Public Scrutiny of Proposed Tax Revisions Begins By JACQUELINE FOX Staff Writer If the first public hearing on a report released in January outlining recommendations for reforming the city’s Byzantine tax code is any indication of things to come, expect a lengthy and complicated debate over the merits of the proposed reforms or whether they are even necessary. Representatives from the city’s Business Tax Advisory Committee (BTAC), commissioned five years ago to study alternatives to the city’s tax system, convened downtown Jan. 26 to discuss the findings of the draft report, the result of a $420,000, two-year study conducted by Fresno-based MBIA MuniServices Co. MBIA has proposed a two-tiered tax system that would levy businesses on their net incomes at a flat rate of $3.50 per $1,000, instead of their gross receipts, which taxes every business, big and small, on their gross revenues, regardless of whether they make a profit, and sometimes more than once through what are known as pass-thru taxes on subcontracting revenues. But the MBIA report also recommends the tax be based on the square footage of a business operation, beginning at 2 cents a square foot for some industries, such as grocery stores, doctors and auto dealerships, but going up as high as 30 cents for others, such as restaurants, apparel manufacturers and commercial landlords. Because the city nets a whopping $300 million annually through the gross receipts tax, MBIA’s report was compiled under a scenario of revenue neutrality, hence, there are winners and losers. And it’s expected that many from the business community on both sides are preparing to lodge a laundry list of complaints and concerns about the recommended changes at the next BTAC meeting set for Feb. 2. The first meeting, however, although public, was largely comprised of BTAC members and city officials, including Jack Walker, a retired tax attorney and committee member who says the current MBIA recommendations appear to involve huge risks and costs and fail to offer a compelling reason for a change in the city’s code, a move that would require voter approval. “There are always huge risks and costs involved when you talk about changing a tax system,” said Walker, who retired from the Los Angeles law firm of Latham & Watkins in January. “And on their face, I just don’t see in these recommendations a compelling need to do that. I also think the issue here is that it shouldn’t be that they (the recommendations) are only somewhat better, but that they should be hugely better before you go down that road of asking for changes in the law and making those expenses.” Walker also said a system based on net receipts and square footage appears now to be even more complicated than the current one based on gross receipts. More scrutiny But more important, he said, was the propensity for red flags under the net tax system, because it would open up businesses to more scrutiny through likely increases in itemized deductions. “I’ve been practicing tax law for more than 30 years and usually when you’re fighting with the Internal Revenue Service, you’re talking about deductions,” said Walker. “I can just see a whole new world of uncertainty and litigation coming out of it. I recognize that the existing system is patchy, but you only have to calculate one number. And right now I’m just not convinced that this report offers up anything better.” But other BTAC members disagree, sighting the need for a change in the tax code in order to both retain existing businesses and draw new ones in. They caution that this meeting was the first of many planned public hearings that will give both business leaders and community organizations a chance to weigh in with both their comments and their criticisms. “With all due respect, there is a huge compelling reason for changing the law,” said Marvin Selter, BTAC co-chair. “The overriding reason for changing the law is, in my opinion, to provide an incentive for businesses to stay here and to come here,” said Selter. Once BTAC has compiled further recommendations for changes it will submit a final report to the mayor’s office. The city council and the office of finance would then review the report and determine whether a ballot measure for altering the tax code should go before the voters in 2005. Reader Questions Sought In an attempt to provide a forum for thorough discussion of the issue, the Business Journal plans to publish a regular section devoted to the proposed revision of the city’s business tax system. In the section to appear in upcoming editions, Marvin Selter, Valley businessman and Business Tax Advisory Committee member, will answer questions submitted by business owners and concerned citizens concerning proposed changes in the tax system. Please submit questions to Business Journal Editor Jason Schaff by e-mail at firstname.lastname@example.org or fax to (818) 676-1747.