Tax Reform Remains Riordan’s Elusive Goal

It remains one of Mayor Richard Riordan’s most trumpeted goals: a sweeping overhaul of the Los Angeles tax code that would leave the city coffers unaffected, but bring fairness and sense to a system that lacks both.

Riordan saw the issue as a key to attracting new businesses--and jobs--to the city, so he assigned the issue to top aides, who brought in powerhouse outside support, all with an eye to producing a document for City Council approval this year. Under their original schedule, a proposed tax code was supposed to be written this past summer and by now sailing through the City Council on its way to approval by the voters.

Today, however, the prospects for significant tax reform in 1998 are over, the idea having fallen victim to a turnover in the mayor’s office, a state ballot measure and a host of tricky political calculations. The prospects for reform are further complicated by the battered influence of a key City Council member.

Advocates still hope for a reform measure next year, but some supporters, once heartened by Riordan’s commitment to it, now worry that it may fade away altogether in the twilight years of the Riordan administration.

Chief among the problems is a ballot measure approved by California voters in 1996. Proposition 218, which Riordan supported, requires voter approval for any proposed municipal tax increase. That squared with Riordan’s Republican principles, but it imposed a huge new hurdle for his tax reform proposal, requiring not only City Council backing, but also a citywide vote.

That’s true even though the intention of tax reform is not to boost overall taxes. In fact, most businesses probably will see a modest decrease, and Riordan aides say that even those who pay more will benefit by the vastly simpler system, which consolidates the city’s existing 64 tax categories into eight.

“We think that by making it simpler, any increase that most companies see will be made up by their savings in accounting costs,” said Deputy Mayor Rockard Delgadillo, one of the chief advocates of the tax reform package.

Today, under the city’s aging, loophole-ridden rules, doctors pay the same rate as gardeners, retail stores can find their various goods taxed at different rates, and motion picture companies, thanks to the aggressive lobbying of their industry’s pioneers, often pay less than a mom-and-pop accounting firm. In many cases, those rates are higher than those of Burbank, Glendale and other neighboring cities that compete with Los Angeles for business, making it harder for Los Angeles to win over companies trying to decide where to locate.

Complex Structure; Variety of Rates

In addition, the code’s complexity creates uncertainty for those businesses. Some companies find themselves taxed at a variety of rates, and honest mistakes can result in penalties on back taxes. Faced with all that, some firms have found it easier to move out of the city than to sort through its tax code.

“It’s a real challenge,” said Larry Kosmont, who produces an annual survey on the cost of doing business in California cities. “And it’s not a challenge that people appreciate.”

In fact, some say Los Angeles already is paying the price for its failure to straighten out its tax code. With the local economy on the uptick, competition is fierce between local municipalities to attract new business--and with it, jobs and tax revenue. In a recent survey by The Times of small businesses throughout Southern California, Los Angeles business owners were by far the most critical of the business climate in their area.

Those are long-standing complaints.

When tax reform was launched in 1995 by former Deputy Mayor Mike Keeley--in those days, it was referred to as “tax equity” but that label was abandoned for the new one--it was largely in response to the complaints from local business leaders.

“The mayor always believed that small business is the engine of economic growth,” Keeley said. “He had formed his business team [which works to lure businesses to Los Angeles and talk others out of leaving], and the team was pounding on the budget side of the house and complaining: How can you expect us to get jobs, when we’re not competitive?”

In the budget submitted to City Council in 1995, Keeley and his team identified the need to clarify and improve business taxes as an important mission. That kicked off the tax equity effort, but no sooner had it been launched than Proposition 218 complicated the task by introducing the need to win voter approval.

Since then, still another issue has risen to challenge the tax effort. Reform of the city’s charter, another top goal of the Riordan administration, brings its own messy politics and high stakes. Where tax reform is intended to clean up the city’s economic footing, charter reform is designed to streamline and improve its governance. Like tax reform, charter reform requires voter approval.

Potential for Voter Frustration

And some political advisors worry that putting all of that on one ballot could hurt both efforts. That is particularly true if, as seems increasingly likely, the two commissions charged with rewriting the charter, one elected and the other appointed, fail to agree on a single proposal.

The elected commission has indicated that in at least two controversial areas it intends to offer voters a choice between the main charter proposal and an alternative. If that appears on the same ballot with the appointed commission’s work, that means voters would be deciding between at least two main charters and two important alternatives--not to mention whatever other issues make that ballot. Faced with such a complicated set of decisions, voters may simply give up and vote against everything, some observers fear.

If they take that frustration out on the tax reform measure as well, the Riordan administration could see two of its most important goals go down to defeat on one day.

Some analysts view the issue differently. They contend that reform, as long as it is seen as good for business, might attract business owners to the polls. Those voters are potentially somewhat more sympathetic than the overall electorate to some of Riordan’s charter reform goals, and therefore may turn out to help both the charter and tax measures.

Even advocates of that idea admit it’s a gamble, especially given that Chief Legislative Analyst Ron Deaton, a determined Riordan foe, has great sway over how the ballot is structured and the arguments presented on it.

There is an additional potential for voter anger. As with any tax reform proposal committed to equalizing the tax burden but not to overall reduction, some businesses will see their taxes go up in order to pay for the decreases that others get. If big oxen get gored, they may mount a campaign to oppose tax reform. And if tax reform appears on the same ballot with charter reform, the no votes might spill over onto both proposals.

In general, the Riordan camp seems untroubled by that prospect. There is such widespread unhappiness with the current tax code that Riordan aides believe business will rally behind the reforms.

While Riordan’s political advisors gauge the risks of running tax reform alongside charter reform, his governmental affairs aides face a different challenge: the virtual absence from City Hall of Councilman Richard Alatorre, the council’s Budget Committee chairman and a proven vote-getter who is one of Riordan’s staunchest allies.

Key Councilman Has Been Sidelined

Alatorre was ready to lead the council charge for tax reform, but a mounting pile of controversies effectively has sidelined him in recent months, depriving Riordan of a key player in a potentially divisive debate. With no end in sight to Alatorre’s troubles--he faces a federal probe into his financial dealings, and a nasty child custody dispute boiled over recently when he submitted to a surprise drug test and showed signs of cocaine use--he seems unlikely to reappear as the standard bearer for tax reform.

Alatorre, who also has wrestled with medical problems, returned to City Council last week, but it remains unclear whether he can muster the clout he traditionally has enjoyed among his colleagues.

Any delay could prove perilous to tax reform. Proposition 218 requires not only that the tax initiative be put up for a vote, but also that it appear on a city ballot.

There are two city elections scheduled for next year, one in April and one in June. To qualify for the April ballot, the measure would need to win council approval in December, an incredibly short time for such a complicated proposition.

Best Opportunity Offered in 1999

Proponents would have until March to win a place on the June ballot, but that is when one or both charter reform measures are most likely to appear, raising the questions of voter confusion.

If the tax bill does not make it on either ballot next year, its only chance would be in 2001, and that means it would come to a vote during a mayoral election. Few advocates of the idea want to see it embroiled in that political contest.

As a result, Delgadillo and Assistant Deputy Mayor Deborah LaFranchi believe that their best opportunity is next year, and they are working to shore up support for it in the business community. LaFranchi has met with civic organizations from one end of the city to the other explaining the proposal and soliciting comments on it.

Those comments have been folded into the proposal, and LaFranchi said it now will be up to those same groups to push for its passage.

“If the business community is not there, this won’t happen,” she said. “They can make this come true.”