When Los Angeles leaders gave a $270-million tax break to the developer of a 1,000-room luxury hotel at L.A. Live more than a decade ago, they argued that the incentive was vital to help the struggling convention center and to catalyze redevelopment in South Park.
Now, downtown Los Angeles is booming and South Park is a magnet for investment. The blocks around L.A. Live and the convention center are cluttered with cranes and construction equipment, and the skyline is rising. Several luxury hotels are being built and other hotel projects are proposed. The convention center has posted record profits in recent years.
So why does the City Council continue to dole out tax breaks to major hotel projects as if downtown was still some blighted redevelopment zone?
A few weeks ago the council approved a nearly $50-million deal for a 247-room hotel. City leaders are now poised to OK another financial aid package — this one for $103.3 million over 25 years for a 1,130-room hotel across from the convention center. That's on top of several other hotel tax breaks worth half a billion dollars that have been approved in recent years. Those dollars could have been used to pay for police and fire services, street paving and tree trimming.
Yet there's been little discussion of whether such tax breaks are still necessary to entice hotel developers downtown. The argument from council members and downtown boosters is that the area needs 8,000 hotel rooms within walking distance of the convention center to attract more events to the city-owned facility. There are now 5,000 rooms available or under construction. Several pending hotel proposals would push the number well above 8,000.
At what point does the city stop subsidizing new hotels? So far, city leaders aren't asking that question. Nor does the city have a comprehensive policy on when to use subsidies to encourage economic development, which projects merit help or what taxpayers should get in return. City staff developed a hotel incentive policy in 2015, but it was never adopted by the City Council.
As it is now, developers go to City Hall, pay for an independent economic analysis of their project, and, if they have a "funding gap" between the project's cost and its projected revenue — and they always do — the city will generally allow them to keep about 50% of the new sales, hotel, utility and property taxes they would otherwise have to pay the city over the coming 25 years. But city leaders rarely question whether the developers' economic analysis is reliable or whether the project really needs public assistance.
City Controller Ron Galperin was a skeptic of such tax breaks when he first ran for office in 2013, especially the deal that let mall developer Westfield keep $59 million in city taxes for building a new shopping center in suburban Woodland Hills. Once elected, Galperin said he was planning a "holistic" look at the city's tax break agreements.
And in 2016, he said that his office was finishing up the audit. "I've had some real issues and problems with some of these [subsidy] agreements because there has been a lot of money that's been given away," he told a group of neighborhood council leaders.
But the audit never came out. Galperin's office now says a report — not an audit — looking at best practices on tax break agreements will probably be released in early 2018. That's a shame. Los Angeles is long overdue for some serious scrutiny of the way it hands out financial incentives and whether those giveaways make sense for taxpayers.
Some tax breaks may be wise investments that spur redevelopment, boost economic activity and generate revenue that the city would not have collected otherwise. But if a tax break goes to a project that would have happened without a subsidy, then taxpayers trade away money that could have been spent on streets, parks and other public services.
Los Angeles leaders should start asking hard questions before they approve more tax breaks. The public needs to know if incentives are legitimate tools for economic development or simply gifts to well-connected developers.