High L.A. Fees Bad News for Other Cities
A new study showing Los Angeles to be among the highest tax and business-fee locations in Southern California seems ominous for the city. Indeed, Los Angeles is overweight in the tax and bureaucracy department, and that is prompting businesses to move to lower-cost places elsewhere in the region, such as Burbank or Glendale, or out-of-state locales such as Seattle and Las Vegas.
But the Burbanks and Glendales shouldn’t rejoice. Los Angeles’ high costs in the long run hurt the entire region, because business everywhere will suffer if a weakened central city cannot maintain essential services such as Los Angeles International Airport.
Meanwhile, all municipalities in the region will be increasingly forced to lean on business for more revenue, because the recently passed Proposition 218 sharply limits the discretion of all communities to tax the general populace.
Ultimately, Southern California’s cities and counties will be forced to embrace charter and even state constitutional reform to devise better ways to work together for the good of the entire region.
The most immediate purpose of the third annual Cost of Doing Business Survey, issued Tuesday by Kosmont & Associates, a Los Angeles consulting firm, is to report that other cities--from neighboring Glendale to far-away Seattle--are poaching business from Los Angeles.
“We are seeing a raiding of Los Angeles’ industrial and commercial base,” says Larry Kosmont, a former city manager himself in Bell Gardens.
Comparisons of business taxes tell why Los Angeles is vulnerable. On the first $10 million of a company’s gross revenue, Los Angeles would impose a tax ranging from $15,000 to $61,000, while Glendale would impose no tax and Seattle a much smaller tax, less than one-third that of L.A.
More inclusive regional comparisons reflect the same pattern: Irvine imposes a much smaller business fee than Los Angeles--although Irvine has high development fees--and taxes in Thousand Oaks, San Bernardino and San Diego are much lower too.
Comparing giant Los Angeles with those smaller cities is pertinent because its taxes and fees make resident companies restless and deter companies from moving in.
“The high fees make it look like Los Angeles is trying to discourage development,” Kosmont says.
In fact, the city is trying to remedy the situation by offering lower taxes to health maintenance organizations to keep them from fleeing to Burbank, which has a lower tax structure.
However, that’s the regional problem in a nutshell. Burbank has lower taxes because it has fewer people and, therefore, a smaller city government to support. But it’s adjacent to Los Angeles, benefiting in many ways from the essential services Los Angeles offers--its airport and ports, its very mass of population that makes Southern California a giant economy unto itself.
There is no growth of regional business if Burbank poaches companies from Los Angeles. Alternatively, Inglewood will need some compensation if Los Angeles succeeds in luring the Lakers and Kings, even though a new sports arena complex could invigorate the urban core.
Such thoughts are timely because the problem of musical chairs will get worse as Proposition 218 forces communities to rely more than ever on money from business to run local services. Proposition 218 decrees that a majority vote must approve all new taxes and re-approve many existing assessments. The effect will be to lower municipal revenues but probably not to lower voter demands for police protection; clean, well-lighted streets; and other amenities.
In fact, many local governments face troubles ahead.
“With the state having taken away property taxes to balance its own budget and direct democracy moves such as Prop. 218, local governments have lost almost all discretion over spending,” says David Abel, publisher of the Metro Investment Report and a member of regional charter reform commissions.
What should be done?
“Charter reform at all levels--city, county and the state constitution itself--to address the problems of financing local government,” says Abel.
Charter reform could bring changes in how the 88 cities of Los Angeles County or the three dozen cities of Orange County interact. More regional cooperation would be possible. For the city of Los Angeles, which will vote on reform in April, opening the charter could lead to more economic and decentralized city government.
The real problem of local financing is for cities to invest in infrastructure for a better business environment. In that respect, L.A. city and county are moving ahead with almost $1 billion earmarked for advanced telecommunications systems for support of business and civic life. Collaborations between business and city government will bolster such efforts.
In Costa Mesa, the Henry Segerstrom group worked with telecommunications companies to build a fiber-optic network linking its South Coast Plaza properties with office buildings in a large area of central Orange County.
The situation is perilous but not bleak. For Los Angeles and all of Southern California, charter reform and infrastructure development--such as the Alameda Corridor and Ontario Airport--do hold promise for the future.
But meanwhile, the verdict of the Kosmont survey is inescapable. Los Angeles must reduce the size of city payrolls and overhead.
“Seeing that the city is long past its building boom days, you wonder why it employs so many building engineers, so many business permit supervisors,” Kosmont says.
Los Angeles must ask itself hard questions, but other cities shouldn’t gloat. The same questions apply throughout Southern California.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Killing the Goose?
Los Angeles imposes higher taxes on business than cities far and near.
Los Angeles: 0.341%
Tacoma, Wash.: 0.302%
Beverly Hills: 0.223%
Portland, Ore.: 0.220%
Santa Monica: 0.216%
El Segundo: 0.164%
Culver City: 0.134%
Inglewood: 0.118%
Rialto: 0.117%
San Bernardino: 0.117%
* Tax for the first $10 million in gross receipts or the first 100 employees (additional assumption may apply), measured as a percentage of $10 million and averaged across six categories. Portland’s rate is tied to business profits (assumed at $1 million).
Source: Kosmont & Associates survey
Show Me the Money
Los Angeles imposes higher license, utility and other business taxes on law firms and manufacturers than other Southern California communities and cities elsewhere.
30,000-Sq.-Ft. Law Firm
Rank: 1
Community: Riverside County
Costs: $0
*
Rank: 1
Community: Santa Clarita
Costs: $0
*
Rank: 2
Community: Lancaster
Costs: $120
*
Rank: 3
Community: San Diego
Costs: $510
*
Rank: 4
Community: Vernon
Costs: $570
*
Rank: 5
Community: Commerce
Costs: $680
*
Rank: 6
Community: Palmdale
Costs: $1,050
*
Rank: 7
Community: Irvine
Costs: $2,610
*
Rank: 8
Community: Phoenix
Costs: $4,750
*
Rank: 9
Community: Anaheim
Costs: $4,980
*
Rank: 25
Community: Los Angeles
Costs: $116,650
*
50,000-Sq-Ft. Electrical Equipment Manufacturer
Rank: 1
Community: Phoenix
Costs: $14,590
*
Rank: 2
Community: Commerce
Costs: $24,750
*
Rank: 3
Community: Vernon
Costs: $24,840
*
Rank: 4
Community: Riverside County
Costs: $24,940
*
Rank: 5
Community: Ontario
Costs: $25,600
*
Rank: 6
Community: Santa Clarita
Costs: $25,850
*
Rank: 7
Community: Lancaster
Costs: $26,110
*
Rank: 8
Community: Palmdale
Costs: $26,300
*
Rank: 9
Community: San Deigo
Costs: $26,980
*
Rank: 10
Community: Irvine
Costs: $27,070
*
Rank: 26
Community: Los Angeles
Costs: $49,470
