City Readies Tax Cut Proposal for 5 HMOs

After months of intensive negotiations, city officials are putting the final touches on a proposal to knock off millions of dollars from taxes paid by local health maintenance organizations--but not as much as the local companies had requested.

Under a new formula expected to be presented to the Los Angeles City Council later this month, five large HMOs that have been disputing their tax burden would collectively pay about $7 million annually, far less than the $25 million to $30 million they owe under the current tax code.

“This should significantly reduce their tax liability,” City Clerk Mike Carey said Thursday.

*

But whether the decrease will be enough to mollify the HMOs--four of which are in Woodland Hills--is unclear.

Although the companies agreed with portions of the proposed modifications, their lobbyist, Michael Gagan, accused the city of making eleventh-hour changes that will force the HMOs to pay a higher rate than bargained for, as well as taxes the city contends are in arrears.

“It’s premature to say exactly what the HMOs will do, but we do believe that the rules were changed on us unfairly at the last minute,” said Gagan, whose clients have threatened to leave Los Angeles over the tax issue.

The five health care organizations have scheduled a meeting next week to consider the proposal. “We haven’t adopted a formal position. We have expressed to the city that we’re not happy with what’s being proposed,” Gagan said. “We have not said that we are going to oppose it, [but] we don’t like it.”

*

The new formula, developed by the city clerk, the city’s chief legislative analyst and the city administrative officer, would exempt from taxation the receipts generated by independent contractors--doctors and clinics--who are not in the city of Los Angeles. This was a key point for the HMOs, which work with health providers throughout the region.

But the remaining gross receipts would still be subject to the city’s top business tax rate of $5.19 per $1,000. Also, Carey said, the city would seek to claim back taxes using the new formula for the years when the HMOs refused to pay the amount they owed under the current code. In the case of one of the companies, that extends back to 1989.

Cumulatively, the five HMOs--CareAmerica, Maxicare, Health Net, Prudential and WellPoint--have withheld nearly $57 million in taxes for the years 1994 to 1996. But the shortfall has not opened a large gap in the city’s budget because officials had come to expect nonpayment and took it into account while budgeting.

*

Revamping the code to reduce the HMOs’ tax burden would therefore not burn a hole in the city’s coffers because “this is money that we weren’t getting anyway,” Carey said.

The HMOs agree with the proposed methodology of how to determine taxes, using only the income from city-based contractors to calculate taxable receipts, Gagan said. But the companies pushed for a lower levy of $4.14 per $1,000, which would have kept them paying the same, or slightly more than, the amount they had been paying up to this point, roughly $5 million a year.

And Gagan accused the city of reneging on a promise to wipe the slate clean and drop the issue of back taxes.

Carey denied that the city had promised to erase any back taxes owed by the five companies. “That would be treating these folks far differently than we treat any other business,” he said.

*

Carey and his colleagues hope to present their report to the City Council by the end of the month. Adopting the proposal would require a change in city ordinances.

The tax break issue arose last winter when the five HMOs threatened to pull out of Los Angeles unless officials dramatically amended the code. Burbank, El Segundo and Glendale, among others, have courted the companies with promises of lower taxes and lease rates.

Mayor Richard Riordan endorsed a tax break, following the lead of Councilwoman Laura Chick, who represents Woodland Hills. Both Riordan and Chick have received political donations from some of those organizations.