L.A.’s Unfair Tax Structure Sends Wrong Message

For some reason, the City of Los Angeles doesn’t like my kind. I know this is hard for many readers to understand, and the reason has nothing to do with my charming personality. After some reflection, I have reached this conclusion based on the fact that the city charges me a far higher rate on my gross receipts taxes than most types of companies. For the pleasure of operating a small public affairs firm (categorized as “professions and occupations”) in the City of Los Angeles, I am asked to pay a 5.7% tax on each $1,000 of my business grosses. In comparison, this category pays far higher tax rates than nearly every business imaginable. Tugboat operators, who are known for their risqué tattoos and tobacco stained shirts, pay only 1.01% on every $1,000. Phone companies get the same low rate, along with child care providers and multimedia companies. Antique show promoters, swap meet operators and landlords are taxed at 1.27%. So are shoe repairers, retailers and radio shock jocks. Even those annoying telemarketers are taxed at nearly half the rate of my category. And for some reason, HMOs are taxed at the same rate as me, which begs the question what exactly did members of the professions and occupations category do to upset city lawmakers so much? I raise this issue because the L.A. City Council reportedly is moving toward re-establishing the Business Tax Advisory Committee (BTAC) to help develop policy recommendations to attract businesses back to L.A. Considering that the city has hardly added a single job since 1985 while adding 1 million residents, one has to wonder what took so long! Nonetheless, I welcome City Hall’s renewed interest in creating jobs through policies that attract businesses as opposed to the many policies that have eroded L.A.’s competitiveness over the years. However, I don’t think City Hall needs to wait several months for BTAC to make new recommendations — there are plenty of recommendations awaiting legislative action. As a member for the last two years of BTAC’s five-year existence, I became quite familiar with L.A.’s tax structure and how unfavorable it continues to be compared to neighboring cities such as Glendale and Burbank, neither of which even has gross receipts taxes. After a lot of hard work under the admirable leadership of co-chairs Mel Kohn and Jack Walker, BTAC was only able to convince the city council to adopt a modest 15% cut spread out over five years. Thanks to the efforts of City Councilmembers Tony Cardenas, Eric Garcetti, Wendy Greuel (and others), the city council also simplified the tax structure by reducing the categories from approximately 65 to just seven. In addition, most businesses were exempted from having to pay the tax if their annual gross receipts were under $100,000. Startups were also exempted. Five years later, revenues from the gross receipts tax is higher even though the tax rates are lower, much to the surprise of skeptical council members who dragged their feet on tax reform for years. At the same time, L.A.’s ranking on the annual Rose-Kosmont Cost of Doing Business Survey has fallen. In hindsight, VICA had it right when it called on the city to simply “axe the tax.” Obviously, the city council never would have gone along with eliminating the tax entirely, so all I am saying is that I wish my fellow BTAC members and I had been more aggressive in pursuing a more significant tax reduction for all businesses. While serving on BTAC, several policymakers inquired why the city couldn’t just split the difference between the lowest tax categories and the highest tax categories so that every business owner paid a simple flat tax. From the perspective of a small business owner who is placed in the highest tax category, I like that idea! Then again, those in the lowest rates would complain that their taxes had increased, and rightfully so. The whole question is moot , however, when one explains that any tax hike proposal must be approved by two-thirds of the voters, something that is not going to happen. Since BTAC disbanded, two “blue ribbon” committees studied business climate issues and made a series of recommendations on how to improve L.A.’s poor image and to create new jobs often while saving the city money. One such committee was the mayor’s Economy & Jobs Committee, which two years ago this month, made 100 recommendations. The other committee, Business Retention and Recruitment Advisory Task Force (BRRAT), was chaired by me and released a similar set of recommendations a few weeks before the Jobs Committee. With the exception of some minor progress at LAX and the recent creation of the City Council Jobs & Economy Committee, none of the recommendations from either group has been taken seriously in the last two years. To its credit, the city council seems to be moving ahead on making L.A. more “film-friendly.” Acting upon recommendations from the CAO’s “Ugly Betty” report, Councilman Richard Alarcon is pursuing a series of reforms geared to filmmakers. These include making city facilities easier for filmmakers to access and placing “energy nodes” at popular shoot locations. While the CAO’s recommendations are helpful, they miss out on addressing the most important factor in explaining why entertainment-related businesses and all the others (except for pot dispensaries) find other cities less costly. They are less costly because their tax rates are significantly lower — some don’t even have a gross receipts tax for businesses. For the next generation of BTAC members, please don’t dance around the primary reason businesses leave Los Angeles. Instead, please seek further reductions in the gross receipts tax rates and get L.A. on the path to eventually being on par with neighboring cities without business taxes. If “axing the tax” is not feasible, then please pursue getting all businesses into the lowest category of 1.01%. Short of that, I’d feel better about myself if my taxes could be lowered at least to the tax rates that include telemarketers. And I’ll promise not to call anyone during dinner. Brendan Huffman is the owner of Huffman Public Affairs, a policy consulting firm in Studio City, and is the host of “Off The Presses,” an internet talk radio show broadcast via www.LATalkRadio.com.