Reallocation of Manufacturer Sales Taxes Sought : Spending: Taxpayer and business groups say the revenues should go to the cities where they are generated. Currently, they are pooled and disbursed statewide.
Manufacturers and taxpayer groups are fighting a state policy that they say is depriving some cities of millions of dollars in sales taxes that they should receive for playing host to big manufacturing companies.
The taxpayer and business organizations have joined several cities in a campaign to overturn a State Board of Equalization policy so that the taxes can be directed to manufacturing companies’ home communities.
Up to 132 cities statewide would gain substantial tax windfalls under such a policy change, according to a private firm that has researched the question. Los Angeles would gain $19 million a year or more, according to advocates.
The losers would be more than 300 other cities that now get a share of taxes generated outside their borders through tax pools. They would be limited in the future mostly to sales taxes generated within their boundaries.
The bottom line is “this is a zero-sum game,” said Larry Micheli, supervisor of the Board of Equalization’s local tax section. “Some cities are going to win. Some are going to lose.”
Distribution of the sales tax to cities and unincorporated areas has become increasingly contentious since property tax revenues were limited by Proposition 13 in 1978. The fight for the $3 billion that goes to localities has escalated in recent years as the recession has eroded most government revenues.
Of the 8 1/4% tax charged on sales in Los Angeles County, 6% goes to the state, 1 1/4% goes to transportation programs and 1% goes to the county’s 88 cities.
Distribution of the 1% share is usually simple. Retail sales produce most of the sales tax revenue and that money goes directly to the city where the sales took place.
But the Board of Equalization currently throws many sales taxes--from mail-order sales, long-term equipment leases and manufacturer-to-manufacturer transactions--into “pools” in each county. The pooled money is distributed to all cities in the county, regardless of the point of sale.
Debate centers on this pooled money and a proposal by the tax administrators that would formalize the pooling policy.
Opponents, including the state’s largest cities and those with many manufacturers, say the pools rob them of taxes that are rightly theirs.
The California Taxpayers Assn. agrees, saying that less money should be pooled, leaving more of taxes to the cities that generated them. “If the cities don’t get a fair share of the revenue they are less likely to approve growth and development in their communities,” said Dave Doerr of the taxpayers group.
Manufacturers have become less welcome because their host cities do not get the full benefit of the taxes they generate, said Chris Micheli, general counsel to the 800-member California Manufacturer’s Assn.
Cities that support industry often complain that they must put up with dirty, smelly and noisy plants--and provide extra street repairs and fire protection--but without receiving sales taxes that the plants generate.
“Those taxes paid by that manufacturer should be directed as much as possible back to that host city because that city has to provide many services,” Micheli said.
The result has been that cities have skewed their land-use development decisions to favor sales tax juggernauts such as auto dealerships and shopping malls to the exclusion of manufacturers, said Dave Elder, a former Long Beach assemblyman who is running for the Board of Equalization. “It makes manufacturers second-class citizens,” Elder said. “It just continues their death spiral in this state.”
Municipal Resource Consultants, a firm paid by cities to root out sales tax discrepancies, has estimated that up to $220 million in manufacturing taxes is being diffused through the pools.
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The firm, at Elder’s behest, estimated that a site-based distribution of the taxes in Los Angeles County, for example, would benefit about a quarter of the cities, which are home to at least 58% of the area’s residents. Los Angeles would gain at least $19 million, Long Beach $5.2 million, Torrance $3.2 million, Glendale $2 million, Santa Fe Springs $1.8 million and Santa Monica $1.7 million, according to the consultant.
Many more cities would lose money they get from the tax pools. Most losers would be suburban cities with little or no manufacturing, such as Malibu, Palos Verdes Estates and Glendora. The consultant did not calculate how much those cities would lose.
Board of Equalization officials say that the question of the pooled funds has been oversimplified by opponents and that pooling was created by cities because of the difficulty of distributing many funds.
They said, for example, that it would be onerous and damaging to business to require mail-order companies to break their sales tax receipts into 469 municipal increments, instead of into the current 58 county pools.
Even if the amount of pooled money were reduced, it is unclear how much would be shifted between cities and how much the additional accounting work would cost, Larry Micheli, supervisor of the board’s local tax section.
Micheli, who is not related to the manufacturer’s association official, also suggested that firms such as Municipal Resource Consultants stand to gain if money is taken out of the pools. The firms would then be paid by cities to fight for the funds, Micheli said.
John Austin, a partner in Municipal Resource Consultants, said his firm will receive no direct benefit if the state changes the way it disburses sales taxes.
The Board of Equalization discussion comes less than a month after the state Assembly suspended another proposal that would have changed the way cities divide sales taxes.
Assemblywoman Valerie Brown (D-Sonoma) had proposed that the current sales tax distribution remain the same, but that any future increases be distributed based on population. Brown argued that this would help all cities maintain services better and reduce the drive to build auto and shopping malls and other big tax generators that she said have been built at the expense of more necessary developments.
Brad Sherman, chairman of the Board of Equalization, has also proposed a fundamental reconfiguration of the state’s sales tax distributions. Sherman, who is facing Elder and four others in the June primary, said the taxes should be disbursed based on the size of cities’ populations and their work forces.
“We should get away from where a sale takes place and pay attention to city’s expenses,” which typically grow along with population and working population, Sherman said.
Sherman said his proposal would require legislative changes and perhaps a state constitutional amendment. He said the shift would be worthwhile in helping promote housing, manufacturing and other developments that are typically not big sales tax producers.
Elder argues that the goals can be achieved more simply by reining in the current tax pooling system.
Taking Back the Taxes
Taxpayer and manufacturer groups say several California cities would gain millions of dollars in sales taxes each year if a state policy were changed to allow the funds to be directed to manufacturers’ communities. Here are some estimates of how much some cities in Los Angeles County would gain:
CITY POTENTIAL GAIN Burbank $1,551,727 Commerce $1,249,799 Long Beach $5,197,170 Los Angeles $19,068,570 Pasadena $2,161,133 Santa Monica $1,768,261 Torrance $3,219,801
Source: Municipal Resource Consultants
