L.A. council votes to cut taxes for Internet-based firms

The Los Angeles City Council on Friday voted to cut business taxes for Internet-based firms that had been socked with a mammoth increase last year after the city changed their tax rate from the lowest bracket to the highest.

The council unanimously approved the measure despite concerns by some members that the tax break would be applied retroactively to Jan. 1 and cost the city $3.4 million in revenue. They argued that L.A. could not afford to lose that money at a time when the city faces a $212 million budget shortfall.

But some of the 1,400 businesses affected by the measure had threatened to move out of the city if the tax rate was not reduced, and proponents of the break said the city would lose even more tax revenue if those firms relocated.

“We will lose more than $3.4 million if we don’t do it this year,” said Council President Eric Garcetti. “It’s the right thing to do on dollars and cents.”

During the debate, Councilman Tony Cardenas said he supported the idea of the tax rate reduction but argued that to make it retroactive would send the wrong message at a time when the city is poised to slash services and lay off thousands of workers. Instead, the councilman wanted the reduction to take effect in 2011.

“We’re taking a step backward. We’re talking about reducing services at our libraries, to our parks, to our Police Department, the Fire Department and everywhere else,” Carendas said. “The question that I have is, are we really going to lose these businesses within the next 12 months if we don’t pass this today?”

Council members Jose Huizar, Paul Koretz and Richard Alarcon also expressed concerns about the lost revenue -- with Koretz saying it made “absolutely no sense” -- but ultimately voted for the measure. Garcetti urged a unanimous vote, saying it already had enough support on the 15-member council to pass.

Rachel Glaser, chief financial officer of the Internet search site Mylife.com, said her company, which employees more than 100 people, had been exploring a move out of Los Angeles to Culver City, Burbank or El Segundo because of the tax increase.

“We’re very happy this passed, not only for our company but for all the other businesses in L.A.,” Glaser said.

Last year, the city’s Office of Finance reclassified her company and other Internet-based firms into a higher business tax bracket. Glaser said the increase would have cost her company an extra $2 million to $3 million over five years.

Before the change, Internet companies were considered “multimedia” businesses and subject to a tax rate of $1.01 per $1,000 of gross receipts. Under the new classification, they were placed in the “business and professions” category, which has a tax rate of $5.07 per $1,000 of gross receipts. Under the measure approved Friday, the city will create new tax classifications for Internet companies that will make them subject to the same rate as multimedia firms, which have the lowest rate.

phil.willon@latimes.com

www.twitter.com/LATimes Willon