L.A.’s City Tax Wreck

Los Angeles city business taxes are a mess, widely viewed as unfair and impossibly Byzantine. Self-employed people and small businesses in particular often just don’t pay, and larger companies say the cost is nudging them out of the city.

Then-Mayor Richard Riordan advanced some reform ideas in 1997, and finally there are real legislative proposals in the works. With next year’s city budget approved, the City Council should make tax reform its first priority.

Here’s one example of what’s wrong: Studio City-based Seller’s International Body Shop, a family-owned business with 19 employees, paid a $9,000 city tax this year because it is assessed at the highest rate, just like a big downtown law firm. It paid up, but an estimated 30% of businesses freely ignore their tax obligation.

The two proposals circulating in City Hall nearly got caught in the budget blender when Mayor James K. Hahn proposed raiding a tax reform trust fund to help balance the budget. The trust fund escaped, but money sitting idle will always be a tempting target, another reason for quick action.

The proposals are similar except for one key element. City Council members Wendy Greuel and Eric Garcetti call for a 5% annual tax cut that would reduce the overall business tax rate by 25% over five years. Greuel and Garcetti maintain that the big cut is necessary to send a message that Los Angeles is a business-friendly city.

It’s a nice message, but one the city can’t afford now. The council should instead consider the 3% annual cut proposed by a city-appointed business tax advisory committee, which would reduce the rate by 15% over five years.

Greuel and Garcetti say their plan would encourage scofflaws to pay their taxes, and this, coupled with tougher enforcement, would bring in enough new revenue to balance out the cut. But that is highly speculative, and any mistake would be costly because the business tax generates about 10% of the city’s total tax revenue.

The two reform proposals are nearly identical in terms of simplifying the code, which has sprouted dozens of poorly defined categories.

The city has been boosting tax revenue by dropping businesses into a catchall category that claims the highest tax rate. This hodgepodge would be replaced by a simpler standard code used in state and federal tax returns.

Seller’s International Body Shop is one business that would benefit greatly; its city tax obligation would be cut by half under the reforms. The number of tax brackets would be reduced and a flat fee established for very small businesses. The tax reform trust fund, which has $11.3 million in it now, would fund the expected initial dip in collections.

Though even the 3%-per-year plan carries some risk, it is one that the city should take. If it wants businesses to pay, it has to offer a fairer, simpler tax, and then enforce it.