New Report Gives City Council Pause In Eliminating L.A. Business Tax
Eliminating the business tax in Los Angeles may not be as smooth a process as some city officials had hoped. Representatives from Blue Sky Consulting Group and the Office of Economic Analysis presented a report this week to the City Council’s Jobs and Business Development Committee that challenged previous, more encouraging projections.
The City Council instructed both groups to analyze the impact of permanently extending L.A’s business tax holiday, which is slated to expire this year. Blue Sky was also told to review the gradual tax phase-out recommended by the Business Tax Advisory Committee. Their critical findings prompted skepticism from those pushing to get rid of the tax entirely.
One such skeptic is the man charged with reviewing the city’s current gross receipts tax levels. Lloyd Greif, chairman of the Business Tax Advisory Committee and chief executive of independent investment banking firm Greif & Co., said the exhaustive review process has only just begun. “Let me put it this way,” he said during an interview Friday, “if I was a betting man, I wouldn’t bet the results of Blue Sky’s report are the gospel—by any stretch of the imagination.”
Blue Sky found that getting rid of the business tax would increase employment and economic activity, but not nearly as much as suggested in an earlier report by USC professor Charles Swenson. In fact, where Swenson’s 2011 study projected a $425-million gain in revenues, Blue Sky’s consultants found instead a shortfall of $400 million.
The firm reviewed studies from the last two decades spanning cities across the country, jurisdictions which had also considered ending the business tax. Blue Sky co-founder Matt Newman, presenting his case to the City Council committee, said the group had also consulted a model for the city of Los Angeles. Both approaches found an increase in economic output of only about 1 percent.
That increase in revenue—altogether about $27 million—would come in the form of property taxes, sales taxes and utilities. But with an annual net loss of $400 million, Newman said the projected increase in economic activity wouldn’t be “substantial enough to fully offset the loss of tax revenues from eliminating the business tax.”
Chairman Eric Garcetti, flanked by committee members Bernard C. Parks and Tom LaBonge, pressed Newman on potential effects of eliminating the tax. They were particularly interested in the impact on unemployment. The firm’s report suggested around 16,000 jobs would be added, reducing the city’s rate by around 1 percent. That figure pales when compared to the 100,000 jobs Swenson projected.
So how did these reports reach such vastly different conclusions, while still finding some benefit to eliminating gross receipts taxes? According to Greif, the most recent report falls short on several fronts, starting with ineffective methodology.
“Whereas Dr. Swenson did his own empirical analysis, Blue Sky relied on a lot of literature that may not have been on point,” he said. Further, “I don’t think they did their homework in terms of the demographic aspects of what’s unique about this particular city.”
Greif pointed out the region’s sprawl, composed of several municipalities, creates some tension when it comes to taxation. “People don’t really perceive the difference between a Los Angeles address and a Pasadena address,” he said of businesses looking to set up shop in L.A. “But they certainly perceive a difference in the business tax.”
According to Greif, roughly 58 percent of business tax revenues in L.A. come from the highest bracket: professions and occupations. Businesses in that category are expected to pay a 0.507 percent tax, which means for every $1,000 they make in annual revenue—not income, Greif clarified—they pay the city $5. Even if a business loses money during a tough year, it would still have to pay taxes. Critics of the gross receipts tax say it serves as a dissuading factor for businesses—why pay more to open in one location versus another just across city boundaries?
That assumption was to some degree confirmed in 2010 when city officials introduced a tax holiday to ease the deficit burden. Mayor Antonio Villaraigosa, who in October of last year called upon the City Council to permanently extend the holiday, said it had helped bring businesses like Tom’s Shoes, Gensler and Blackline Software to L.A.
And Villaraigosa is not alone in his support of the holiday. Garcetti, a candidate for mayor in 2013, and Councilmen LaBonge and Mitch Englander have all pushed for an extension through 2015, a move that could help firmly establish L.A. as a business-friendly city.
Greif said reinstating the tax would have the opposite effect, hurting residents in the end. “We don’t so much look at it as being business-unfriendly,” he said. “We look at it as being employee-unfriendly. Our concern is that the business tax has become a job-killer.”
With an unemployment rate nearly 4 percent above the national average, that effect will be of particular concern for Angelenos. “Maybe, just maybe we’re chasing businesses away,” Greif said, “and if we’re chasing businesses away, we’re chasing jobs away.”
He pointed to an analysis from 1980 to 2010, a period in which the city gained roughly 850,000 residents. During that time, he said, the city lost anywhere between 115,000 and 135,000 jobs.
“It really doesn’t make sense when you think about the fact that L.A.’s got the port, it’s got the airport, it’s got the city-owned utility,” he said. “It’s got all these things going for it. How come it’s not an economic engine? The most visible difference is that L.A.’s also got a gross receipts tax, and that it’s much higher than surrounding jurisdictions.”
So Greif and his fellow committee members proposed a phase-out of the tax over a five-year period. “It was designed to be a gradual process to allow businesses to react accordingly,” Greif explained, “either renewing their leases or coming to the city—expanding and investing within the city essentially.”
Still, L.A. officials may have been startled by such a dramatic change to the city’s general fund. According to Greif, the business tax contributes 10 percent of the city’s budget. That could be what prompted council members to commission the most recent analysis. “I think because it was such a dramatic recommendation—to eliminate the gross receipts tax which has been around since 1936,” Greif said, “that the city decided to get a second opinion.”
And while Greif acknowledged Blue Sky’s report could be considered a setback, he said his committee would continue its review. “We’ve asked them some questions that frankly I don’t think they were fully equipped to answer on Wednesday,” he said. “So we expect more feedback to come from them.” Once they’ve gathered enough facts, the Business Tax Advisory Committee will revisit its own phase-out recommendation, deciding then whether it’s an appropriate course of action.
But an April 20 deadline looms for the city to draft its new budget. Greif anticipates some blowback from resistant city officials, but he said the time for change is now.
“Sometimes you have to take ‘em kicking and screaming to do something that’s ultimately in their best interest,” Greif said. “It’s like saying, ‘Hey, you gotta take some medicine. Might not taste good, but you’re going to get better.’ Well, the city is sick right now, ok? With this kind of level of unemployment, it is sick. We’re trying to heal it.”
Published March 31, 2012, on Neon Tommy.