Feb. 12 (Bloomberg) -- Eric Garcetti, who began his Los Angeles mayoral term seven months ago, wants to phase out a business tax he says drives away companies and has left the city with a smaller employment base than three decades ago.
While his plan faces resistance from the City Council because the tax provides 10 percent of municipal revenue, Garcetti says the gross receipts tax has kept the likes of Legg Mason Inc.’s Western Asset Management Co. from moving into Los Angeles from just beyond the city limits in Pasadena.
“We can’t afford not to do this,” Garcetti, 43, said last week during an editorial board meeting at the Los Angeles office of Bloomberg News. “It’s kind of an intellectually lazy thing to do to say, ‘Oh, what about the hole in the budget?’”
Garcetti, elected in May as the third consecutive Democratic mayor of the second-most populous U.S. city, said Los Angeles is losing employers to other locales in Southern California and to different states because the business tax is higher than elsewhere in the region and has no parallel in large cities such as New York, Chicago and Houston.
The tax is a “big problem” in efforts to keep existing businesses in Los Angeles, including financial-services firms such as TCW Group Inc. and Oaktree Capital Management LP, Garcetti said.
Between 1980 and 2010, employment in Los Angeles fell 9 percent, even as the population grew about 28 percent, according to a 2012 report by the city’s Business Tax Advisory Committee. Elsewhere in Los Angeles County, the population rose by about 34 percent and jobs increased about 17 percent, the report showed.
In 2011, though, the city’s employment grew by 3.8 percent while the rate for the county was 0.5 percent, according to Beacon Economics, a Los Angeles-based research company.
Mary Athridge, a spokeswoman for Legg Mason, said the company had no comment on Garcetti’s targeting of the business tax. Doug Morris, a spokesman for TCW, said only that the firm supports policies that help Los Angeles “retain its place as a world-class city.” Bruce Karsh, president of Oaktree Capital Management, didn’t respond to an e-mail seeking comment.
The tax is assessed on gross receipts at rates of 0.101 percent to 0.507 percent, depending on the type of business. Multimedia companies and wholesalers pay the lowest rate, while professional services businesses including financial firms pay the highest, according to a report by an advisory committee that studied the tax. The levy is projected to yield $471 million for the fiscal year ending June 30.
Garcetti’s call to eliminate the tax over 15 years puts him at odds with the chairman of the City Council’s budget committee, Paul Krekorian, who contends that the mayor’s move may harm city services such as police and street paving.
A battle over the business tax may elevate the profile of a mayor who since taking office has been fine-tuning the city’s 42,000-employee municipal bureaucracy, said Sherry Bebitch Jeffe, who teaches political science at the University of Southern California in Los Angeles.
“So far, he’s spent most of his time inside City Hall,” she said by telephone. “As long as things are running smoothly, I don’t know that Los Angeles residents know a lot about him, or want to know a lot about him.”
Garcetti, the son of former Los Angeles County District Attorney Gil Garcetti, was elected to a Hollywood-area City Council seat in 2001. The holder of degrees from Columbia and Oxford Universities is of mixed Mexican and Italian heritage and served as council president for six years. He’s the first practicing Jew elected to lead the city.
The mayor didn’t mention the business tax during a budget workshop with about 400 residents last week at a church in Los Angeles’s San Fernando Valley. Instead, he pledged to use data to improve city services like repairing streets and getting fire engines to emergencies more quickly.
Krekorian, in a telephone interview, said Garcetti’s campaign promise to eliminate the tax runs counter to his stated commitment to improve municipal services. He also said the recent growth rate of jobs in the city disproves the notion that the tax drives out businesses.
“We could lose $425 million in municipal revenues and we might not see the benefits we hope for, and we might further decimate city services that were already harmed by the recession,” Krekorian said.
Told of Krekorian’s comments, Garcetti replied, “I don’t want to part with that revenue either.”
“I also don’t want a slow death by a thousand cuts,” he said.
Cities including Philadelphia and Seattle tax business revenues, as do states such as Ohio and New Mexico. Los Angeles’s gross-receipts rates are “onerously high,” the Business Tax Advisory panel concluded. It recommended phasing out the business tax over 15 years.
Jack Humphreville, the budget advocate for the city’s network of advisory neighborhood councils, said Garcetti’s proposal is a continuation of the city’s practice of ad hoc budgeting.
“They don’t have any revenues to replace it,” Humphreville said. “This city has no plan. They’re just hit or miss, bouncing from budget to budget.”
Moody’s Investors Service raised the city’s rating in January 2013 to Aa, third highest, the first increase in two decades, citing rising property-tax receipts. Standard & Poor’s rates Los Angeles AA-, its fourth-highest grade.
The city’s eight-person advisory panel on business taxes also recommended reducing the city’s number of tax categories. In its 2012 report, the panel said reductions in rates could be deferred if overall tax revenue decreases.
“We believe that a number of businesses have strategically located themselves outside of the city of Los Angeles,” Mel Wilson, a San Fernando Valley real-estate agent and former Chamber of Commerce president who served on the panel, said in a telephone interview. “They’ve done it because they don’t think they’re being treated fairly with respect to taxes.”
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