Modest Package Is a First Step for L.A. Entrepreneurs
Los Angeles will never be Glendale, Burbank, Santa Clarita or Calabasas when it comes to low business taxes.
Those cities charge either no business tax or what one small-business owner calls a “happy-to-be-here tax” because the rate is so low.
But the tax reform proposal unveiled Tuesday by Mayor Richard Riordan is, at long last, an attempt to drag Los Angeles into the 20th century and give a break to companies that have created one of the entrepreneurial hot spots of the nation.
Admittedly, it’s not a business tax package for the millennium.
For example, the proposal doesn’t address the basic, changing nature of business and technology, in which corporations lay off employees one day, then turn around and hire them as consultants the next. The practice has spawned an army of self-employed who are, in truth, not business owners at all but online versions of street-corner day laborers.
Yet they must pay city business taxes too, just like the flower shop owner, auto dealer, manufacturer or restaurateur. Under Riordan’s proposal, the self-employed would receive an average tax savings of 25% from their current city tax bill--that is, if they weren’t scofflaws and were paying city taxes to begin with.
The tax package does not even touch the city’s utility tax--which at 12.5% is the highest in Southern California. The average for cities in the region is 5%.
The proposal also does not include what most small-business owners would prefer: a net income tax instead of a gross receipts tax. Many small businesses have no real net income. They just plow revenue back into the business and use credit cards, savings and family loans to cover personal expenses and other business expenses not met by revenue.
Some business consultants say that fully 50% of their clients have no net income. Yet they will still have to pay taxes, because Riordan’s proposal continues the gross receipts tax.
It’s not that the consulting team hired to study the tax system didn’t consider other ideas. It initially looked at a net income tax, said Arthur Andersen consultant David G. Naney, who worked on the tax equity portion of the proposal. But it discovered that California law sets up the state as the only collector of individual income taxes and prohibits other government bodies from assessing and collecting such taxes.
To create a city net income tax would have required a state constitutional amendment, Naney said, adding, “We probably couldn’t carry the day on it.”
Which is just as well, said Carol Schatz, president and chief executive of the Central City Assn., whose organization hosted meetings with the mayor’s staff and other business groups earlier this month.
“One [political] reality is, just how much radical tinkering you can do and get something through,” Schatz said. “What you’re talking about by doing [a net income tax] is throwing out the entire basis for the tax system, which is not going to get done quickly.”
What would be done quickly under the mayor’s reform package is reduce the existing 64 tax categories and rates to eight, reduce business taxes for most businesses and make up the $24-million difference through other means.
For Don Simon, president of the Apparel Contractors Alliance of California and owner of Ed Simon Ltd. in Los Angeles, the new rates would decrease the dramatic difference he sees between doing business in Los Angeles and across the street in Glendale. He pays more than $8,200 yearly in city business taxes. If he moved just across the street, his bill would be $600.
The new tax rates could reduce his tax bill by 66%.
“This had to be done or the city was going to lose its manufacturing base,” Simon said.
The proposed tax rates would replace arbitrarily assigned rates, Naney said, and replace them with rates based on the average profitability of companies in various industries, according to federal Standard Industrial Classifications, or SIC codes.
Also proposed is a Tax Advisory Group, an ongoing committee of business owners and other private-sector types that would examine how the tax changes are working and provide ideas for more revisions in later years.
“This is the first time that the city of Los Angeles has ever done this on an ongoing basis,” Naney said.
Just like the rest of the mayor’s tax package, it’s a 20th century idea, already in place at the federal level in the Treasury Department and at the state level in a number of agencies that routinely create ad hoc business advisory groups.
But creation of the city tax advisory group would symbolize a shift in the city’s business attitude that was exemplified when Riordan unveiled the proposals Tuesday morning. Riordan and others used words such as “entrepreneurship,” “small business,” “new media” and “start-ups”--music to the ears of small-business owners attending and an indication that the mayor recognizes such businesses are part and parcel of the business community.
Some proposals are geared specifically to small businesses, such as a first-year exemption for start-ups and a $5,000 exemption for businesses earning less than $5,000 a year.
The package is expected to sail through the City Council to land on the June ballot. Opposition will no doubt arise from the Writers Guild of America West, which believes writers and artists should not have to pay business taxes and filed a lawsuit against the city. It’s likely to mobilize its army of writers and creative TV producers to campaign against the proposal.
But Schatz believes city tax reform is a slam dunk before the voters. The package would cost residents nothing, would have no anticipated financial impact on the city and would provide tax relief for business.
“What’s not to like?” she asked.
Further, creation of the tax advisory groups would set up a mechanism for more radical change down the line, she said.
“It’s just the essence of governance that you make changes in baby steps because people are not comfortable with radical change,” she said. “But we’re just getting started here, from our point of view.”
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Tax Break
Here’s a sampling of the savings that some industries would reap under Mayor Richard Riordan’s proposed business tax overhaul:
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Current Proposed rate per rate per $1,000 $1,000 in gross in gross Industry receipts receipts Legal services $5.89 $5.40 $490 Apparel and texile manufacturing 2.03 1.40 630 Miscellaneous retail 1.82 1.60 220 Computer programming services 1.38 1.20 180
Savings rate per $1 million in gross receipts Legal services Apparel and texile manufacturing Miscellaneous retail Computer programming services
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Source: Gumbiner Savett Finkel Fingleson & Rose
