Explaining Southern California's economy

It's time to say goodbye to the LA business tax

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Los Angeles Mayor Antonio Villaraigosa.

KPCC's Brian Watt reported recently that LA Mayor Antonio Villaraigosa wants to extend the city's business tax holiday "indefinitely." Which could be interpreted as the mayor saying that he wants to get rid of the business tax altogether — rather than simply extend the holiday for another four years, as some city council members have suggested. (Currently, new businesses are exempted for three years.)

LA is facing a budget deficit, of around $250 million, which sounds like a lot but isn't really that bad, given the dreadful nature of the economy. Meanwhile, the business tax is expected to bring in something like $425-$440 million this fiscal year. That sounds pretty good, but the complaint is that LA's business taxes are so high that they actually cost the city money, in terms of lost revenue from other taxes that would flow from increased business activity.

There are dueling viewpoints. KCET cites a report by USC's Charles Swenson that says ending the tax would bring in more dollars:

Will the city recoup its $425 million in lost revenue? Perhaps. A study by USC Professor Charles Swenson demonstrates that the loss in revenue will be offset by increases in other tax revenue, due to the creation of new jobs. The study suggests that in a worst case scenario the elimination of the tax will bring in $25 million in increased revenue, and in a best case scenario could bring in $321 million.

But the outspoken economist Christopher Thornberg of Beacon Economics isn't buying it. Here he is quoted by the LA Times:

[Thornberg] reviewed Swenson's study and concluded it was "so flawed as to really provide no guidance on this issue," according to the report. The assessment that eliminating the business tax would increase overall tax revenues was "improbable at best," he said.

The choice is stark: sacrifice the business tax now and perhaps atttract future revenue that would outweigh the loss; or resume taxing businesses on gross receipts and lock in $440 million — at the possible cost of seeing those businesses split town.

Obviously, you could resume taxing and still be $250 million in the hole, due to escalating costs elsewhere. Even if Swenson is horribly wrong, ending the tax could probably increase overall revenue by at least a few million, which seems like a worthwhile risk.

Even fairly liberal LA politicians admit that LA isn't a great place to do business. This is former Deputy Mayor Austin Beutner, writing last year in the LA Daily News — before deciding to run for mayor himself:

Decades of poor policy and bad practice have combined to make Los Angeles a hard place for businesses to succeed. There is no shortage of good ideas around - from reforming the city's business tax code and cutting and streamlining bureaucracy to helping to foster jobs of the future in technology, trade and tourism. It is going to take more than politicians standing up and repeating these ideas to make them a reality.

A fastidiously balanced budget in LA isn't going to create jobs (although a balanced budget plus a job-creation strategy might create a lot of jobs). The city itself can't really hire enough people to drive down an unemployment rate north of 12 percent (more than three points higher than the national level of 9 percent). Businesses can. Sticking with the old tax model, in this case, doesn't make sense.

Follow Matthew DeBord and the DeBord Report on Twitter.

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