LA’s Business Tax Cut and Lessons for the South Bay
California has a reputation for being bad for business with its high taxes and immeasurable red tape. According to Mayor Garcetti, Los Angeles’ business tax “is the highest in the county, making our city more expensive and less attractive to do business in.”
On February 11, 2015, Mayor Garcetti signed into law an ordinance reducing business taxes for the City of L.A., stating “[c]utting our business tax will entice more businesses to stay, come and hire in L.A.” The cut takes the top tax rate from $5.07 per $1,000 in gross receipts to $4.75 in FY 2016, $4.50 in FY 2017, and to $4.25 in FY 2018. Council members say the move is the first step toward phasing out the gross receipts tax, which many other cities do not impose.
The gross-receipts tax is a tax on top-line revenues, before operating expenses and other business costs are factored in. Several major business groups have called for the elimination of the tax altogether, saying that dropping the tax would drive business investment in the city.
Even after the cuts, L.A.’s business tax rate remains the second highest in the county, by far. According to a 2012 report by the Los Angeles Business Tax Advisory Committee, Los Angeles and Santa Monica have the highest rates at .507% and .503%, respectively, followed by Culver City at .301%. The fourth highest rate belongs to Inglewood, at .165%. The comparison nationwide is more dismal. According to the 2012 report, out of the 15 largest cities in the nation, only L.A., Philadelphia and Columbus charge a gross receipts tax for “professions and occupations,” and L.A.’s tax is more than double that of Philadelphia and Columbus.
Chief executive of the Los Angeles Area Chamber of Commerce, Gary Toebben, said “[w]hile this reduction in the gross-receipts tax is less aggressive than the plan recommended by the Business Tax Advisory Committee, it is a step in the right direction. It is a clear acknowledgement by the mayor and city council that having the highest gross receipts tax in L.A. County and one of the highest in the United States is detrimental to recruiting new businesses and to retaining and growing existing businesses.”
The departure of businesses like Toyota and Farmer Brothers from the South Bay demonstrates a need to get creative with incentives to retain good businesses. Toyota is moving 3,000 jobs to a new North American headquarters in Texas. Farmer Brothers intends to build a new plant “in a low-cost state, whether it be Oklahoma or Texas,” and expects to save $12 million to $15 million.
According to “people familiar with the search” for a new location, factors in Toyota’s decision included a major airport, good quality of life, relative proximity to Toyota's other U.S. operations, and not in the shadow of Detroit, where America's Big Three auto makers are headquartered. Torrance should have scored high on that scale.
Another factor: the site had to be near affordable housing and high-quality schools. Chief executive of Toyota’s North American operations, Jim Lentz also cited Texas' business-friendly climate, as well as the absence of personal income tax.
“Excessive litigation, overregulation, and high taxes are factors for both the employer and the employees in making location decisions," Allan Zaremberg, president and CEO of the California Chamber of Commerce, said in a statement. According to its latest business-license filing, Toyota employs 3,929 people in Torrance, and pays $1.2 million annually in taxes and fees.
Toyota’s departure seems to be more of a California problem than a Torrance problem. Business taxes in Torrance are .001%. California and Torrance officials blame each other.
Doing business in California is expensive compared to other states, due to unemployment insurance, taxes, workers compensation, energy, healthcare, regulations and litigation costs. So what are some California cities doing to improve the situation?
Hawthorne got competitive, convincing SpaceX to remain in its 1-million-square-foot headquarters building through 2022 as long as the city reduces certain taxes on the business. The deal includes a $260,000 cap on annual business license fees, which are calculated based on gross receipts. The agreement will allow SpaceX to maintain a flat tax rate as it gets larger. Additionally, if SpaceX chooses to expand its facilities in the city, fees for planning and building will be reduced by 75 percent of what is normally charged. City officials, aware that officials in Florida and Texas were trying to woo the emerging rocket company, enthusiastically backed the deal in a unanimous City Council vote in October 2012.
There is much room for improvement on the part of California and its municipalities in the revitalization of the business climate. It remains to be seen whether LA’s business tax cut will convince businesses to stay, especially considering the impending minimum wage hike. One clear lesson is that cities cannot remain complacent when friendlier states like Texas and Florida come knocking on the doors of their most profitable businesses.
