HMO Tax Changes Set the Stage

Despite dissent from some members, the Los Angeles City Council put its money where its mouth is last week by approving a new tax structure for health maintenance organizations threatening to pack up and flee to communities with lower rates. Contrary to what critics claim, the new structure is not simply a giveaway to corporate fat cats. It brings the HMOs into line with other firms and should set the stage for a revamping of the tax structure citywide--a step that’s necessary for Los Angeles to make good on its business-friendly rhetoric.

Although the annual tax bills of five HMOs will drop from $25 million to $7 million, their actual tax rate remains untouched. They will still pay $5.91 in tax on every $1,000 in gross receipts. Under the new rules, however, the companies will be taxed only on income from work done within the city limits. The old structure taxed the companies on income from work performed by clinics and doctors outside the city. That’s an equitable change.

But what about the $18 million in lost revenues? In truth, the city never collected that much because the HMOs withheld part of their bills every year in protest. So the estimated $7 million HMOs are expected to pay under the new structure will be about $2 million more than they were paying. In addition, the companies agreed to pay about $8 million in back taxes and interest.

Although the council’s action settles the immediate problem, the larger debate over the city’s tax structure rages on. The bottom line is that many companies can operate more profitably in neighboring cities. Following what has become something of a trend in Southern California, the HMOs got City Hall’s full attention after they threatened to pack up and leave--taking jobs and taxes with them.

Reacting to threats and implementing policy piecemeal is no way to run a great city like Los Angeles--or a dynamic region like Southern California. Companies play cities off each other because they can--and because Los Angeles often fails to be competitive in the first place. Citywide reform of the tax structure, such as is proposed by Mayor Richard Riordan, is a start, but regional cooperation and strategy would do more to keep Southern California’s economic engine running strong.