Tax Break OKd to Draw Business to Poor Districts

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

The measure spares new businesses in the city’s so-called “empowerment zone” from the gross-receipts tax for five years. In a rare moment of cooperation between the mayor and the council, the tax break passed by a 12-2 vote, drawing broad support from politicians who saw it as a way to strike back at those who “poach” business from the city.

Areas that would benefit include those portions of the northeast San Fernando Valley, South-Central L.A. and East L.A. that lie within the borders of a federal empowerment zone.

“We think there is a market opportunity here to garner [jobs] from neighboring cities,” said Rocky Delgadillo, deputy mayor for Riordan.

City Councilwoman Jackie Goldberg called the program a good risk.

“There are swatches of these areas that have no dry cleaners, swatches that don’t have a single sit-down restaurant,” she said.

Relations between the mayor and the council have long been chilly, and the tax-incentive idea seemed headed for trouble early on when Goldberg and Councilman Mike Hernandez sought to add restrictions that the mayor opposed.

They wanted to ensure that sweatshops wouldn’t benefit from the tax breaks. But the mayor wanted to keep the program free of complex requirements that would mean more red tape.

In the end, Goldberg and the mayor reached a compromise: an annual review of the program by City Council members to guard against creation of what Goldberg termed “junk jobs.”

The compromise gives the mayor’s office broad discretion in handing out the tax breaks without subjecting beneficiaries to burdensome paperwork.

“We came up with a proposal that met both of our concerns,” said Debbie La Franchi, assistant deputy mayor. “We are very happy with it.”

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That the debate over sweatshop jobs happened at all gratified members of the Los Angeles Living Wage Coalition, who have lobbied heavily to make sure questions of good wages and benefits are addressed. Of late, the coalition has seen their efforts rewarded as so-called “living wages”--defined by the group as $7.25 per hour plus health benefits--have been invoked for issues ranging from the tax incentive program to contracts at LAX, said Madeline Janis-Aparicio, a lawyer with the group.

“The debate was wonderful. There is a lot of thought and concern about it,” she said.

The program joins a bevy of economic incentive programs now in place in the city, or scheduled to begin shortly.

These include the state enterprise- and federal empowerment-zone programs, which allow businesses that meet certain criteria to save on tax bills for employees.

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, or gross receipts.

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 cheaper. He moved to be closer to customers, he said. But paying less in business tax was “absolutely a major consideration,” he said.

With Tuesday’s vote, businesses that move into the empowerment zone will be able to skip paying the tax for five years.

Those companies already doing business in the empowerment zone would also benefit because their business taxes will be guaranteed not to rise for the duration of the program.

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

The tax breaks for existing businesses will cost the city about $400,000 a year, according to Delgadillo.

The mayor had argued that sales tax and utility revenues gained by attracting new businesses and convincing old ones to stay would easily make up for that loss, and then some.

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.

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Zabin said that, while 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 each other’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.

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 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.