Taxing Problem, Simple Solution

The San Fernando Valley and its neighbors are looking at steps to turn the region into a more business-friendly environment, as new and recovering companies are choosing to do their business elsewhere. In March, the city of Los Angeles approved a tax subsidy for Westfield Group to expedite a Woodland Hills project at Westfield Topanga that will create 1,500 jobs when completed. The city of Burbank held workshops for nearly 500 entrepreneurs in 2013 to help spur startups and business growth. And up north, the Santa Clarita Economic Development Corp. has just allocated $200,000 to attract new businesses in aerospace, medical devices, information technology, manufacturing and entertainment. However, these efforts are all relatively minor fixes. The largest albatross around this region’s neck is the city of Los Angeles’ gross receipts tax – which is the highest business tax by a factor of 9.5 times the average rate of the other 87 cities in the county. As a result, businesses are setting up shop right outside city borders while enjoying the city’s services as residents, commuters or regular visitors. Unfortunately, the city is receiving none of the revenue and benefits of having these businesses in the area. The severity of this issue is far from overstated: Between 1980 and 2010, the city’s population increased by 27.7 percent, while the number of jobs decreased by 9.1 percent. However, the rest of the county saw an even higher population growth (33.8 percent) and a full 16.5 percent increase in job creation in the same time period. The people are in Los Angeles, but they are working just a few blocks from the city limits. This certainly has benefits for Valley cities such as Calabasas, San Fernando and Burbank, which absorb some of the businesses looking to be in the region without locating inside expensive Los Angeles – as they should, since the Valley is a great place to live, work and raise a family. But with much of the Valley being inside Los Angeles, it is losing a lot of potential revenue and business. While this has been an ongoing problem in the region for decades, there has always existed a tangible solution: Phasing out the business tax in three stages over 15 years. The first stage would consolidate the city’s nine tax classes into three, the second would consolidate three into one class, and the final stage would eliminate the tax completely. The Valley Industry & Commerce Association (VICA) has led the push for this solution over the last decade, urging then-Councilmember Eric Garcetti – who was always supportive of the proposal – to help pass the phase-out. It took a little longer than we had hoped, but as mayor, Garcetti has recently officially prioritized the phase-out as a top economic goal of his administration. The biggest hurdle now is the City Council, as some members are hesitant about losing a revenue stream they have relied on for years. However, as VICA has continuously argued, and as the Business Tax Advisory Committee states in its latest report: “Lowering the business tax rate will increase economic activity, increasing other revenue streams.” Specifically, it is estimated that the economic activity generated from a phased-out business tax would create 119,000 new jobs. Additionally, the report predicts that gross receipts tax revenue would be more than made up from the increased property taxes, sales taxes, utility taxes, permit and licensing fees and power revenue transfers that would occur as a result of new businesses and current businesses expanding. Opponents that scream about how the business tax brings in $440 million a year are punishing the region for their shortsightedness and unwillingness to support big policy changes that research says will work. It also highlights city leaders’ fear that grander changes in a budget structure might actually force them to cut exorbitant pension plans or unnecessary programs. Instead of making small tweaks that are more ceremonial than anything, the city needs to finally take the albatross off its neck. Join the Ax the Tax coalition at www.axthetaxlosangeles.org to start the phase-out of the business tax this year. The Valley Industry and Commerce Association (VICA) is a business advocacy organization based in Sherman Oaks that represents employers throughout the Los Angeles County region at the local, state and federal levels of government.