Proposed Tax Incentives for HMOs Assailed


The effort to keep five HMO corporations in Los Angeles, which prompted Mayor Richard Riordan last week to endorse a $15-million tax break, is part of a potentially corrosive process that many cities have begun abandoning in favor of regional cooperation, experts say.

Known in planning lingo as “poaching,” the practice of one town trying to steal another’s tax base can lead to corporate blackmail, drain public coffers and sour relationships between business and government, according to several leading experts on economic development.

Yet Riordan, who is up for reelection this spring, may have felt he had no choice but to offer the health care companies a generous incentive to remain in Los Angeles, especially because four are in the voter-rich San Fernando Valley, political consultants said.

“Poaching is a war against all,” said Max Neiman, a political science professor at UC Riverside. “It’s very, very bad for the state of California.”


Citing such possible pitfalls, a majority of City Council members voted last week to study the issue rather than immediately grant the tax break to the five health maintenance organizations. But when the HMOs said later that day that several suburbs were competing for their business, the mayor favored instituting the breaks right away.

That would be a mistake, said Trish Kelly, associate director of the California Assn. for Local Economic Development.

“It has to be very carefully considered,” Kelly said. “You don’t just take their demand at face value. We have told communities sometimes, ‘Hey, maybe you’re really better off without them.’ ”

When a business makes demands on a city and the city responds, both are participating in a cycle that urban planners say pits municipalities against one another and is expensive for taxpayers--not only for the incentives offered but in consulting fees and in-house labor costs.


“I see it as dysfunctional and predatory,” said UCLA professor Allen Scott, director of the Lewis Center for Regional Studies.

But caught up as he is in a reelection campaign, Riordan would have had a difficult time rejecting the HMOs’ demand to cut their gross receipts business tax, or the fee they pay the city based on their income, said political consultant Larry Levine. Four of the HMOs--CareAmerica, Health Net, Prudential and WellPoint--occupy about 30% of the office space at Warner Center in Woodland Hills. The fifth company, Maxicare, is on South Broadway in downtown Los Angeles. Together they provide 6,500 jobs and generate about $23 million in tax revenue.

Gary Mendoza, the mayor’s aide for economic development, said the mayor’s decision was based on 10 months of study.

“You don’t need to look at their books,” Mendoza said. “You just need to look at the tax structure of competing jurisdictions.”

Burbank, for example, where officials admit they are aggressively pursuing the HMOs, has no gross receipts sales tax. And Calabasas, where private developers are courting the companies, has a very low one.

As Los Angeles and its neighbors prepare to do battle, other parts of the country are learning to cooperate with one another.

In Detroit, Mayor Dennis Archer has reached out to the suburbs with success, even persuading General Motors to remain in the city. Portland, Seattle and Charlotte, N.C., have crafted peace treaties with their neighbors.

Southern California has come late to the table of cooperation, mostly because the economy until recently was so strong here that it didn’t matter if businesses hopped from one community to another. The economic slump of the 1990s, combined with a hunger for more revenues on the part of growing suburbs, changed everything.


It got so bad in the Inland Empire that the cities of Moreno Valley and Riverside, bruised by a battle over a shopping mall, entered into a noncompetition contract.

Neiman of UC Riverside said the only way to stop the cycle is for cities to stop providing incentives for companies to relocate.

“It’s not a criticism of business,” Neiman said. “It’s the perverse behavior that results from perverse incentives.”