PERSPECTIVE ON THE BUSINESS CLIMATE : Look at the Big Picture, Taxpayers : 20th Century Fox merits Los Angeles’ support for the jobs and tax revenue it generates far beyond its neighborhood.
Southern California is in the third act of an economic tragedy, and the headlines remain bleak: The construction and real estate engines of our economy are idling; aerospace is facing new cutbacks. Foreign business people are being told that Los Angeles is a poor investment, a place of exorbitant labor costs, restrictive environmental laws and civil disturbances, not to mention the prospect of the Big One.
The one thing we still have going for us is Hollywood. Movie and TV production account for $11 billion in annual gross revenue in Los Angeles County--dollars that come in from around the world. As long as Los Angeles is the world media center, it will be popular, “hot,” a place tourists want to visit, a place whose clothing and other products are considered trend-setters, a place where business people may be willing to locate even at higher cost so that they may be in what I modestly refer to as the “center of world culture.”
So why is Los Angeles willing to see 20th Century Fox move out of town?
Fox is proposing a zoning amendment to change its lot from “high-density residential” to “studio use only.” Some residents of the adjacent Cheviot Hills neighborhood naturally oppose the proposed change, arguing that it will result in increased automobile traffic through their residential neighborhood.
City governments control critically important land-use decisions: zoning, building permits, sewer permits, etc. Since city governments are elected by local residents, they may be initially inclined to oppose major business expansion.
City governments also consider the effect of a project on city budgets. An expansion of the workplace population necessitates more police and fire protection, traffic regulation and road maintenance. City officials compare these costs with the tax revenue they can expect from the new or expanded business; they normally do not focus on taxes that will be paid by the business and its employees to county, state and federal governments.
The key to reviving the California economy is to attract and retain export-oriented companies--companies that create goods or services here for consumers in other states or countries. But California’s tax system sends entirely the wrong signal to city governments weighing development decisions. This is because sales tax revenue is the largest source of funds for most cities. A movie studio generates virtually no sales tax revenue for its home city, no matter how many millions it brings into the metropolitan area. In contrast, an automobile dealership typically provides hundreds of thousands of dollars of sales tax revenue to its home city. Some communities have facilitated the development of whole shopping malls of auto dealerships, despite the aggravations of traffic, the unaesthetic conditions and other nuisances, just for the sales taxes they generate.
At the same time, many California cities actually seek to exclude businesses that generate “export” products, which are the lifeblood of the state’s economy. The city of Cupertino scorns a major research complex proposed by Apple Computer. And Los Angeles is not eager to accommodate an expansion of 20th Century Fox.
In 1990, Fox reported more than $1.4 billion in payroll, contract employee and vendor payments. More than 80% of the payroll payments and 66% of the vendor payments stayed within Los Angeles County; 70% of the payroll and 64% of vendor payments were to residents and businesses in the city of Los Angeles.
These payments have a substantial multiplier effect, as the payees spend most of these dollars locally. Thus Fox accounts for a total local economic output of $3.65 billion and total household earnings of $1.08 billion. The latter figure is the equivalent of 39,000 jobs--jobs we can’t afford to lose.
The state also benefits from Fox’s business, since these 39,000 jobholders will pay about $54 million in state income tax, and another $31 million in sales taxes. Unfortunately, under our state’s system of municipal finance, only a small portion of those millions go to the city of Los Angeles. Little wonder that the city is disinclined to put up with the traffic and the demand on already strapped city services that a Fox expansion would cause.
Still, if we want to reverse the economic tragedy Southern California is mired in, we have to be pro-jobs. The people of Los Angeles should support the 20th Century Fox expansion. And we should redesign our revenue system so that cities are rewarded for accommodating businesses that bring in dollars from outside California.
