L.A. Panel Endorses Tax Cut for Businesses

After more than a decade of false starts by officials, a City Council committee cleared the way Thursday for a comprehensive plan that would cut business taxes in Los Angeles by $95 million a year and create special breaks for the entertainment industry.

Committee members predicted that the full City Council would approve the long-awaited reforms, which eliminate taxes for most companies, before the end of the year, allowing some changes to begin Jan. 1.

“Today is a good day for businesses in the city of Los Angeles,” said Councilwoman Wendy Greuel, a member of the council’s Ad Hoc Business Tax Reform Committee. “It has been a long time coming. We are saying, ‘Los Angeles is open for business. Los Angeles wants your business.’ ”

Business leaders hailed the vote as a significant milestone, even though some of the changes fall short of the proposals sought by the Los Angeles Area Chamber of Commerce, the Valley Industry and Commerce Assn. and other groups.

“It’s big,” said Bonny Herman, president of the San Fernando Valley’s business association. “I’m very pleased.”

The reform package would eliminate the city’s business tax on firms earning $100,000 or less, about 61% of companies in Los Angeles, and phase in a 15% cut for all other companies over five years.

Other measures would eliminate business taxes on bad debt and exempt writers, directors and other entertainment industry workers from paying the tax if they make $300,000 or less in gross receipts.

The committee voted 3 to 0 to recommend the reforms, which had the support of a city-appointed Business Tax Advisory Committee.

The reform package would also simplify the city tax code, cutting the existing categories that determine how a business’s tax is calculated from 75 to seven. The tax ranges from $1.18 to $5.91 per $1,000 of gross receipts, depending on the business.

Businesses have sought reform for decades, but city budget crises have delayed the effort. When businessman Richard Riordan was elected mayor in 1993, he vowed to reform the tax system.

A study released in 1998 recommended the creation of a citizens business tax advisory committee, which released reports in 2000, 2002 and 2004 that recommended various reforms.

Originally, business groups wanted a 25% tax cut for businesses making more than $100,000 a year, but Herman said 15% appears to be the best City Hall can do.

In fact, City Administrative Officer William Fujioka and Chief Legislative Analyst Ron Deaton recommended Thursday that, out of prudence, the tax cut for large businesses be held to 10%.

But the committee rejected the advice after several businesses said such a small reduction would not be meaningful.

The 15% reduction for businesses making more than $100,000 would start in January 2006 and be phased in, with the tax decreasing each year based on the amount of tax revenue received by the city.

To protect the city budget in case of a financial crisis, the tax cut for large businesses would occur only if the city’s tax base grows more than the 4% average officials project.

Greuel said she believes more audits of businesses and business growth stemming from tax reform should bring in enough new revenue to cut taxes by 15% within five years.

For smaller businesses, those making $50,000 or less would be exempt from the gross-receipts tax starting in July 2005 and those making $100,000 or less would be exempt starting in July 2006.

That reform would remove 130,300 businesses, or 61% of those currently paying taxes, from the business tax rolls, said Mayor James K. Hahn, who made a rare appearance Thursday before a council committee to support the reforms. “It will encourage more businesses to start here in Los Angeles,” Hahn said.

Currently, the highest gross-receipts tax on a business making $100,000 is $591, so some are skeptical that the cuts will do much to add jobs or create new businesses.

Jim McQuiston, who owns a management consultant business in Hollywood, told the committee that for the average small firm the tax break would amount to no more than the cost of two opera tickets.

“It won’t bring in more jobs,” he said.

But a study released Thursday by MBIA Muniservices indicated that tax cuts could encourage Los Angeles businesses to stay put and new firms to move in.

To provide incentives for the city’s multibillion-dollar entertainment industry to keep doing business in Los Angeles, the reforms would end the gross-receipts taxes for writers, directors and other industry workers who make $300,000 or less.

“It’s going to be the first time in decades that we are going to see meaningful business tax reform in this city,” said Cheryl Rhoden, assistant executive director of the Writers Guild of America.

The reform would also reduce the tax burden on small and medium-sized film production companies by $2 million annually by adjusting the rate at which companies pay taxes.

The two entertainment industry reforms would take effect in July 2005.

An exemption from business taxes on bad debt would take effect Jan. 1, the first reform to kick in.

One point still to be resolved before a full council vote is whether to include a provision for reinstating taxes without voters’ approval if the city runs into a financial crisis.

The reforms now go to the council’s Budget and Finance Committee. That committee’s chairman, Bernard C. Parks, has said he is open to tax reform but wants to be cautious, because the gross-receipts tax raises $380 million a year and accounts for about 11% of the city budget’s revenue.

Parks was unavailable for comment.

Even if Parks, a candidate for mayor, decides to oppose some of the reforms, his committee is likely to recommend them.

In addition to Parks and Councilwoman Cindy Miscikowski, the five-member budget committee includes Councilmen Tony Cardenas and Greig Smith, who voted for the reforms Thursday, and Eric Garcetti, who co-wrote the tax-reform proposals.

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Business tax reforms

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The Los Angeles City Council’s business tax reform committee recommended Thursday these changes to the tax on gross receipts:

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Eliminate the tax for businesses with gross receipts of $100,000 or less.

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Reduce the tax 15% for all other businesses.

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Stop collecting the tax on bad debts.

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Reduce the tax burden on small and medium-sized film production companies by adjusting the tax rates.

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Exempt individual artists earning up to $300,000.

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Trim the categories used to calculate the tax from 75

to seven.

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Allow businesses to pay on a cash or accrual basis.

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Source: Councilwoman Wendy Greuel’s office