Council OKs Reductions in Business Tax

The Los Angeles City Council narrowly averted the demise of business tax reform Wednesday by approving a hastily drafted plan that cuts most business taxes in the city, simplifies the tax code and avoids the ballot box.

Tax reform nearly fell apart when Council President John Ferraro refused to support either a compromise plan--backed by Mayor Richard Riordan and Councilmen Richard Alatorre and Mike Feuer--or competing proposals by Councilwoman Jackie Goldberg.

In a chaotic, two-hour debate over one of Riordan’s top governmental priorities, the council finally produced nine votes for a new proposal--one that had been cobbled together on the sidelines of the chamber.

Although made on the fly, the package that won approval Wednesday had distinct political advantages for a number of council members. By approving at least some tax reform plan, the lawmakers avoided sending a message that they are unfriendly to business a month before seven council elections. Ferraro was able to back a reform package without taking sides in a debate between colleagues with strong, competing positions--an attractive luxury given that the council president would like to seek reelection to his leadership post.

The new proposal builds on the compromise plan, but it ensures that businesses will not face tax increases. Under voter-approved Proposition 218, the tax reform plan would have to be placed on the ballot if the council imposed tax increases.

But under the new version, for which many in City Hall are crediting Ferraro, two-thirds of city businesses will receive a tax decrease and the remaining third can either choose to continue paying their current tax rates or move to the new tax structure and voluntarily pay a tax increase.

“Only in L.A. would you have two tax systems,” said one high-level City Hall official who watched the council debate. “This was unbelievable.”

Tax reform, which has been under review for several years, became bogged down in council politics only about two weeks ago. Both Feuer and Goldberg offered their own plans, with Goldberg the more critical of the mayor’s original proposal.

Carol Schatz, president of the Central Cities Assn., supported the mayor’s plan, and said tax reform took on a life of its own.

“We were caught in the cross-fire between the council and the mayor over charter reform and other smoldering issues,” she said.

During Wednesday’s debate, three deputy mayors and numerous other mayoral aides converged on the council, attempting to win some kind of compromise.

When it was over, Ferraro said: “I haven’t seen anything like this in a long time.”

The diluted proposal won support despite the warnings of the city’s chief legislative analyst, Ron Deaton, who predicted that it will mean a $23-million drop in general fund revenue in the first year and a $17-million drop after that.

Still, most council members said they were eager to adopt a plan that simplifies the city’s antiquated tax structure and reduces most business taxes. The tax reform plan will return to the council for a final vote after the city attorney drafts the ordinance.

As with Riordan’s original proposal, the plan cuts tax rate categories from 64 to 8. Companies will pay $1.18 per $1,000 in revenue to $5.50 per $1,000 in revenue. It also allows start-up businesses to pay a $25 filing tax and minimum taxes in the first year. If the company has less than $500,000 in gross receipts, it would be exempt from paying back taxes.

“The outcome is good,” said Feuer, who tried mightily to win approval for the compromise plan. “It gives business a choice they’ve never had before. I think it’s a very good outcome all the way around.”

Goldberg, who succeeded in winning Mark Ridley-Thomas and Rita Walters to her side, said she favors reducing business taxes but argued that the package approved by the council fails to address inequities in the tax code. She said she believed the mayor’s plan would place businesses in tax codes in an arbitrary fashion.

“Different folks are treated differently,” Goldberg said. “Business tax relief is needed, but why not let everyone share in it? I don’t understand why that’s such a difficult concept.”

Although the ultimate package differed significantly from Riordan’s original proposal, mayoral aides nevertheless said it was a step in the right direction. Deputy Mayor Rocky Delgadillo said the tax relief plan will send a strong message to businesses inside and outside the city that Los Angeles acknowledges that its tax code was too cumbersome and complicated and that it will be simpler and less expensive to do business here.

“Our system is outdated, non-responsive and not competitive,” said Delgadillo, who oversaw tax reform for the mayor. “The cost of doing business in the city will drop and that’s the bottom line.”

The debate’s uncertainty was caused in part by two absences by council members on opposite sides of the issue. Neither Councilwoman Laura Chick nor Councilwoman Ruth Galanter was present, denying each side a vote needed to win a majority. The result was the long deadlock and scramble for votes.

The council debate was so tumultuous that Councilman Mike Hernandez said at one point lawmakers looked like they didn’t know what they were doing.

And in the end, Councilman Joel Wachs clapped his hands together and said: “Bratwurst, Bratwurst.”

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The Plan

The following is a glimpse of the tax reform plan approved Wednesday by the City Council:

Start date: Start-up and small business provisions Jan. 1, 2000; all others Jan 1, 2001.

Number of rates: Eight; from $1.18 to $5.50 per $1,000 in revenue.

Filing tax: $25 to be paid by all businesses.

Minimum tax: $75 minimum tax paid by businesses with gross receipts of $5,000 to minimum tax threshold for their category.

Start-up businesses: All pay filing tax and minimum tax in the first 12 months. If less than $500,000 in gross receipts, exempt from back taxes; construction and film industry companies not considered start-ups.

Winners/losers: 133,786--or 63%--receive a tax decrease. 77,677--or 37%--choose between staying at their current tax rate or switching to the new code and paying more.

Biggest tax decreases: Lawyers, food stores, retail and apparel and other textiles.

Impact to general fund: Drops of $23 million the first year, $17 million in subsequent years.

Source: Chief legislative analyst’s office