An L.A. tax that’s really gross

If Los Angeles business leaders were looking for somebody to carry the torch on one of their most important causes, it’s a safe bet that Wally Knox wouldn’t rank very high on the list.

The former Democratic assemblyman acknowledges that he had a reputation in the state capital as a “wild-eyed, union-loyal liberal.” He is perhaps best remembered for his authorship of the 1999 law that secured overtime pay for Californians who work more than eight hours a day -- legislation that many from the corporate world condemned as government meddling into the decisions of private employers.

So when Knox starts spouting a line that sounds pro-business -- specifically, advocating to replace the city’s gross-receipts tax, a big bugaboo for local companies -- it makes your ears prick up.

On Monday, at an economic forecasting conference at UCLA, Knox used his turn at the dais to trumpet trading in the gross-receipts tax for a “more rational” levy that would be based on a firm’s profit.

In other words, let’s tax the city’s businesses on the bottom line, not the top.

Knox -- who made similar statements last month at a meeting of the Southern California Assn. of Governments -- isn’t out speechifying for the heck of it.

After Mayor Antonio Villaraigosa delivered the closing remarks at the UCLA confab, I buttonholed his honor to ask what he thought of Knox’s idea. As we were talking, Knox walked over and began to explain more precisely what he had in mind. The mayor’s eyes lighted up.

“I love it,” said Villaraigosa, an old friend of Knox’s from their days together in Sacramento. “Damn right I want to look at it.”

Gary Toebben, president of the Los Angeles Area Chamber of Commerce, says he also “took note of Wally’s comments and think we ought to work with him.”

Knox, who recently founded a research organization in L.A. called the Institute for the Middle Class, is not pushing this issue to make executives happy (though he’s not necessarily opposed to that). His hope is that if businesses here are more successful, they’ll share their prosperity with their workers in the form of higher pay and better benefits.

Although that remains to be seen, it is in fact hard to imagine a tax that is dumber than the one on gross receipts.

The effect is that if you and I both run shoe stores that ring up $1 million of sales this year -- but you earn $200,000 in profit and I endure a net loss -- we’ll owe the exact same thing to the city: $1,370. (Rates range from a low of $1.09 per $1,000 in gross receipts for wholesalers to $5.50 for professions such as law firms, with retailers at $1.37.)

One result, Knox fears, is that this makes companies less willing to invest in the kinds of technology and fresh approaches that will be crucial as L.A. continues its transformation from a manufacturing center to a more service-oriented economy. “You’re penalized for trying to restructure,” he says.

Messing with the tax code is not without risk.

Villaraigosa, who is intent on reducing the city’s budget deficit, can ill afford to have the number crunchers goof up and set a profit tax that’s too low. They need to guarantee that, at the least, any new tax would generate the same amount of money as the old one: $434.5 million last year, accounting for about 10% of the city’s annual budget.

Many are also bound to gripe that shifting to a profit-based tax would be too complicated to calculate and hard to administer. But there’s no reason that the city’s data collection apparatus couldn’t be plugged in to the state or federal income tax system, in which the needed information already exists. Some initial expense might be required to piggyback in this fashion, but that shouldn’t be a deal breaker.

Most daunting will be the politics. In 2004, after many years of business community complaints and a long period of study, then-Mayor James K. Hahn and the City Council finally approved a series of reforms to the gross-receipts tax. They kicked in last year, and now businesses with annual revenue of less than $100,000 don’t have to pay. Meantime, the 250,000-plus firms in the city that aren’t exempt will, over time, see their taxes trimmed by as much as 15%. (About half of that cut has already been phased in.)

But a 2004 report commissioned by the city called for going even further. It characterized the gross receipts formula as “not economically efficient” and “not equitable,” and instead suggested implementing a tax that would reflect both profit and a company’s square footage (a nod to the concept that businesses with a larger physical footprint use more city services).

“We were given an assignment that we knew would fail politically,” says Gary Painter, a professor at USC’s School of Policy, Planning and Development, who was part of the 12-member panel that prepared the report.

The real problem, he says, is that every time you overhaul the city’s tax structure -- even if it doesn’t swipe a dime from L.A.’s coffers and is fairer and smarter in the way it encourages economic activity -- some businesses are going to wind up paying more than they were before. And even if they’re in the minority, they tend to make the most noise at City Hall.

Beyond that, some worry about that deadly affliction from which many a public servant has been known to suffer: inertia.

“Some council members might think they’ve already done their thing” by passing the earlier reforms, says consultant Larry Kosmont, whose annual cost-of-doing-business survey continues to rate L.A. as inordinately expensive. In truth, he adds, “they’re far from done” in terms of fixing things.

Of course, if anyone can break through the torpor, it’s Villaraigosa -- particularly on a subject like this. When then-Mayor Richard Riordan attacked the gross-receipts tax, the council could shrug it off as a sop to his business allies. But it would really be something for a mayor who is still trying to establish his pro-business bona fides to take this on.

And if he succeeds, the whole political equation could begin to change. As I’ve written before, I would love to see a “living wage” ($10.64 an hour) taken past the doors of a dozen airport hotels and extended across the city. But it would be easier to do that -- or even seriously debate doing that -- if L.A. was viewed as friendlier to business overall.

To get a little, you’ve got to give a little. And there’s no better place to start than by supplanting the gross-receipts tax. Even the doubters can be brought along -- that is, once the mayor Knox some sense into them.

Rick Wartzman is an Irvine senior fellow at the New America Foundation. He is reachable at rick.wartzman@latimes.com.