully.”

He complained that the city report failed to account for increased revenue from other taxes, such as those on sales and property, that could come if businesses expand or move to Los Angeles. But Santana said that would be difficult to determine. “The challenge is how do you isolate external factors, like the financial crisis or an unprecedented economic boom,” he said.

Councilman Bernard C. Parks, who heads the Budget and Finance Committee, noted that tax reform efforts began a decade ago and suggested the city should have data that could be analyzed, but he was skeptical about a budget based on hoped-for future revenues.

“I just don’t know at this time how you’re even going to suggest $440 million be pulled out of the budget, and we will just take a flier on it will come from somewhere,” he said.

The committee decided to ask economists with no ties to the city’s bureaucracy to analyze the affect of proposals to end the tax, extend the current tax break for new businesses and freeze the amount of taxes that businesses now pay.

Charles Swenson, a USC professor of accounting whose report on the business tax was dismissed as flawed in the city report, came to City Hall to defend his work.

His report projected that eliminating the business tax would encourage economic activity and bring in new tax revenue to replace the lost money. He stood by that conclusion, but said he could not say how quickly that would happen. “I don’t think anybody can predict with any certainty the trajectory of the indirect revenues coming in as the result of business expansion,” he said.

That’s the key reason that Santana has said that the city must account for any lost revenue in each budget. “We are not confident enough that these revenues will automatically go up in the way that’s being projected out,” he said, “because we can’t say that with all certainty.”


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-- John Hoeffel at Los Angeles City Hall

Photo: Eric Garcetti, president of the Los Angeles City Council

Credit: Irfan Khan / Los Angeles Times