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L.A. council votes to exempt mutual fund firms from business tax [Updated]

November 16, 2011 |  2:50 pm

Jan perryThe Los Angeles City Council took more steps Wednesday to chip away at the city's business tax, voting to exempt mutual fund firms.

The council also asked for an ordinance to be drafted that would extend the three-year tax break offered to new businesses after it expires at the end of next year.

Business leaders have been urging the city to eliminate the tax on gross receipts, saying it discourages companies from moving to L.A. and is a drag on the economy. The council and Mayor Antonio Villaraigosa are exploring ways to undo the tax.

In calling on the council to extend the tax holiday for new businesses for another three years, Gary Toebben, president of the Los Angeles Area Chamber of Commerce, said, “This is the right message to send to businesses that we want to attract into the community.”

Under the ordinance the council approved 13 to 0, the tax on mutual funds will be phased out in three years, starting in 2012. City officials projected that ending it will cost $7.5 million.

The initiative was pushed by Councilwoman Jan Perry, who represents most of downtown. "Companies are rightly looking toward the city for a very clear signal that they should continue to do business here,” she said, adding that the ordinance would send "a very good message."

The change puts the city on an even playing field with others. City officials concluded that Los Angeles is the only jurisdiction in the state that taxes mutual funds. The state and federal governments also do not tax them. Los Angeles assesses the tax at the highest rate, $5.07 for every $1,000 in revenue, which is one of the steepest local levies in the state.

The city’s chief legislative analyst noted in a report that the tax “creates a disincentive for mutual funds to locate in Los Angeles, and could force funds and fund managers currently located here to move to an adjacent jurisdiction.”

But Councilman Bill Rosendahl questioned whether the city would lose needed revenue to make money managers even richer. “Obviously, we want to be business friendly, but we don’t want to shoot ourselves in the foot,” he said.

John Wickham, a legislative analyst, told Rosendahl that the city risked losing mutual fund firms to lower-cost cities because they are under pressure to reduce management fees. That, he said, could threaten about $12 million the city raises from business taxes on fund managers.

The council also debated whether to consider extending the business tax holiday, a measure championed by council President Eric Garcetti, who along with Perry and others is running for mayor in 2013. “This can work,” he said. “It can be the difference that attracts new businesses.”

Although the council voted 11 to 0 to write an ordinance, some council members expressed skepticism, questioning whether the tax break was really attracting new businesses.

Councilman Paul Krekorian also said he had misgivings about continuing to give new businesses a financial advantage when competing with established ones that have been paying their taxes. “I have a strong concern about that fundamental unfairness,” he said.

Councilmen Bernard C. Parks and Paul Koretz cautioned against extending the tax break based on anecdotal evidence and pressed for a detailed analysis on how it is working.

Koretz said the biggest disincentive for new businesses is the city’s slow approval process. “In most of the cases where I’ve talked to new businesses, they rarely complain about the taxes,” he said, arguing that businesses would open in the city even without the lure of a business tax ban.

But Councilman Mitch Englander, who introduced the motion with Garcetti, disputed that. “I absolutely disagree that businesses are going to come here no matter what,” he said.

Englander also has teamed up with Garcetti to introduce a motion to eliminate the business tax on new car dealers, a proposal Villaraigosa made recently as he revealed that Beverly Hills Porsche would keep its marquee name but move next year to Los Angeles. Villaraigosa has also urged the council to make the business tax holiday permanent.

[Updated at 7:35 p.m.: The mayor’s office said Villaraigosa supports the proposal to extend the business tax holiday for three more years and will sign the ordinance exempting mutual funds.]


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