L.A.’s New Tax Plan Generates Optimism Among Local Businesses
Local business leaders are expressing optimism that a hastily drafted tax plan approved Wednesday by the City Council will lead to real tax relief for L.A. businesses--if the council follows through on its word.
In a raucous session filled with so much horse trading that even veteran business advocates were left dazed by the proceedings, the City Council approved a plan that cuts taxes for most companies, raises them for none and avoids a ballot requirement that would have left the fate of business tax reform in the hands of Los Angeles voters.
On its face, the compromise plan is good news for L.A. business owners, who’ll see both simplification and tax relief. But as always, the devil is in the details, according to Larry Kosmont, president of Kosmont & Associates Inc., which tracks business taxes and fees in more than 100 Southland cities.
“Buy the champagne, but don’t put it on ice,” Kosmont said. “I think the council has the intent and motivation to carry through with this plan. But I’ve seen intent and motivation diluted by politics many times in the city of Los Angeles.”
The deal hammered out Wednesday offers approximately $24 million in tax relief starting in 2001, while it simplifies the city’s complex tax code by slashing the current 64 tax rate categories down to eight. It allows start-up businesses to pay only a $25 filing fee and minimum taxes in the first year and exempts tiny businesses with revenue of less than $5,000 from paying anything but the filing fee.
The plan is virtually identical to the tax cutting plan promoted by Mayor Richard Riordan and councilmen Richard Alatorre and Mike Feuer, with one important exception: The Riordan plan contained about $8 million in tax increases for some businesses, a provision that would have required the measure to be put before voters to comply with Proposition 218. The council declined to boost taxes for anyone so close to the upcoming council elections. Under the new plan, about two-thirds of city businesses will get a tax cut, while the remaining one-third can continue to pay their current tax rates under the existing system, or they can move to the new tax structure and voluntarily pay the higher rates.
Even though some business owners may choose to pay higher taxes, Wednesday’s plan doesn’t require voter approval or run afoul of Proposition 218 because of the optional nature of the tax hike, according to Jon Coupal, president of the Howard Jarvis Taxpayers Assn.
The City Council “isn’t trying to get around Prop. 218; they’re complying with it,” he said. “We generally agree with the proposal. We like it.”
Business watchers say there are two major upsides to this compromise plan. No company would be forced to pay higher taxes under the new system, and it removes the uncertainty attached to any ballot measure.
The downside is that without a ballot mandate forcing the council to act, they could always stall, backslide or amend the current plan beyond recognition.
“We’re all a little unsure as to whether or not . . . it could be gutted in the future,” said Carol Schatz, president of the Central City Assn., a powerful downtown business group. “We’ve got to hold their feet to the fire to make sure tax reform isn’t watered down or eliminated.”
Another potential snarl is how to accommodate taxpayers who choose to stick with the current tax code. Deputy Mayor Rocky Delgadillo predicts that very few taxpayers will go that route. He figures most will opt for the simplicity and lower compliance costs of the eight-rate plan.
“The current system is so entangled and difficult and byzantine . . . that we have businesses paying accountants tens of thousands of dollars to figure out what they owe,” Delgadillo said. “For most, the benefit of cheaper compliance would far outweigh a modest tax increase.”
But others aren’t so sure.
Accountant Gale Case said he’d never heard of a business tax system that allows companies to effectively choose which tax code to use.
“It’s going to be a very complex situation,” said Case, a partner in Beverly Hills-based Ozer, Andersen & Radder. “They effectively have to keep the old system alive to accommodate those who want to stay. Even if that’s a relatively small number, keeping two systems alive simultaneously is going to be a nightmare.”
City officials say it could take several weeks to several months to hammer out final details. The plan requires a final vote by the full City Council.
