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Thursday, Mar 28, 2024

TAXES—Jaundiced Eye Cast on City’s Business Tax Reform

Valley business leaders have applauded a call by a citizens panel for sweeping reforms of L.A.’s business taxes, but some question whether the Los Angeles City Council has the will or the gumption to institute real change. The problem is that Los Angeles is addicted to the $300 million it collects in business taxes each year, and secession may be the only way to force the city to go cold turkey, argued David Fleming, chairman of the Economic Alliance of the San Fernando Valley. “This is the Jesse James form of taxation. You take a gun and a mask and you make businesses pay,” he said. “The only true way (to reform the system) is through secession.” That reaction follows the recent release of a report called the “Blueprint for Business Tax Reform” by a task force created last year by city officials. In its report, the Business Tax Advisory Committee confirms what business leaders have been saying for years: the business tax is burdensome and complicated, and it’s driving companies out of Los Angeles. A recent example is Canoga Park-based Qualstar Corp., a digital tape storage firm that is moving into a new facility in Simi Valley next year. When President and CEO William Gervais went looking for room to expand his company, he decided it was easier to move to a city where business taxes aren’t an issue than to stay in one where they are. “The business taxes are lower,” Gervais said. “There are no utility taxes.” That’s not all. “The city of Simi Valley wants us,” he said, “and the city of Los Angeles doesn’t.” Jack Walker, the committee’s vice chairman, said, “The system is not well run. It’s not well funded, and it is not sufficiently coherent. It’s very frustrating and expensive for businesses to comply with.” Because the tax is based on a company’s gross receipts, not its net income, the system can be especially unfair for startups or other companies that might have significant revenue but little or no net income. “That’s a big problem. It’s not a good policy to tax people just starting out,” said Walker. Confusing categories Businesses are taxed based on the type of work they do, but companies with several segments may end up paying in two or more rate categories, making it a nightmare to calculate their tax returns, the committee noted. In other cases, businesses are double-taxed. For instance, when a contractor is paid for completing a project, he or she is expected to pay taxes on the total amount even if subcontractors did a large chunk of the work. The city then expects the subcontractor to pay taxes on its share of the proceeds as well. Corporations, on the other hand, are taxed on revenue they book when they charge a subsidiary for accounting, legal or other services even though actual cash never changes hands. Those inequities, as well as the city’s slipshod approach to collecting the tax, may help explain why more than one-third of the businesses in L.A. don’t even pay the tax and many more underreport their gross receipts, the committee found. That’s costing Los Angeles about $60 million a year in back taxes, money that could be used to lighten the tax burden of companies that are following the law, Walker said. The committee made a number of recommendations for reform, but Walker conceded its aim is to make the system more fair and enforceable rather than provide tax relief. The committee recommended that the City Council: Expand the city’s Tax and Permit Division to make it more business-friendly and go after scofflaws. Extend amnesty to delinquent firms in 2001. Develop a Web-based filing system to simplify compliance and allow companies to pay their taxes using credit cards. Create an ombudsman to help taxpayers navigate the system. Make the tax rates uniform and fair, eliminating double taxation. Hire an outside economist to review the city’s tax rates. Not everyone is pessimistic Los Angeles City Councilman Michael Feuer characterized the committee’s work as “very promising” and said he’s optimistic the council will adopt many of its recommendations. Feuer, who chairs the City Council’s Ad Hoc Committee on Tax Reform, has proposed a series of reforms that mirror the committee’s recommendations. “We need to make it easier in L.A. for businesses to do business,” he said. Fleming is not holding his breath. “This (tax reform) always crops up just before an election, but then just goes away,” he said. “The way the city’s budget is set up, (the business tax) is where it gets its income. It would be too painful for the city to cut the tax.” The committee’s recommendations are a start, said Fleming, but until L.A. lowers its taxes, it will remain at a competitive disadvantage to other communities that have little or no business taxes such as Calabasas, Westlake Village and Glendale. Cathy Maguire, chair of the Valley Industry and Commerce Association, applauded the recommendations and was more upbeat about the chances of the City Council acting on them. “It just seems like the climate is such that it has a good chance of getting through,” said Maguire. Just simplifying the system will go a long way in satisfying many in the business community, she added. “A lot of businesses have to have lawyers and tax attorneys and everyone else to help them do their filings. It’s very expensive and time-consuming.” Walker promised that the 19-member committee mostly lawyers, accountants and taxpayer advocates will work hard to make sure the council acts on the recommendations. If the council reforms the business tax in a meaningful way, it could take some of the steam out of the secession drive in the Valley where the business tax has been widely criticized by business leaders. “I think it’s likely the City Council will enact many of our proposals,” he said. Richard Close, chairman of Valley Voters Organized Toward Empowerment (VOTE), said he’s willing to bet the City Council lets the tax ride. “The composition of the City Council is not business-friendly. They don’t understand the need to keep businesses, especially in the Valley,” he said. While VOTE can’t promise that leaders of a new Valley city would reduce or abolish the tax, Close believes residents would have more say over their own destiny. “The real issue is local control,” he said.

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