City Council Cuts Taxes for HMOs

After months of debate, the Los Angeles City Council quietly approved new rules Tuesday that will knock millions of dollars off the tax bills of five health maintenance organizations that had threatened to pull out of the city over the issue.

The council amended the tax code to allow the HMOs to pay taxes only on income from work done within the city limits, exempting income from any work performed by doctors and clinics outside Los Angeles. That revision--which comes a year after the HMOs threatened to move their headquarters out of town unless their tax burden was significantly reduced--will result in a collective drop in their annual taxes from $25 million to just $7 million.

“This was, more than anything, about bottom line common sense and putting some flesh on the bones of [being] business-friendly,” said Councilwoman Laura Chick, the measure’s sponsor, whose west San Fernando Valley district is home to four of the health care companies.

In contrast to the hourlong debate on the matter two weeks ago, when Chick postponed a vote to ensure her proposal’s success, the reduction passed Tuesday, 12 to 3, without a word uttered for or against the measure.

But afterward, Councilwoman Jackie Goldberg reiterated her stand against extending tax relief to companies that until a few years ago operated on a nonprofit basis.

“Nobody put a gun to their heads” to convert to commercial status, she said. “With that [switch] should come the tax liabilities that for-profits like them are charged.”

Goldberg, who represents the Hollywood area, acknowledged that earlier this year she had helped spearhead legislation that gave a tax break of up to 80% to multimedia businesses, many of them located in her district.

“The difference is that those were always for-profit. It was a business for which L.A. was trying to be a leader and bring in new jobs,” she said.

Proponents noted that under the original tax code, the five HMOs, which employ about 6,500 people, together would account for nearly 10% of the city’s entire gross-receipts tax revenue. To protest what they viewed as a disproportionate tax burden, the five companies--CareAmerica, Health Net, Maxicare, Prudential and WellPoint--withheld nearly $57 million in taxes for the years 1994 to 1996.

The new tax structure does not change the companies’ actual tax rate, which remains at the top level, $5.91 per $1,000 in gross receipts, despite the HMOs’ push for a lower rate of $4.14. By contrast, multimedia businesses were allowed to drop from the highest tax tier to the lowest rate of $1.18 in their tax-cut package earlier this year.