Bids to Lure Companies Slow Tax Increases

By JEAN MERL

Feb. 11, 1997 12 AM PT

TIMES STAFF WRITER

Growing competition among cities in the Los Angeles area has all but halted a once-widespread practice of jacking up business and development taxes to help pay for municipal services, a comprehensive survey has found.

“Almost every city and community in the state is engaged in a determined effort to entice new businesses to locate within its boundaries and to discourage existing [ones] from moving,” said Larry Kosmont, president of the Los Angeles-based consulting firm that today will release its third annual “Cost of Doing Business Survey.”

To virtually no one’s surprise, Los Angeles--despite having a mayor bent on improving the city’s business climate--again turned up as the most expensive place to do business in the county, as it has in each of the previous two years of the survey.

Beverly Hills, Santa Monica, El Segundo, Culver City and Inglewood also were ranked among the costliest. In contrast were Industry, Santa Clarita and Westlake Village, which impose neither business license fees nor utility taxes--common revenue sources for many of their neighbors.

But as the expanded survey shows, the competition for business--and the jobs and tax revenues it generates--extends well beyond the county and beyond Southern California. Among the 200 communities in this year’s survey, including a first-time Northern California edition due later this month, Seattle, Tacoma, Wash., Reno, Las Vegas, Eugene, Ore., Portland, Ore., Phoenix and Tucson are providing plenty of out-of-state competition.

Kosmont’s real estate consulting firm Kosmont and Associates began doing the survey to help its corporate clients make location decisions.

Business taxes are hardly the only--and not always the most important--consideration in where a firm locates, Kosmont said. Prestigious addresses in upscale communities and convenience to amenities such as the airport often weigh heavier.

“But [taxes and fees] are clearly part of the equation,” he said. “They can push the decision one way or the other.”

This year’s study has grave implications for Los Angeles.

“What we are seeing is a picking apart and raiding of Los Angeles’ industrial and commercial base” by communities that can move quickly to make themselves competitive, Kosmont said.

But the nation’s second-largest city, “a lumbering giant,” Kosmont calls it, has not been able to move quickly enough to keep its more nimble neighbors from luring firms away.

“It got big, but it forgot to get efficient,” said Kosmont, labeling as “excellent but piecemeal” Mayor Richard Riordan’s efforts to create a more hospitable business climate.

He cited L.A.’s Business Team, which works with individual companies to lure them to town or keep them here, and a permit streamlining effort that includes assigning a caseworker to each new commercial or industrial project.

Also, the Riordan administration has moved to create a lower tax rate for multimedia firms and HMOs, five of which are threatening to move to neighboring cities if Los Angeles doesn’t lower their tax bills.

The mayor and City Council also have agreed to provide about $70 million in tax breaks and other incentives for Steven Spielberg, David Geffen and Jeffrey Katzenberg, the three entertainment superstars planning to build their DreamWorks SKG project on the city’s Westside.

“These are all very important, but Los Angeles really needs to recast its tax structure,” said Kosmont, who was city manager in Bell Gardens before starting the consulting firm 11 years ago. “Until then, it is really a sitting duck.”

A series of case studies comparing the costs of doing business in various cities illustrates the point. For example, someone who wants to build a 60,000-square-foot office building in Los Angeles would pay $54,000 to $731,000 in fees. But there are no fees to build in City of Commerce, Irwindale, Portland, Seattle and Vernon, the survey found.

Occupants of such a building, such as a law firm taking up 30,000 square feet, would pay annual business license, utility and property taxes of $116,650 in Los Angeles. They would pay nothing in the unincorporated areas of Riverside County and in Santa Clarita, $120 a year in Lancaster and $510 in San Diego. In Santa Monica, the second-most expensive city after Los Angeles, occupants would pay $97,180 a year.

Operators of a 50,000-square-foot electrical equipment manufacturing facility would pay $49,470 a year to Los Angeles but only $14,590 in Phoenix, $24,750 in Commerce and less than $27,000 in Lancaster, Palmdale and San Diego.

Gary Mendoza, Riordan’s deputy mayor for economic development, said he was not surprised by the findings but said the city has made significant progress despite the poor marks it earned in the Kosmont survey.

“Los Angeles has a very significant competitive challenge that has to be addressed,” Mendoza said.

At least part of that challenge will be addressed when a consultant conducting a “tax equity study” for the city issues its interim report in two weeks. Mendoza said the report could lead to some simplifications of the city’s complicated business tax structure.

Recommendations for undertaking an overhaul of the taxing system are not expected until the study is finished this summer, Mendoza added.

He also disputed Kosmont’s characterization of the business-friendly steps the city has taken to date as being piecemeal.

“These are all pieces of our strategy to make the city a better place to do business,” Mendoza said, citing workshops where business owners could tell city officials their concerns, and a successful campaign to line up financing for the Alameda Corridor, a 20-mile truck and rail throughway that will speed transport of freight between the harbor and downtown.

He said the city cannot wait for a comprehensive tax overhaul to reduce the rates paid by multimedia companies and HMOs, which have developed or changed considerably since the city’s business tax structure was adopted. And the tax-break package offered to DreamWorks will be extended to others who locate or expand in the city, generating jobs and other tax revenues, Mendoza said.

Kosmont noted that while the news his survey turned up this year is generally good for businesses, he noted a “possible dark cloud on the horizon” in the form of Proposition 218. That is the statewide measure approved by state voters in November that requires taxpayer approval for any general tax increase.

Proposition 218 narrows cities and counties’ revenue raising options. And it may tempt them to turn again to imposing special development and other business-discouraging fees, Kosmont said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

(Southland Edition, B3)Year-Round List

Hanging Out the Welcome Sign

In terms of the business and development taxes and fees they impose and the incentives they offer, nine areas won “top spot” designation on a private real estate consulting firm’s annual survey. The city of Los Angeles not only did not make this or two other lists of communities considered most hospitable to business but also turned up as the costliest place to do business in Los Angeles County.

The Top Spots:

These jurisdictions impose neither business license nor utility user taxes:

* Industry*

* Eugene, Ore.

* Mission Viejo

* Santa Clarita*

* Westlake Village*

* Orange County unincorporated area

* Riverside County unincorporated area

* San Bernardino County unincorporated area

* Santa Barbara County unincorporated area

Professional

Communities:

These jurisdictions do not tax professional offices at significantly higher rates than those charged other businesses, a common practice among cities and counties:

* Burbank*

* Costa Mesa

* Glendale*

* Huntington Beach

* Irvine

* Lancaster*

* Orange

* Palmdale*

* Phoenix

* San Diego

* Tucson

* Los Angeles County unincorporated area