The Los Angeles City Council voted 10-2 to extend a policy that exempts new businesses from paying a gross receipts tax for their first three years of operation. Councilman Paul Krekorian, chair of Budget and Finance, voted against the extension, saying there needs to be more study of the economic impact.
New businesses will continue to get a tax break from the City of Los Angeles.
The City Council on Tuesday voted to extend its policy of exempting new businesses from paying a gross receipts tax for their first three years of operation. The exemption will apply to businesses that begin operating before the end of 2015.
In an effort to attract new businesses to Los Angeles, the City Council agreed three years ago to waive the tax through 2012, without a cap on how much a company earns. Prior to that ordinance, it was the city’s policy to waive the gross receipts tax for two years for companies making less than $500,000.
Councilman Mitch Englander said the extension is a step toward eliminating the gross receipts tax, which generates more than $400 million a year for the city. The tax is frequently cited as a sign that Los Angeles is not business-friendly. The theory is that, by eliminating the tax, more new businesses will flock here.
“Time and time again, we’re listed as the most unfriendly business city in California,” Englander said. “It’s not just the business tax structure, it’s the bureaucracy and getting permits, getting businesses open.”
Since 2010, 11,100 new companies have claimed the exemption and the City of Los Angeles has waived $30.1 million in new business tax receipts. Moving forward, the city could lose $16.8 million a year in revenue, according to the City Administrative Officer. However, those same new businesses accounted for $8.8 million in other taxes such as parking, transient occupancy, and fire and police permits.
“This office is unable to determine whether there has been or will be any net gain to the city as a result of the extended [new business exemption], due to the complexity of the economic analysis required to quantify offsetting revenue increases,” according to a report from the City Administrative Officer.
Councilman Paul Krekorian, who chairs the Budget and Finance Committee, voted against the extension, arguing there is not enough evidence that the policy is a good one for the city.
“We don’t know whether this is generating a single penny in new tax revenues or creating a single new job because there’s been no analysis that’s ... demonstrated whether or not any of these 11,000 businesses would have started here with or without this tax incentive,” Krekorian said. “I think we’re really buying a pig in a poke.”
Tuesday's vote was 10-2. Because such ordinances must pass unanimously, it will be back next week for a final vote.