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Too many tax breaks and too few questions

Too many tax breaks and too few questions
Mayor Eric Garcetti talks during an interview with the Associated Press in Los Angeles on Aug. 16. (Richard Vogel / Associated Press)

Since 2005, the Los Angeles City Council has approved about $1 billion in tax breaks for developers of seven hotels in downtown L.A. and a mall in the San Fernando Valley. Yet a new report from city Controller Ron Galperin found that city leaders have done little to make sure that developers truly needed the tax breaks or studied whether the money was well-spent.

Among the report’s disturbing findings: The city doesn’t have a comprehensive strategy for doling out incentives. It doesn’t have the expertise to negotiate such deals. And it doesn’t challenge developers’ assertions that they can’t afford to build without a tax break.

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Have these incentive agreements been a good deal for taxpayers? Sadly, Galperin didn’t answer that question, and neither can city officials. The city doesn’t regularly evaluate which kinds of projects merit help or what taxpayers should expect in return.

That’s a striking dereliction of duty by Mayor Eric Garcetti and the City Council, who have a responsibility to use taxpayer dollars wisely. In theory, tax breaks can boost economic activity and generate tax revenue that the city wouldn’t have otherwise. But if a tax break goes to a project that would have been built even without a subsidy, or to a project that doesn’t deliver the promised benefits, then the city has traded away money that could have been spent on police, sidewalks, libraries and other public services.

The justification for most of the incentives awarded is that the city needs more hotel rooms downtown to serve the convention center. But downtown is booming, and there has been little discussion of whether tax breaks are still needed to entice hotel developers to build there.

Galperin’s report outlines several basic, common-sense policies to ensure that tax breaks are necessary and that developers deliver on promised jobs and economic benefits. He recommends that the city enact an economic development strategy and align tax breaks with that strategy. The city should hire experts to scrutinize the projects’ financial assumptions and to negotiate the deals. And the city should evaluate the projects after they are built to determine whether the subsidies were justified.

These are non-controversial, good-government reforms. The question is whether the City Council and Garcetti will enact them.

So far, council members have been loath to limit their power to grant tax breaks to favored projects. City staff drew up a policy in 2015 for when to grant incentives to hotels, but the council never adopted it. The process today remains a political one: The developer — in some cases a big donor to local campaigns — goes to the local council member, who decides whether the project should be considered for a tax break.

This is far too much money to be handed out with so little scrutiny and accountability. Developers of four more hotel projects have asked for incentives as well. Without clear rules on when to offer tax breaks, city leaders run the risk of making them the norm, whether they are needed or not.

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