El Segundo Looks at New Tax to Solve Budget Woes

In a move that has prompted the city’s largest employer to cry foul, El Segundo council members are proposing that a payroll tax be imposed on business to bail the city out of its fiscal woes.

The council has scheduled a special meeting Tuesday to try to reach agreement on just how high the new tax should be. The tax would replace at least one tax now levied on business.

“We want a tax that not only allows us to balance the budget immediately, but also will allow us to avoid having to come back to the table again in the future and say we need other taxes,” Councilman Jim Clutter said in an interview.

Officials of Hughes Aircraft Co., the city’s biggest firm with about 27,000 workers, said that a payroll tax, which is levied as a percentage of the money a company spends on wages and salaries, will not provide the city with a stable solution for its financial problems.

The company argues that a number of other El Segundo employers do a great deal of defense work, which results in the number of workers on their payrolls fluctuating tremendously.

Hughes also contends that a payroll tax discriminates against corporations that employ a large number of well-paid professionals, which it does.

“We are dead set against a payroll tax,” said Jim Hurt, the company’s director of public affairs. “It’ll hit a company like Hughes disproportionately harder than it will others.”

The council’s decision to adopt a payroll tax comes after months of debate over how the city should go about raising new monies. Besides Hughes officials, an official at Rockwell International also questioned whether the adoption of a payroll tax is wise.

Jerry Saunders, president of the 500-member El Segundo Chamber of Commerce, said the organization had taken no position on the payroll tax until it is determined how much it would be and what existing taxes would be eliminated.

Although once flush with money, the city has been forced to search for new sources of revenue since 1982, when the local Chevron USA refinery lost a major contract for the sale of fuel oil and the city’s sales tax revenues plummeted by millions of dollars annually.

As a result, city officials in the past two years have been forced to delay millions of dollars of capital improvement projects, and this coming fiscal year, the city faces a budget deficit of $1.6 million. Without a new source of revenue, cutbacks in all the city’s major departments, including fire and police services, could result, said interim City Manager Frank Meehan. The city’s annual operating budget is about $20 million.

As now planned, the payroll tax would supplant a $60-per-employee tax that council members adopted in 1986. The council has complained that the tax is hard to administer because the methods for computing the number of employees vary. For instance, many larger companies hire temporary, or contract, workers and do not count them as part of their own work force, the council has said. This is particularly true of aerospace companies.

Council members also said they might abolish another tax, which charges a business a nickel for each square foot of space it occupies over 5,000 feet. The city collected just under $5 million last fiscal year from both the employee and square footage taxes.

Just how much more money a payroll tax would generate is uncertain because council members have yet to decide just how high it should be.

Los Angeles’ Rate

However, if the council decides to charge the same payroll tax as the city of Los Angeles--0.75%--it could raise more than $14 million annually, according to El Segundo officials.

Councilman Alan West said that he favors a payroll tax of 0.25%.

Clutter, however, has said he wants to charge the same percentage as Los Angeles. “I see no reason why El Segundo should take a lesser tax than Los Angeles,” Clutter said.

Hurt said that he did not know how much Hughes could wind up paying under the payroll tax. The company paid $2.1 million this fiscal year in employee and square footage taxes, he said.

Hurt argued that a payroll tax makes little sense at a time when the company’s local work force has dwindled in response to expected federal defense spending cutbacks. During the past several years, Hughes’ El Segundo work force has decreased by about 3,000 workers, and further reductions are planned in coming months.

‘Not Good’

“For the city to hang its hat on a payroll tax in this kind of climate is not good for the city and certainly not good for us,” Hurt said.

That same view was expressed by Rockwell International, which has about 4,200 employees in El Segundo. At the peak of the company’s B-1 bomber program in 1985, it employed 8,400 workers locally.

“It just seems to me that a payroll tax in this area, which is heavy with defense work, would be counter” to providing a stable source of revenue, said George Wiley, the company’s director of human resources.

Councilman West countered that a payroll tax makes sense because, as the work forces at companies such as Hughes and Rockwell decrease, so does the cost of providing city services for them.

TAXING BUSINESS IN EL SEGUNDO El Segundo is considering levying a payroll tax to help it make up a projected 1989-90 deficit of $1.6 million in a $20 million operating budget. Here are 1988-89 revenues from the city’s current $60-per-employee tax and 5-cent square-footage tax compared with projected revenues from a payroll tax.

CURRENT TAXES

Employee tax: $3.9 million

Square footage tax: $960,000

TOTAL: $4.86 million

PAYROLL TAX OPTIONS

at 0.75%: $14 million

at 0.5%: $9.3 million

at 0.25%: $4.7 million

SOURCE: city of El Segundo