Council OKs Tax Plan to Lure Firms to Empowerment Zone

Seeking to draw companies to stubbornly depressed industrial districts, the Los Angeles City Council adopted a new set of businesses tax incentives Tuesday that had been advocated by Mayor Richard Riordan to promote job growth.

The measure gives new businesses that locate in the city’s so-called empowerment zone a five-year exemption from paying taxes on their gross receipts. In a rare moment of cooperation between Riordan and the council, it passed by a 12-2 vote.

Areas that would benefit include those portions of South-Central and East Los Angeles and the northeast San Fernando Valley that lie within the borders of an existing federal empowerment zone.

Deputy Mayor Rocky Delgadillo said the tax break, which will cost the city about $400,000 a year, could help attract businesses and “garner [jobs] from neighboring cities.”

City Councilwoman Jackie Goldberg called it “a good risk. There are swatches of these areas that have no dry cleaners, swatches that don’t have a single sit-down restaurant.”

The tax incentive plan seemed headed for trouble early when Goldberg and Councilman Mike Hernandez sought to add restrictions that the mayor opposed. They wanted to make sure sweatshops would not benefit from tax breaks; Riordan wanted to keep the program free of complex requirements that would mean more red tape.

In the end, they compromised, agreeing to an annual review of the program by council members to make sure new employers were not creating what Goldberg termed sub-minimum-wage “junk jobs.”

That the debate over sweatshop jobs occurred at all gratified members of the Los Angeles Living Wage Coalition who have lobbied heavily to make sure wage and benefit issues are addressed when the council wades into economic policy. The coalition has lobbied for policies that obligate city contractors to pay workers a so-called living wage of $7.25 an hour plus health benefits.

The creation of the city empowerment zone joins a host of economic incentive programs, including the state enterprise zone and federal empowerment zone programs that allow businesses to pay smaller state and federal taxes depending on the proportion of employees who live in the zone.

But in contrast to these high-profile anti-poverty initiatives, the city’s new program targets only the city business license tax, based on companies’ annual sales.

The rate of the tax varies depending on business type, but a typical manufacturer might pay $1.48 per $1,000 in sales.

Many business owners find it especially irksome, in part because a company can lose money in a given year and still pay a steep rate based on gross receipts.

The tax is “a headache,” said Bruce Burns, owner of an audio company that recently moved from Los Angeles to Burbank, where business taxes are lower. He moved to be closer to customers, he said. But paying less in business taxes was “absolutely a major consideration” as well, he added.

Riordan’s office contended that the cost of the tax breaks would be made up and surpassed by sales tax and utility revenues gained by attracting new businesses and convincing old ones to stay.

All council members except Rudy Svorinich Jr., who was absent, and Nate Holden and Rita Walters, agreed to the empowerment zone compromise.

Virtually ignored in Tuesday’s council debate was the testimony of UCLA economist Carol Zabin, who said that there is little evidence that tax incentive programs based on zones really work. “Research from all over the country shows that this is among the least effective types of business assistance,” she said.

Zabin said that although businesses may welcome the tax breaks, little tracking is done to see how much the programs really cost in tax dollars over time. Businesses decide where to locate their operations based on a multitude of factors, she said. Meanwhile, competing cities hurt themselves trying to undercut one another’s tax rates.

“It’s like a trade war. Instead of racing to the bottom, let’s look at making an economic development strategy for the whole region,” Zabin said.

Assistant Deputy Mayor Debbie La Franchi defended the tax breaks as a relatively cheap way to convince businesses of the city’s dedication to revitalizing poorer areas. “It sends the right message. . . . This is not a silver bullet, but it’s one very important symbolic tool,” she said.

Ross W. Thomas, a Pacoima industrial real estate broker for Delphi Business Properties, agreed. Thomas said he is planning to use the tax break in his sales pitch to clients.

“For many companies, it will heighten their interest in moving to the area,” he said.