Originally posted at www.foxandhoundsdaily.com
By Charles Crumpley, the Editor of the Los Angeles Business Journal
L.A.’s business community can take this bit of solace from last week’s primary election for mayor: Both candidates who are advancing to the general election have vowed to eliminate the gross receipts tax.
Those who have to pay that tax generally revile it. It can wipe out all or much of a struggling company’s profits – which makes it tempting for a business operator to move to one of the neighboring cities that don’t charge the tax.
But there are two questions I hope Eric Garcetti and Wendy Greuel answer soon.
First, do they still intend to try to kill the gross receipts tax? Since a proposed sales tax increase failed at the polls last week, the city’s poor financial situation was not helped. That gives the candidates political cover to go back on their vow and retain the gross receipts tax because it brings in hundreds of millions of dollars to the city. It might be tempting for them to say they want to kill the gross receipts tax but just can’t.
But assuming they still want to kill the tax, that brings us to the second question: Why do they want to phase out the tax instead of killing it totally and immediately?
Some taxes can be phased out with no problem, but this is not one of them. This is the kind of tax that needs to be wiped out entirely and quickly for it to have the salubrious effect they want.
Simple example: You’re a business person thinking of expanding or locating in Los Angeles and you’re weighing the pros and cons. L.A.’s gross receipts tax is giving you pause. However, you learn that the city is killing the tax effective now. That means you’re safe; you can expand or move to Los Angeles. Today.
Alternatively, you learn that the city is phasing out the tax over 15 years, which is the schedule Greuel and Garcetti have said they favor. That means you, the business operator, should consider expanding or moving to Los Angeles in about 15 years.
Actually, it gets worse. The mayoral hopefuls have said they want to cut the tax in increments each year in a kind of let’s-see-how-it-goes exercise. But that would send the clear signal that the city has not committed to eliminating the tax. Our business operator in the example would be justified in giving up on Los Angeles and moving or expanding elsewhere.
The phased approach would create a self-defeating cycle: Business activity won’t increase because the tax isn’t cut significantly. The tax won’t be cut further because business activity hasn’t increased.
There’s a widespread suspicion that the gross receipts tax costs the city more than it yields. Reportedly, the tax helped drive 95 car dealerships out of the city in the 20 years after the 1992 riots. Garcetti told the Los Angeles Times that the return of just five of those dealerships would yield the city so much sales tax that it would offset the loss of gross receipts tax from all the others.
If you believe that, if you believe that the gross receipts tax is actively hurting the city, then the best action would be to eliminate it. Totally and immediately. Tell businesses that it is safe to expand here or locate here. Today.
An attempt to phase it out will result in failure.