Riordan Offers Business-Friendly Tax Plan

After years of study, Mayor Richard Riordan has completed a sweeping set of recommendations for overhauling the city’s antiquated business tax structure, and his aides are pushing to let voters consider the reform measure next summer.

In a report to be released today, Riordan outlines a simplified business tax system intended to lighten the burden on most industries and eliminate some of the complexity from a Byzantine code that critics say discourages some companies from coming to Los Angeles and encourages others to leave, taking jobs and tax revenue with them.

“This is something I’ve been trying to do almost since the day I got elected,” Riordan said Monday in a meeting with Times reporters and editors. The mayor said he was optimistic about winning approval for his tax reform, which he called a “well-thought-out plan.”

But while the report says “virtually all industries” would see their taxes go down, it acknowledges that some companies would be hit with an increase, creating a potential pool of tax reform opponents whose efforts could cloud the measure’s political prospects.

The new code would cut the system’s current 64 tax categories down to eight, meeting the goal of simplification. And hundreds of industries--from law firms to barbershops to computer companies--would see their business tax rates fall anywhere from a few percentage points to 80%.

In total, officials said, more than nine in 10 city businesses would realize a savings. Those asked to pay more would, in some cases, make up the difference with lower accounting costs. The city’s current tax code is so complicated that some companies spend more preparing their city taxes than they pay in state or federal taxes.

The proposal also includes a provision for a business tax amnesty in 2000, allowing companies that have failed to pay taxes in past years to pay without penalty. Riordan aides estimate that the amnesty would raise about $10 million, and hope that the simpler tax system would discourage future tax evasion. In addition, the proposed revisions would exempt from city taxation start-up companies for the first year and any business that earned less than $5,000.

Built into the existing code are anomalies--gardeners pay as much as surgeons, libraries pay the same as law firms--as well as historic protections, the most famous of which is the shield that movie production companies enjoy from city levies. Old-time entertainment industry executives successfully negotiated a cap to their Los Angeles business taxes.

What that means is that a movie company could shoot a blockbuster, like “Titanic,” in Los Angeles and pay less in business taxes than the average ticket broker or medium-sized accounting firm.

Under the proposal, movie productions would see their legal cap raised from just under $13,000 to about $22,000 per film. More important, the city would begin charging those taxes up front, only issuing a film permit once the movie company had paid its estimated taxes.

Since city officials estimate that the vast majority of movie production taxes are uncollected, that system should improve the amount of money flowing to the city coffers. In fact, the report estimates that those changes alone will net an additional $1 million in city revenue.

Supporters of the proposal hope that approach will neutralize potential opposition from the entertainment industry, which could afford to campaign against tax reform if it considered the idea a threat to its livelihood.

Resistance Is Forming

Even before it is released, however, Riordan’s tax reform measure is already attracting some opposition. Mark Ryavec, who represents a coalition of artists, musicians, writers and others who work at home, said he will oppose the reform measure because it does not exempt writers who work at home, instead including them in the city tax’s lowest bracket--meaning that a writer who earned $100,000 a year working at home would pay about $120 in business taxes. Dennis Dreith, president of the Recording Musicians Assn., said his group, too, would oppose the plan.

Despite those early signs of unhappiness, Riordan said he expects relatively little lobbying against the tax reform proposal, in part because there is such widespread discontent with the current system.

Los Angeles began imposing a tax on businesses around the turn of the century. That flat-fee system was replaced in the 1930s with a code based on gross receipts. Much of that Depression-era flavor still remains in a jerry-built system that has been amended over time, but never radically overhauled.

The business tax ordinance now reads like a time capsule, preserving details of Los Angeles’ commercial life from another era. Scattered among the 227-page document are references to phonograph machines, dance halls, Skee-Ball alleys and trailer camps, while terms such as multimedia, the Internet and high technology are nowhere to be found.

And nestled into the code are loopholes that defy explanation, such as exemptions for blind wholesalers, strolling musicians and condom machines.

Small business advocates have complained for years about the city’s policy of taxing most businesses based on their revenue or “gross receipts,” rather than on their income or some other measure. That means that even money-losing companies must pay the piper in Los Angeles, a particular concern for start-up firms that may have high sales but very little income in the early going.

That has many entrepreneurs thinking twice about starting businesses in Los Angeles, says John Rooney, president of the Valley Economic Development Center. He said the topic surfaced at a recent gathering, where several hundred prospective business owners were stunned to learn the tax disparity between Los Angeles and surrounding cities.

“It was scary. It was like a tidal wave hit the room,” Rooney said. “The irony is that the city of Los Angeles can’t afford to chase away these entrepreneurial businesses. Our residents need jobs, and that’s where the jobs are going to come from.”

No one knows about the high cost of Los Angeles’ business taxes more than accountants, who fall into the catch-all “professions and occupations” category of the business tax ordinance. That group pays a stratospheric $5.91 in tax per $1,000 of revenue.

“The rates are egregious,” said Barbara Rosenbaum, who last year merged her Sherman Oaks accounting practice with a Santa Monica firm. “I get hit harder than a lot of my clients.”

But the rates are only part of it. A typical retail business can fall under eight or nine tax categories, forcing businesses to spend valuable time just calculating the tax.

“It’s the high rates coupled with the administrative burden that really makes businesses crazy,” Rosenbaum said. “I have had clients pick up and move out of state because the combination of doing business in L.A. and California just became unmanageable.”

Timing Is Critical

To become law, the tax reform package first needs the support of the City Council. Because a number of council members have been involved in drafting the package, many observers think it will find relatively easy going there.

Complicating the proposal’s prospects, however, is the requirement that it appear on a citywide ballot and win the approval of voters, as well as council members.

Riordan’s leaves office in 2001, and his advisors do not want to wait for his term to wind down before launching their effort. The trouble for them is that there is no city ballot in 2000, so their last opportunity to put this before voters, short of waiting for Riordan’s final months, is June 1999.

That ballot, however, is also slated to include one or possibly two proposed city charters, and some charter reformers have hoped to keep that election clear for voters to focus on that issue rather than be distracted by other proposals.

In a letter last month to council President John Ferraro, elected commission Chairman Erwin Chemerinsky urged the council to clear the field for charter reform.

“We ask the City Council to place as few other matters on the June ballot as possible,” he wrote. “We believe that it is essential that the June ballot be as simple and non-confusing as possible. . . . We hope that the June election will be devoted to charter reform.”

Riordan acknowledged that there is some risk to running charter reform and tax reform at once, but noted that there also may be advantages. If small business owners turn out to vote for tax reform, those same people may be inclined to see the value in charter reform, the mayor said, giving both campaigns a boost.

Deputy Mayor Noelia Rodriguez, addressing the same question, also hinted at how the administration may approach the coming series of historic votes.

As she put it, “1999 is going to be the year of reform in Los Angeles.”