Press Release
From: Valley VOTE
Valley Voters Organized Toward Empowerment
14622 Ventura Blvd. #424, Sherman Oaks, CA. 91403
Contact: Joe Vitti
Email: javittisr@cs.com (818) 366-1668
Valley VOTE Press Release
Date: 3/08/04
The Board of Directors of Valley VOTE has voted
to support the following proposal for Business
Tax Reform for Los Angeles.
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Valley VOTE Resolution
BTAC's Proposal for Business Tax Reform
WHEREAS, Valley VOTE is extremely concerned about the City's existing business tax system, which negatively impacts growth in jobs and economic activity within the City; and
WHEREAS, Valley VOTE has previously offered a series of constructive recommendations to reform and improve the City's business tax in its publication of "Los Angeles Business Tax Reform: A White Paper" on November 3, 2003, which Valley VOTE shared with MBIA MuniServices Company, the Mayor's Business Tax Advisory Committee (BTAC), Valley Industry & Commerce Association, United Chambers of Commerce of the San Fernando Valley, Economic Alliance of the San Fernando Valley, and others prior to the issuance by MBIA MuniServices of its report; and
WHEREAS, BTAC's proposed modifications to a major alternative proposed by MBIA MuniServices, called the "Value Added Proxy", closely reflect several of the recommendations made by Valley VOTE in its white paper; therefore, it is
RESOLVED, that Valley VOTE endorse in principle the "Value-Added Proxy" system proposed by MBIA MuniServices Company, with modifications proposed by BTAC. The modified Value-Added Proxy system is intended to reduce the overall business tax collections by at least 15 percent by 2010. As proposed by BTAC, the plan would have five tax rate levels that would reflect various levels of business' profit margins; the new tax rate levels would phase in over five years (from 2006 through 2010), after which no business would pay more tax than it pays at present; a flat tax of $150 for small businesses; existing exemptions and incentives would be preserved; and a revised formula would clarify how to apportion gross receipts between those generated within Los Angeles and those generated outside the City.
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Background
For years the Valley VOTE organization has recommended
major changes to the Los Angeles Business Tax Structure.
A front page story with a major headline in the Daily News of
Nov.30,2003, is recent evidence of this ongoing argument
from Valley VOTE to the Mayor and the City Council of L.A. to
radically reform L.A.'s tax on businesses. By convincing the
business community that elected officials are committed to
real change, the business climate will take a favorable turn,
and consequently, the financial conditions within the city will
ultimately improve.
The motion presented above was prepared by the Finance
Committee of Valley VOTE, chaired by Richard Bort. The
Executive Board of Valley VOTE approved the motion at
it's meeting on March 2,2004.
Discussion
MBIA MuniServices Company was engaged by the City to develop viable alternatives to the City's existing tax on gross receipts, with one major constraint: any proposed alternative must be "revenue neutral". That is, the City presently collects approximately $360 million annually from the existing business tax, and any alternative also must prospectively collect the same amount.
Valley VOTE took the lead among community organizations by issuing its white paper on November 3, 2003, which attacked the requirement for revenue neutrality, chastised the present system for being overly complex with some 59 different tax rate categories, being an excessive cost burden to businesses, and being costly for both taxpayers and the City to administer. Valley VOTE called for the City government to send a clear signal to the business community that Los Angeles is friendly to business. The white paper was circulated in draft form to all members of the Mayor's Business Tax Advisory Committee (BTAC), most City Council members, VICA, and other individuals and organizations interested in business tax reform in Los Angeles.
The white paper specifically called for the following changes in the business tax structure:
a) Allow for the deduction from gross revenues of certain standardized pass-through costs from gross receipts to determine the taxable amount.
b) Simplify the number of tax classifications by reducing them from the present 52 to no more than about five.
c) Increase the small business exemption of $5,000 of annual gross revenues to approximately $180,000. This would exempt substantially all of those 146,000 small payers from paying the business tax. A business that has less than $180,000 of annual gross revenue is, indeed, a small business.
d) Cap the business tax at some maximum amount for all taxpayers, perhaps striated by gross revenue levels.
e) In recognition that it will take time to grow replacement revenues, we recommend reducing the business tax in stages over a period of several years.
f) Initiate a simple business license, and a related annual license fee, for all businesses in the city. The annual license fee should be relatively modest, between $25 and $100, and it would be payable by all businesses for the privilege of doing business in the city.
On November 10, 2003, Valley VOTE President Joe Vitti addressed a BTAC meeting to express Valley VOTE's recommendations, particularly the need to sharply reduce the business tax burden. BTAC had, by this time, been exposed to several alternatives then being considered by MBIA.
After considering many different approaches to business taxation, MBIA proposed a Business Enterprise Tax, which would be based on a combination of a multi-rate tax on square footage and a single-rate tax on net receipts. The net receipts component would deduct from gross receipts the cost of materials and subcontractor payments.
Unfortunately, the requirement that the City placed on MBIA to consider only revenue-neutral alternatives virtually killed any chance of acceptance by the business community. That is because any tax reduction for some businesses must necessarily be offset by tax increases for other businesses.
When MBIA's report containing its proposals was finally released, on January 14, 2004 after several months of vetting by the City's Office of Finance, BTAC recognized that the requirement for revenue-neutrality had to be eliminated, and that the Business Enterprise Tax proposed by MBIA posed numerous problems.
BTAC reviewed the report and looked at all of the alternatives that MBIA had evaluated and rejected. That review brought BTAC to the conclusion that one of the proposals, the "Value-Added Proxy", could possibly form the basis for viable business tax reform provided that several modifications were made and the requirement for revenue neutrality were eliminated.
Significantly, of the six specific recommendations contained in Valley VOTE's white paper (see above), fully four are integral parts of BTAC's proposed modification. The small business exemption, presently $5,000, was not raised as we recommended, although small and medium-size businesses may qualify for a flat fee; and no cap on the amount of tax paid by any business was proposed. However, no business will pay a larger tax than it presently pays, which has a similar effect as a cap.
Among BTAC's objectives, in modifying MBIA's proposed "Value-Added Proxy", was to achieve not only an overall reduction of business tax collections, but to ensure that no business paid more under the new system than it paid under the former system. If any taxpayer were to experience a tax increase, Proposition 218 would require that the proposed tax system be submitted to voters for approval. Therefore, BTAC mandated that every business would experience tax relief, with no businesses experiencing increased taxes.
BTAC's proposal contains the following bullet points (italics added for clarification):
Gross receipts tax with five tax rate levels [proposed rates not disclosed]
All businesses to be categorized by NAICS Code [NAICS is a nationally-recognized industry codification system. L.A. already has all business taxpayers coded to NAICS.]
Each business to be assigned to a rate level according to the average "value-added" (profitability) for that business's NAICS category. Businesses with high pass-throughs and costs-of-good-sold to pay at lower rates than high margin businesses.
Over 5 years (beginning in 2006), every business now taxed at a higher rate than its new, assigned rate to be brought down to its new level, in 5 equal steps. No business would go up, so there would be no "losers" and no need to go to the ballot.
Existing exemptions and incentives to be preserved or improved. [Primarily to protect existing entertainment industry tax incentives]
Apportionment formula to be made clear and uniform for all categories, and a transition plan to be devised to avoid Prop. 218. [Apportionment formula addresses problem businesses have in apportioning gross receipts between business conducted within L.A. and business conducted outside L.A.]
Small and medium businesses -- approximately half the tax base -- to be given an option to pay a flat tax of about $150. [Without knowing the five tax rates, we cannot determine how "small" a business must be to qualify for this flat tax.]
Contact me with any questions or comments,
Joe Vitti - President of Valley VOTE
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