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EVALUATION OF ALTERNATIVES TO THE CITY’SGROSS RECEIPTS BUSINESS TAX

REPORT TO THE CITY OF LOS ANGELESOFFICE OF FINANCE TAX & PERMIT DIVISION

January 14, 2004

MBIA MuniServices Company

In Association With

Burr ConsultingColantuono, Levin & Rozell, APCGary PainterRobert E. CendejasRobert WassmerRyan & CompanyStuart Gabriel

FORWARD

CKNOWLEDGEMENTS

This report has been prepared by a panel of experts in accounting, economics, law and taxadministration under the auspices of MBIA MuniServices Company (MMC). The panel hasconvened to review the full list of alternatives, to identify the alternatives that merit in-depthanalysis, and to assess which alternatives merit becoming policy recommendations. The panelincluded the following individuals:

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Marc Herman, MMC President, Project Director

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Dave Boisselle, Municipal Audit Expert;

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Beverly Burr, Economist and Principal Author;

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Richard Carlson, State and Local Tax Accountant;

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Robert Cendejas, Transition Expert;

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Michael Colantuono, Municipal Finance Attorney;

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Stuart Gabriel, Real Estate Economist;

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Mark Mandell, Municipal Finance Attorney;

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Tom Mauk, Tax Administration Expert;

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David Naney, State and Local Tax Consultant;

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Gary Painter, Urban Economist; and

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Robert Wassmer, Tax Economist. The opinions expressed in this report are solely those of the authors and do not necessarily represent the views of the University of Southern California, California State University— Sacramento, or Ryan & Company. The opinions expressed in this report provide the perspective of municipal tax and economic experts and should not be considered a substitute for the policy deliberations and decisions to be made by the City of Los Angeles Mayor and Council. This evaluation was greatly aided by the guidance, interviews and data provided by the City of Los Angeles (hereafter, “the City”) working group on tax reform, which includes representatives of the Mayor’s Office of Economic Development, Office of Finance, Chief Legislative Analyst, City Administrative Officer and the Business Tax Advisory Committee. The working group members,

along with representatives of the City Attorney’s office, participated in discussions of evaluationcriteria, alternatives, and policy issues with the expert panel.In addition to research conducted by the panel members, Lisa Boland and Beverly Raine of MBIA MuniServices Company coordinated and conducted municipal benchmark studies and ataxpayer survey, in addition to providing research, writing, and editing assistance throughout thereport. Merrillee Fellows of Colantuono, Levin & Rozell drafted sections of the report, as didNatalia Golotvina of Burr Consulting. Annie Voy of Burr Consulting conducted the user feebenchmark study and municipal tax policy research. Humberto Macias and Cecelia Griego of BurrConsulting provided municipal tax policy and taxpayer research assistance.

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OCUMENT

The Executive Summary provides a brief overview of the report findings and recommendations.For readers interested in background, specifics, analysis, and references, please proceed to thebody of the report where such issues are addressed:

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The first chapter provides the policy context and the purpose of the report;

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The second chapter provides an overview of the existing business tax, anorientation as to how the City’s current business tax policy is structured, and acomparison of the City’s business tax revenue reliance and rates with benchmark cities;

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The third chapter discusses the revenue-neutrality and legal constraintsassociated with designing tax alternatives. This chapter provides an analyticalframework to promote consistency, intellectual rigor and objectivity in theevaluation of alternatives to the business tax. It explains how evaluation isperformed in light of conflicting and competing policy objectives;

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The fourth chapter provides policy lessons from tax reform efforts in sevenstates. Further, it provides the results of two business community roundtablesand a Los Angeles taxpayer survey. Finally, it discusses the panel’s evaluation of the existing business tax;

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The fifth chapter explains the differences between various measures of economicactivity. It includes an overview of business income explaining the accounting differences between income, value-added, and gross receipts. This chapter alsoexplains and illustrates the differences between businesses in real estate usage,ownership, and costs—issues relevant to commercial occupancy taxation;

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The sixth chapter provides the long list of tax policy alternatives initially identified as well as the preliminary evaluation of these alternatives. Further, itprovides explanation as to why the consultants rejected certain alternatives forpurposes of in-depth study in this report;