Getting to Bottom Line of Riordan’s Business Tax Overhaul Plan

It’s being billed as the largest tax cut in Los Angeles history.

But business leaders Tuesday said Mayor Richard Riordan’s proposed overhaul of the city’s antiquated tax system is more appealing for its simplicity than the prospect of whopping rate reductions, which are largely absent from the $23-million tax-relief plan.

Some advocates already are grumbling that the plan is merely symbolic, pointing to the proposed 8% reduction in the $290-million business tax burden as a drop in the bucket. Still, business watchers say symbolism is important for a city long perceived as hostile to its commercial residents. City officials estimate Los Angeles’ business tax is 2 1/2 to 7 1/2 times larger than that of surrounding cities.

“It’s not going to make Los Angeles the most inexpensive city in Southern California. Far from it,” says Larry Kosmont, president of Kosmont & Associates Inc., which tracks the cost of doing business in more than 100 Southland communities. “But I think it sends the right message that the city is trying to clean up the code and make Los Angeles more business-friendly.”

Speaking Tuesday before a downtown audience brimming with business leaders, Riordan outlined his plans to drag the city’s 1930s-era business tax code into the next century. Essentially, the new code would whittle the city’s existing 64 tax categories down to just eight. More important, businesses would calculate their entire tax bill using a single rate tied to their primary business activity, rather than paying multiple rates on different lines of business.

That seemingly minor change has huge implications for enterprises such as department stores, which currently must figure their taxes using as many as nine different taxing categories. It’s a bookkeeping nightmare so time-consuming that some businesses have found that complying with the tax is more costly than the levy itself. Additionally, companies would be able to file taxes based on their own fiscal year, rather than conforming to the city’s requirement that they file on a calendar year.

“These are very positive changes that should help many businesses add to their bottom line,” said Barbara Rosenbaum, a CPA with Santa Monica-based Gumbiner Savett Finkel Fingleson & Rose Inc. “No one is going to make a killing with the tax savings. The administrative savings are the real benefit here.”

A bound report of the mayor’s plan calls for tax rate reductions in “virtually all industries” with some businesses seeing rate cuts as high as 80%. Most businesses would see only modest reductions, but some clear winners have emerged in the early going.

Among them are Los Angeles’ newest and smallest firms. Start-up companies would be exempt from city business taxes in their first year of operation and companies with less than $5,000 in revenue would have to pay only a $20 filing fee. In addition, the minimum tax would be reduced to a flat rate of $75 for all categories, while the top tax rate would be reduced 9% to $5.40 per $1,000 of gross receipts. Small fry such as gardeners, who had been stuck paying the highest rates, have been reclassified to pay the lowest proposed rate of $1.20 per $1,000 of gross receipts.

Those changes would mean average tax savings of 14% for companies with fewer than five employees, and a 25% cut for the self-employed, according to the report.

“It’s fantastic that the city for once is actually proposing to give somebody trying to start a new business a helping hand,” said Steve Dworman, who publishes a newsletter from his Brentwood home. “If Riordan can get this passed, not only would I thank him, but I’d be happy to go mountain biking with him.”

In addition, the mayor’s plan offers fat rate reductions to businesses in key growth industries such as biotechnology and computers. Big sales tax generators such as car dealers would likewise reap substantial tax cuts, as well as old-line industries like apparel that employ significant numbers of workers but are feeling the pinch of offshore competition.

Garment manufacturers would see their average rates slashed 31%, with some contractors reaping reductions as high as 66%, according to Joe Rodriguez, executive director of the Garment Contractors Assn. of Southern California.

“We’re thrilled,” Rodriguez said. “We’ve been paying artificially high rates for years.”

However, some industries would see their rates actually rise, most notably the motion picture industry. Long beneficiaries of a sweetheart agreement cut by the old movie moguls, production companies would face a maximum tax of $22,000 per film, up nearly 70% from their current ceiling. In addition, the city would begin collecting those fees upfront before issuing film permits, a compliance move estimated to funnel an extra $1 million a year into city coffers.

Riordan says he is confident he can get the film industry on board with his plan. But Jack Valenti, president of the powerful Motion Picture Assn. of America, is taking a more cautious view.

“We’ve certainly supported Mayor Riordan in his attempts to reform and revise all the tangled business laws in Los Angeles,” Valenti said. “But we’re just seeing this [proposed tax code] for the first time. We’re going to have to examine it very carefully.”

Another area of possible contention involves the city’s recommendation to tax writers and artists who work at home. Advocates for those groups already have voiced skepticism about the package, and civil libertarians cautioned that it is important to tread carefully when it comes to taxing certain activities that are protected by the U.S. Constitution.

But Doug Mirrell, a noted 1st Amendment lawyer, said that when business taxes are fairly applied and constitutionally protected activities are not singled out, courts have upheld them.

“It’s certainly not the case that just because you’re in a 1st Amendment business that you’re exempt from business taxes,” he said.

At the same time, there are a host of complicated problems when it comes to enforcing a tax on a 1st Amendment-protected activity such as writing. For one thing, writers would be required to register with the city, a practice that could have a chilling effect on certain kinds of speech. For another, determining how much of a written work was actually composed inside the city can be tricky.

Take the writer who conceives a screenplay idea at home, works on it for a few months while vacationing out of the country and then types up the final product back in Los Angeles. If the screenplay hits the gold mine and the writer is paid $5 million, how much of that money is the city entitled to under its business tax? That question was posed by lawyer Gary Bostwick, a free expression specialist.

“I think they have the right to impose some sort of tax,” he said of the mayor’s proposal. “The real question is what kind of tax, how does it get administered and what’s it for?”

Another concern for the Riordan administration is how to beef up enforcement of the proposed tax code. At present, as many as 30% of the city’s businesses are believed to be shirking the tax, costing the city treasury an estimated $75 million a year.

Closing that gap will be critical to winning City Council support for the measure. Riordan is pitching the plan as being “revenue neutral,” meaning that his proposed $23 million in tax relief to businesses would largely be paid for through increased compliance by scofflaws.

To that end, the report calls for a tax amnesty in the fall of 2000 that which would allow tax cheats to come clean without penalty. That program alone is estimated to generate $10 million a year in ongoing new revenues, while a bulked-up auditing staff is projected to track down another $5.25 million worth of unregistered businesses.

While those efforts would help the city repair streets, trim trees and pay police officers, some small-business advocates wonder just how effective the mayor’s proposed tax overhaul would really be in helping small businesses thrive in the city.

“It’s a good first step but only the tip of the iceberg,” said Nitin Bhatt, interim director of USC’s Business Expansion Network, noting the many layers of onerous regulations that Los Angeles businesses face. “It’s really great the mayor has done something, but I’m not sure how significant it will be to the average entrepreneur.”

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The Plan’s Winners and Losers

Mayor Richard Riordan’s tax plan calls for broad-based relief that should reduce city business tax rates for many Los Angeles businesses. Some firms would pay more, however, while others wouldn’t see much change. Here’s a sampling of potential winners and losers under the proposal:

Winners

* Gardeners, repair businesses and other mom-and-pop shops: Tax relief for small fry.

* Computers, cable television and biotech: Lower rates for growth industries the city wants to encourage.

* Furniture, apparel and metals: Reduced rates for traditional industries the city wants to retain.

* Educational services, social services and membership organizations: Taxed at lowest rate.

* Start-ups: Exempt from city business tax their first year of operation.

* Businesses with $5,000 or less in revenue: Exempt from the tax.

Losers

* Film production companies: Tax ceiling raised 70% to $22,000 maximum per film; must pay taxes upfront before city issues film permit.

* Doctors, lawyers and other professionals: Slight reductions, but still pay highest rates.

* Scofflaws: City beefs up enforcement to track down tax cheats.

Mixed Bag

* Retail: Simplified rate structure raises tax rates for some types of stores, lowers it for others.

Mayor’s Plan at a Glance

* Projects $23 million in tax relief, coupled with tougher enforcement to raise enough new revenue to neutralize impact on city coffers.

* Reduces 64 tax categories to eight.

* Most industries receive a rate reduction.

* Top tax rate reduced 9% to $5.40 per $1,000 of revenue.

* Businesses pay just one rate based on their primary business activity, rather than multiple rates for different activities.

* Start-ups exempt from tax their first year of business.

* Companies with revenue of $5,000 or less pay filing fee but no tax.

* Allows fiscal year filing.

* Tax amnesty in fall of 2000 allows businesses to pay back-taxes without penalty.

* Tax credit to businesses that designate Los Angeles as recipient of the local portion of their state “use tax.”