Business Tax Reform Is About Creating, Keeping Jobs

To keep the long-running economic expansion in Los Angeles going, the city needs to continue attracting and retaining businesses that create high-quality jobs.

A key part of the strategy is developing a business tax system that is more fair, efficient and business-friendly. That’s why I recently introduced before the City Council a tax-reform package that promotes ideas that emerged from the volunteer Business Tax Advisory Committee, a group of industry, labor and tax experts.

With targeted tax-rate reductions, tax simplification and measures to increase compliance, we can dramatically improve the business climate in Los Angeles without sacrificing significant tax revenue that pays for city services.

A city study is underway to learn more about L.A.’s fast-growing industries, the quality of the jobs they’re creating and how rate relief should be targeted to attract and retain businesses likely to sustain our economic growth. In the meantime, many businesses are concerned about the needless complications and inequities of our tax code and filing requirements.

Los Angeles should make the tax system more simple and fair by eliminating taxes on pass-through revenue and inter-company transactions, costs companies charge clients or related companies without markup.

Pass-through revenue is money paid by a customer to reimburse one business, such as a prime contractor, for having paid another business, such as a subcontractor. Inter-company transactions are cash transfers or book entries between commonly owned companies that are actually a single business.

Assessing these transactions really amounts to double taxation. Most other jurisdictions don’t do it and neither should we.

We also can simplify things greatly by creating a Web-based business tax center that enables taxpayers to file returns electronically, pay taxes by credit card and access their own tax records.

Establishing an independent tax settlement board that operates with clear rules and firm deadlines would streamline the process for disputing assessments. Under the Byzantine bureaucracy now in place, some tax assessment disputes have dragged on for eight years. Representatives of the Big Five accounting firms agree that simplifying this process would dramatically improve taxpayer sentiment.

In addition, the advisory committee suggested that we establish an ombudsman during the tax filing season in January and February to assist businesses trying to identify their tax classification and calculate what they owe. The Office of Finance already has agreed to my request to create such a position.

Equality is a cornerstone of fairness, and yet the current tax code gives government an arbitrary advantage over the private sector. When businesses are found to owe more taxes than they have paid, the city charges them a 15% interest penalty on the overdue amount. When businesses overpay their taxes and a refund is due, the city pays only a 7% interest rate on the money it owes. That’s simply unfair. We need to level the playing field by equalizing the interest rates on refunds and overdue amounts.

Working together with the state, the city also has an opportunity to significantly increase taxpayer compliance, thereby generating new revenue and making the system fairer for businesses that already pay their share.

A 1995 study showed that approximately 60,000 more businesses located in Los Angeles reported income to the state Franchise Tax Board than are listed in the city’s business license tax rolls. Those scofflaws are being subsidized by law-abiding taxpayers and are depriving residents of millions of dollars a year in city services.

State law unfortunately prohibits the Franchise Tax Board from sharing the identities of those businesses with the city. A bill sponsored last session by Assemblyman Gil Cedillo (D-Los Angeles) would have changed that, but the bill inexplicably failed in the 11th hour. We should support that bill (Assembly Bill 63) again, as should municipalities throughout the state.

In the long run, better auditing and information sharing will lead to higher tax compliance. Los Angeles should closely track compliance gains and invest two-thirds of the revenue produced in rate reduction and additional tax reform.

The city adopted a package of tax reforms last year that exempted start-up businesses from any city tax on the first $500,000 of gross receipts, exempted businesses earning less than $5,000 from any business tax and allowed all firms the option of fiscal-year tax filing. That’s a good start, but we need to go further.

Business tax reform is not an abstract exercise. It’s about jobs, plain and simple. It’s time for Los Angeles to take tax reform to the next level to keep our economy moving in the right direction.