Small Neighbors Could Teach L.A. About Working With Small Business

Los Angeles’ city government and City Council, if they stick to a business tax reform plan agreed to last week, will finally join other smart cities in Southern California in developing a new relationship between local government and small business.

The big city may have miles to go before it is hailed as a good place for business. But it can take lessons from many communities--including Riverside, Irvine, Azusa, Downey, Burbank and many others in the region--that understand the new era in which cities can’t raise taxes and in which only growing businesses can buoy municipal budgets.

So business and local government increasingly are partners in ways that Los Angeles, unfortunately, has yet to comprehend. Los Angeles has the highest business license tax in California. Its city government staff is renowned for being unhelpful and slow to deliver business permits or recognize the special needs of small companies.

Mostly, the council and city government, thinking that old-fashioned big business is still around to be taxed and regulated, have been out of touch with the changes that have occurred in Southern California’s economy--the most vibrant in the United States.

Today, it is hard even to count how many businesses there are in this region. The Census Bureau estimates there are 422,000 business entities in the eight-county region from Santa Barbara to the Mexican border. And bankers and economists say there could be 70,000 more that miss the official count.

In Los Angeles County, there are 216,000 registered businesses, but an estimated 35,000 more are not on the rolls of any city. Many are entrepreneurial one-person operations that have no formal employees but are linked to scores of helpers, suppliers and customers by telecommunications and the Internet.

Why is that pertinent to tax reform? Because unregistered businesses don’t pay most municipal taxes, although they do pay sales taxes and, presumably, federal income taxes.

It is pertinent also because cities need to know and nurture their local businesses. Long ago, cities lost the use of most property taxes to state government. And since the 1996 passage of Proposition 218, they have lost the ability to increase municipal taxes without approval by 51% of voters in a direct election--a prohibitive condition.

So local companies, making greater tax payments as their profits grow, are City Hall’s main hope for revenue to pay for police, fire, street repair, libraries and other public services.

Smart cities that have seen the new dynamic have lowered business tax rates and “streamlined their tax systems and modernized their procedures,” says Larry Kosmont, whose annual Cost of Doing Business Survey compares more than 100 Southern California cities.

That Los Angeles is simplifying its system from 64 tax categories to eight is a step in the right direction, Kosmont says. A new tax system also allows the city to provide “an amnesty,” bringing businesses that haven’t registered onto the rolls with no questions asked.

Next, Los Angeles needs to focus its efforts on the kind of business activities it wants to retain. Again, the world is changing. Los Angeles depends on retail sales taxes as a major source of revenue, but experts see Internet commerce threatening retail taxes. Utility taxes from telephone and electricity users are also threatened by changes in technology.

The City Council even needs to learn what kind of companies reside in Los Angeles. A key tax reform lowers license fees to encourage start-up companies. But the council seemed not to understand that larger companies and family businesses can use help also, says Rebecca Barrantes, who represented the 1,000-member Latin Business Assn. in tax hearings. “Our Latino companies all want to grow to be big,” Barrantes says.

Other cities are focusing their efforts. “Each community can have a competitive advantage in a strong economy,” says Rick Cole, city manager of Azusa. His city of 45,000 has chosen to encourage housing growth as an aid to retaining and attracting industry. Azusa is the site of the proposed 1,602-home Rosedale development, which has won City Council approval but is being held up because of a protest by some residents.

Many cities shun housing development, but Azusa thinks it can be a boon if “we’re nimble enough to hold down costs and taxes,” Cole says.

Downey, a city of 100,000 in southeast Los Angeles County, is another community with a focused agenda. Downey is about to receive title from NASA to the 160-acre aerospace complex where the Apollo space capsules were built. The city wants to attract light industry to the site, which the city will be able to lease at an attractive rate, says Downey City Manager Jerry Caton.

Downey could easily lease the site for warehousing and fill municipal coffers. But it is not going to do that because warehousing creates too few jobs. Downey is holding out for manufacturers of medical instruments or plumbing fixtures. “Low-tech or high-tech makes no difference. We want industry that pays good wages so the employees can buy houses here,” Caton explains.

The lessons of Downey, Azusa and others are about the role of city government, which is to provide an environment for business to prosper without giving away community prerogatives.

To be sure, Los Angeles, the largest city in California with 3.7 million people, is far more complex than its tiny neighbors. But it can learn from their example.

And Los Angeles city government can certainly improve. If tax reform survives political maneuvering that still could gut it, Los Angeles can start reforming its regulatory morass. “In other cities you can apply for business licenses and permits online and get quick responses,” says William Gartner, professor of entrepreneurship at USC. “But you can’t do that in Los Angeles.”

In a city with a municipal budget of more than $2.5 billion and more than 33,000 employees, somebody should ask, “Why not?”