Overhaul of Business Tax in L.A. Proposed

A long-awaited report on Los Angeles’ business-tax system proposes an overhaul of the antiquated code that has bedeviled entrepreneurs for decades with its complexity and inequity.

The report, released Wednesday, recommends that the city abandon its current practice of taxing businesses based on their gross sales and move to a code based in part on how much physical space they occupy within the city limits.

Although the revised structure would be simpler to calculate and would provide municipal coffers with the same amount of revenue as before, its effect on businesses would vary. Some industries would see fat tax reductions, while others would see substantial hikes.

Among the big winners would be auto dealers, grocery stores, accountants, doctors and other professionals.

Businesses reaching for their wallets would be restaurants, apparel manufacturers, parking garages and landlords, some of whom already are lining up to complain.

“Of course we’re entirely opposed to any tax increases,” said Ilse Metchek, executive director of the California Fashion Assn., which represents the region’s apparel industry. “Isn’t everybody?”

The report, prepared by the Fresno-based consulting group MBIA MuniServices Co. and funded by Los Angeles, is just the latest word in a long-running debate that looks to continue for the indefinite future.

The reforms advocated in the report would have to be approved by the City Council, then placed on the ballot to gain approval by voters. Some observers say that’s unlikely to happen until after March 2005, when Los Angeles residents will go to the polls to pick a new mayor.

Meanwhile, a city-appointed Business Tax Advisory Committee formed in 1999 to spearhead the overhaul is scheduled to disband later this year.

Still, some who have worked on the issue said business-tax reform was far from a dead issue and that the new recommendations would provide a blueprint for change.

“It really changes the outlook for raising revenue in Los Angeles,” said Mel Kohn, president of the Business Tax Advisory Committee. “It’s a work in progress ... but it lays the groundwork.”

Los Angeles’ business tax accounts for $360 million of the revenue in the city’s $5.1-billion budget. State law precludes cities from levying income taxes on businesses, so municipalities have had to devise other means of extracting revenue from them.

Los Angeles’ current system requires businesses to pay taxes on their sales, ranging from a low of $1.18 per $1,000 of gross receipts to a high of $5.91.

Experts say the tax is costly, unfair and complicated, with some businesses required to calculate their share across multiple industry categories in a system that boasts 59 of them.

Wednesday’s report proposes that businesses pay just one rate -- $3.50 per $1,000 -- based on their net receipts rather than their gross receipts. Experts say that would be significant because it wouldn’t penalize businesses for so-called pass-through revenue they pay to subcontractors, nor for the cost of their materials. Very small businesses would pay only a $145 minimum tax.

The hybrid system would also require businesses to pay a tax based on the size and type of their facilities, ranging from 2 cents a square foot to 30 cents a square foot.

Some real estate firms would be hammered. According to the report, a commercial landlord who rents a small retail space would see his or her Los Angeles business tax payment double, while the landlord of a 30,000-square-foot apartment building would pay three times what he or she is paying now.

“If they go through with this, they are going to have a lot of vacant buildings,” said Rex Hime, president of the California Business Properties Assn. “So instead of a vital economy you have a run-down economy.” Hime said his group would be active in opposing such measures.

Also wary are restaurateurs, who would see hefty increases under the proposals.

“We understand that a lot of cities are hurting,” said Andrew Casana, director of local government affairs for the California Restaurant Assn. “But so are a lot of mom-and-pop restaurants.”

Some politicians were vexed that the so-called revenue neutral proposals in the report appear bent on preserving the government’s take rather than on cutting taxes for all firms.

“Los Angeles’ business tax is one of the highest in the region,” Councilwoman Wendy Greuel said. “We can not compete with neighboring cities if we continue to penalize businesses for locating in Los Angeles.”

The Business Tax Advisory Committee’s Kohn said the public would have plenty of opportunity to air its suggestions and concerns at meetings being planned by his group over the next few months.

The study can be downloaded from the Office of Finance website at www.lacity.org/finance/.