Friday, February 13, 2015

Los Angeles: when cutting business taxes makes sense

As a progressive Democrat, you might not normally expect me to be in favor of cutting business taxes. One exception? My home city of Los Angeles and "gross receipts tax" it imposes on businesses. The gross receipts tax is, well, pretty gross. It taxes businesses not on their profits, but simply based on how much they collect on their invoices. Simplistically speaking, all business that collect, say, $1 million in invoices are taxed on that basis, regardless of how high their operating expenses are.

Needless to say, this unfairly penalizes businesses in industries with low profit margins, as well as businesses that invoice for a high amount of passthrough expenses. Let's take the marketing research industry, for instance: standard practice for focus group facilities is to pay the people who come in to do their focus group projects, and then invoice the clients for the amount of money they spent. In some cases, the incentive money can comprise the majority of the invoice, and yet it's a passthrough expense: the facility makes no money on it, but because it still counts toward gross receipts, the city can assess taxes on it. This leaves the facility two options: either to eat the cost of paying taxes on money it doesn't make, or to try to make up the difference by raising prices elsewhere and thus putting it at a competitive disadvantage. In either case, it makes operating a service business within Los Angeles more uncomfortable than it should be, and in the marketing research industry, the gross receipts tax has been a factor for focus group facility owners in whether to locate a business within Los Angeles proper, or pick a neighboring city like Santa Monica or Culver City instead.

Thankfully, Mayor Eric Garcetti is changing that. From a recent release:
LOS ANGELES -- Mayor Eric Garcetti today signed his business tax cut plan into law and received the endorsement of the influential Los Angeles Business Council for his plan to increase L.A.'s minimum wage.
"Together with the City Council, we are taking a strategic approach to creating jobs and opportunity for Angelenos. Cutting our business tax will entice more businesses to stay, come and hire in L.A., and responsibly raising the minimum wage will inject significant spending into our neighborhood businesses," Mayor Garcetti said. "I'm proud to have the support of the Los Angeles Business Council, which represents such a broad cross-section of L.A. businesses."
"Today, we are taking a significant step to helping our economy grow," said Council President Herb Wesson. "We want to do everything we can to retain and bring business to the City of Los Angeles. We also want to help our residents earn a decent wage, and today I'm pleased we're making progress on both."
"With today's cut to our business tax, we are shattering the myth that Los Angeles is a bad place for business," said Councilmember Paul Krekorian, who chairs the Council's Budget and Finance Committee. "And this is just the first step. We are committed to further reforming our business tax to make it cheaper, more predictable and less arbitrary. Tax reform like this works, and I'm confident it will help grow our economy and create more jobs for Angelenos."
Mayor Garcetti has made job creation and support for businesses a cornerstone of his back to basics agenda. L.A.'s business tax is the highest in the county, making our city more expensive and less attractive to do business in, while the current minimum wage leaves even full-time working people below the poverty line, which is a drag on our overall economic recovery.
The business tax cut represents a 16 percent overall reduction over three years, saving L.A. businesses a total of $90 million. The cut takes the top tax rate from $5.07 per $1,000 in gross receipts to $4.75 in FY 2016, $4.50 in FY 2017, and to $4.25 in FY 2018.

Now, I'm not suggesting that this tax cut will end up paying for itself. But eliminating the gross receipts tax and replacing it with something that is less punitive towards businesses with a lower profit margin will definitely increase business development and reduce any competitive disadvantage Los Angeles faces compared to its neighbors.

Combined with the minimum wage increase that's on track for passage, it looks like the city's economic future is getting brighter for everyone under Mayor Garcetti's leadership.


Phil Perspective said...

And businesses will pay their fair share, how? I bet you know the reason behind a gross receipts tax. It's probably the hardest tax to dodge as business. At least it would seem to me that's likely the case. Besides, businesses are always going to whine about the taxes they pay, even if it's a pittance. Just look at the large multinationals now.

Unknown said...

I agree to some extent, but the way the city currently administers the gross receipts tax is unfairly punitive. I would be fine with a gross receipts tax that exempted pass-through expenses or purchases made on behalf of clients that had nothing to do with revenue generation. But as it stands now, the tax is punitive and anti-competitive--and that's why a progressive Democratic mayor and an overwhelmingly Democratic city council passed it.