February 16, 1999

Ron Deaton
Chief Legislative Analyst
City Hall, Room 512
200 N. Main Street
Los Angeles, CA 90012

      Re: Request for Support for Alternative Business Tax Reform Proposal

Dear Ron:

I urge your support for an alternative business tax reform proposal that contains the most significant benefits for the start-up business Los Angeles needs to grow, offers broad-based tax reductions while focusing on the businesses we most want to encourage, simplifies our arcane and complex tax system, and does so at less than two-thirds the cost of the Mayor's proposal.

Specifically, I propose:

1) A tax exemption for start-up businesses of up to $500,000 of first-year gross receipts to stimulate innovation and attract new investment to Los Angeles. This exemption would benefit more than an estimated 95% of start-up businesses. Under this proposal, these businesses only would be responsible for the $75 minimum tax and the $20 filing fee. This approach would cost an additional $750,000 over the Mayor's proposal.

2) Tax relief for businesses that, according to the Mayor's criteria, offer particular benefit to the economy of Los Angeles. Those five criteria identify businesses: in key growth industries; that produce "critical" jobs; whose tax rate is correlated to gross profits; that generate other City revenue; or that further "civic prosperity." The remaining businesses would be re-assigned to the rate closest to what they currently pay, thereby saving $4 million compared to the Mayor's proposal.

This approach provides relief for roughly two-thirds of businesses, but it zeroes in on those most desirable to the Los Angeles economy.

3) Balanced tax reductions, so that the businesses eligible for tax relief under this proposal receive a reduction of one, rather than multiple tax rate levels. This approach saves $2.9 million over the Mayor's proposal.

There has been vigorous debate over the legitimacy of assigning particular classes of business to the categories outlined in the Mayor's proposal. The combined effect of recommendations 2) and 3) of this proposal is to diminish the importance of those categories, by drawing only the broad distinction between businesses the Mayor identified as having some important role in the city's economy, and those offering less specific benefit: The former receive a one-step tax break, the latter do not.

It is significant to note that the Council and the Mayor retain the right to lower business taxes by ordinance (we just cannot raise them without a vote of the people). As a result, businesses not slated for specific relief in this proposal could still receive it by ordinance at a later date.

4) Retaining tax simplification recommendations including reducing to eight the number of tax rates, and requiring businesses to report in only one tax rate category unless more than $500,000 of their business falls in another category. These steps will save businesses money in tax preparation and encourage greater compliance--increasing both business profitability and revenue flowing to the general fund.

5) Reducing the top category from its current $5.91 per thousand dollars of gross receipts to $5.50 (instead of the $5.40 rate in the Mayor's proposal). This would save $1.5 million over the Mayor's proposal--and most of the businesses in this top rate are relatively insensitive to business tax rates.

6) Being aggressive about tax collections, including a new one-time tax amnesty program for out-of-city businesses with increased penalties for non-compliance following the amnesty period. The Committee already adopted my proposal to eliminate the Mayor's proposed amnesty period for Los Angeles businesses if the legislature passes, and Governor Davis signs, a pending bill requiring the Franchise Tax Board to share information with the City Clerk, but this would not assist us with out-of-city businesses.

These proposals invigorate the business climate of Los Angeles, particularly by attracting start-ups. Recognizing that the City may lower but not raise taxes by ordinance, however, they offer more conservative reductions than the Mayor's proposal. This limits present risk to the general fund --saving $7.6 million relative to the Mayor's plan --but it preserves long-term flexibility, allowing the Council to stimulate targeted sectors of the economy in the future. Tax simplification, audits, and a possible amnesty will bring in additional revenue to offset the short-term consequences of rate reduction.

I have been among those most critical of the short time we, as a Council, have had to deliberate on business tax reform. But I also believe it is long past time to adopt a more competitive, forward-thinking business tax policy. Consequently, we should view the steps recommended here, along with the Committee recommendations consistent with it, as a beginning. We can and should continue to make appropriate changes in the years to come.

Tomorrow I will offer amendments to the Committee report which reflect these proposals. I hope to earn your support.

Thanks very much for your consideration.

Sincerely,

Michael Feuer