Hoping to keep film companies and other businesses from leaving Los Angeles, the City Council adopted a landmark package of tax reforms Wednesday that would exempt 61% of firms from city business taxes and eventually slash levies by $92 million annually.
More than a decade in the making, the tax package was passed unanimously by the City Council and sent to Mayor James K. Hahn, who has pledged to sign the seven measures into law.
"Today we are turning a cumbersome, archaic business tax system into something that is simple, equitable and makes Los Angeles competitive with surrounding cities," said Councilwoman Wendy Greuel, a co- author of the measures. "Today we are creating a business tax system that attracts business to Los Angeles and works to create jobs and invests in L.A.'s economy."
Business leaders who had pressed for relief for more than a decade, since Richard Riordan was mayor, praised the reform as an important step to address complaints that Los Angeles was a difficult city in which to conduct business.
"It is a landmark day," said Mel Kohn, a San Fernando Valley accountant who was a co-chairman of the city's Business Tax Advisory Committee. "We believe a message will go out to businesses in and out of the city that we are business-friendly."
The key elements of the reforms are measures eliminating the gross receipts tax for the 130,000 companies that make $100,000 or less in a year and gradually cutting taxes by up to 15% for all other businesses.
To cushion the blow on the budget, the revenue reductions will be phased in. The exemption for small businesses will take effect next July for those making $50,000 or less, and in July 2006 for those making $100,000 or less.
"Over 130,000 businesses will no longer have to send a check in with their tax returns in the city of Los Angeles," Councilman Tony Cardenas said.
For large companies, taxes will be cut by as much as 4% a year starting in July 2006 until the 15% reduction is reached. But that reduction will occur only to the extent that growth in the tax base meets city projections.
The reform package also will provide special tax breaks for the film industry.
One measure will cut the tax burden on small- and medium-sized film production companies by $2 million annually starting next July by revising the rate at which they pay taxes. Also in July, writers, directors and other film industry workers will see their business tax eliminated as long as they make $300,000 or less each year.
"This is significant because it sends a message to the production industry that the city wants to retain and attract their business," said Steve Caplan, senior vice president of the Assn. of Independent Commercial Producers and one of more than 30 business and union leaders present to cheer the council vote.
To simplify the tax code, the council agreed to cut the number of categories -- from 75 to seven -- that determine how a business' tax is calculated. The package also will allow companies the option of paying taxes on a cash or accrual basis and will end the city practice of levying business taxes against bad debt starting Jan. 1. Currently, if a plumber performs a job and bills $50,000 but the client doesn't pay, the plumber still owes taxes on the $50,000, Cardenas said.
Hahn said he looked forward to signing the entire package.
"I worked hard to get this reform package passed because it will improve our business climate, create jobs and generate revenues that I can use to put more cops on the street," Hahn said in a statement.
Previous efforts to reduce business taxes have been hampered by a resistant bureaucracy and periodic budget crises.
For years, tax reform floundered until a group of newly elected council members took it up under pressure from a new coalition of business and union leaders.
Business leaders also threatened to make tax reform a major issue in the March election if the mayor and council failed to act by Oct. 31.
The reforms were passed out of the first committee a few days before that deadline.
The coalition consists not only of business groups such as the Greater African-American Chamber of Commerce, but also the Service Employees International Union, Valley Vote and neighborhood councils from the Westside to Sunland-Tujunga.
This time, Greuel and others argued that tax reforms would help pay for themselves. As more business is conducted in a friendlier atmosphere, it will drive up tax revenue. At the same time, the city will step up enforcement to get tax scofflaws to pay.
Currently, companies pay taxes ranging from $1.18 to $5.91 per $1,000 of gross receipts, depending on the type of firm. But the business community has long said the taxes were confusing and a burden that companies weighed when considering where to locate.