People say the city is falling apart. Many feel that correcting the inequities of the Los Angeles Business License Tax is the Holy Grail of the region’s economy. But the mayor and city council are taking an approach that makes the problem worse, not better. A little tinkering around the edges and exempting small businesses grossing under $100,000 a year is not the solution. A snapshot of the San Fernando Valley reveals significant growth and a region choking on its own traffic. At the same time, there is a shortage of housing and a shortage of high- paying jobs. Why? Simple. It’s because we have created an anti-business climate. The new business license fee structure has made many categories cheaper, and in many cases, even tax-exempt. Unfortunately, those categories do not create enough high paying jobs, if any. The fact that Los Angeles is the second-largest city in the nation, yet has not one single Fortune 100 company headquartered here, proves the point. Adjacent cities, all a fraction of the size of the Valley, have more large company headquarters than our metropolis. These cities operate with surpluses compared to L.A.’s persistent deficit. We do not encourage the high-paying jobs; rather, we invite them to move to Burbank, Glendale, Pasadena, Santa Clarita and other nearby cities where they are really wanted. The new jobs created in the Valley do not represent a mix of large and small employers; they are most small businesses. Fast-food restaurants have popped up on the corners, replacing gas stations that only employed a few minimum wage earners. Now those fast-food restaurants employ more than 25 minimum wage earners. Add up all those fast-food outlets and it becomes clear that we have created thousands of minimum wage earners. That is the Valley’s job growth pattern, a pattern leading to a lack of affordable housing for minimum wage earners. This is why, in many cases, several families have to live together just to afford high rents. The businesses we do not attract to the Valley are those that generate a high volume of sales, those that employ many people earning higher wages and important health and other benefits. Why? Because we tax businesses based on their gross revenues, regardless of their profits. A doctor with gross revenues of $300,000 and a net income of $100,000 owes a tax of a few hundred dollars. A large retailer doing millions of dollars with a small profit margin might have the same net income of $100,000 as the doctor, but its L.A. business license could be $25,000, or almost one-fourth of its profit. That’s even before paying state and federal income taxes. In a bad year with large revenues and no net profit, that retailer would still owe the same large license fee. Not only does this outdated and unfair tax system discourage businesses from coming to the Valley and the rest of Los Angeles, it encourages them to open up to adjacent municipalities and to invite our citizens to come and spend their money at their friendly stores. The result is not only lost business license revenue, but sales tax revenue as well. Not too long ago, a West Valley BMW dealership grossing more than $100 million dollars a year in revenue and providing numerous high-paying jobs moved to an adjacent city. Today, that same dealership is grossing much more and the savings on their business license pays a significant portion of their rent. The Valley lost a large source of sales tax revenue, a high-volume retailer and probably a number of the dealership’s new employees live outside the city. What we should do to truly fix our broken business license system is to give credits toward their business license fee to large employers that pay living wages, generate sales tax revenue and make Los Angeles their home. Instead of penalizing them for being a successful large business, we should incentivize them. Why would a large employer doing billions of dollars in revenue come to the Valley when they can move to an adjacent municipality and be in a business-friendly environment and a tax-free heaven? Many insurance companies, mortgage brokers and research firms located along the 101 corridor prove the point. Wake up, Los Angeles! Encourage high-paying employers and employers that generate a lot of sales tax to come back. We need them more than they need us. Rickey M. Gelb is managing general partner of Gelb Enterprises, a real estate development and property management company.
