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Executive Summary
LA s LAs Gross Receipts Business Tax, with Rates Ranging Up to 0.507%, is Unconscionably High9.5 Times Higher Than Average for Rest of LA County LAs Jobs Have C t t d Whil P LA J b H Contracted While Population H E l ti Has Expanded O d d Over P t 3 Past Decades Citys Untenably High Unemployment Rate of 14.6% is 60% Higher Than Nations Already Lofty 9.1% Level City of LAwith All of Its Structural AdvantagesShould be Leading LA County in Economic Activity Not Trailing It Activity, LAs Reputation for Being Business Unfriendlyand Thus Worker & Quality of Life UnfriendlyEmanates from Most Visible Embodiment: Onerous & Widely Criticized Gross Receipts Tax Business Tax Advisory Committee, Task Force Appointed by Mayor & City Council, Has Studied Problem & Recommends Phasing Out Antiquated Gross Receipts Tax Over Next 4 Years
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27.7%
-9.1%
33.8%
16.5%
Between 1980 and 2010, the Population of the City of Los Angeles has Grown by 27.7% while the Number of Jobs Created in the City has Declined by 9.1% In Comparison the Population of the Rest of LA County Comparison, (Excluding LA City) has Grown by a Similar 33.8% while the Number of Jobs Created has Increased by 16.5%, Fully 25.6% and 514,000 Jobs Higher than LA
Source: Southern California Association of Governments (SCAG) RTP Database
Key Findings From 2007 Tax Foundation Study on Gross Receipts Tax Structure y p
Economic Neutrality: Gross Receipts Tax Interferes with Private Market Decisions Competiveness: Gross Receipts Tax Interferes with Capacity of Businesses to Compete with Companies in Other Jurisdictions F i Fairness: G Gross R i t T d Receipts Tax does not T t E ll Sit t d t Treat Equally Situated Businesses the Same. Businesses with Similar Net Incomes Could Have Radically Different Tax Rates when Based on Revenues Transparency: Gross Receipts Tax is a Stealth Tax with its True Burden Hidden from Taxpayers Rate: Unlike most Taxes, the Effective Rate of a Gross Receipts Tax is Higher than Statutory (or Advertised) Rate
Source: Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance. Publication of Tax Foundation, John L Mikesell, Jan. 2007. Web. 11 Mar. 2010. <http://www.taxfoundation.org/research/show/2180.html>.
Penal Aspect of Professions & Occupations Catch-All Out of Touch with Current Economic Reality y
Gross Receipts Tax 1st Adopted in 1936, when L.A. Economy was Manufacturing Driven Rates were Designed to Attract & Retain Manufacturing Jobs
Total Nonfarm Employment*
1949
Construction, 7.7% Transportation & Utilities, 8.0% Mining, 1.0%
2010
Construction, 2.8% Transportation & Mining, 0.1% Utilities, 4.0%
Manufacturing, 30.3%
Manufacturing, 9.9%
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Penal Aspect of Professions & Occupations Catch-All Out of Touch with Current Economic Reality y
Stark Reality of 2011 is L.A. Economy is Service-Based Services Businesses were 52.3% of Total Last Year, Up from Just 14.7% a Half-Century Ago Manufacturing Down to an Anemic 9.9% of Total from 30.3% Since 1949, L A County Services Sector Employment has Grown by 1949 L.A. 860% while Manufacturing has Shrunk by 11% A Gross Receipts Tax Structure that Gouges the Regions Primary Source of Employment is Counterproductive & Self-Defeating No Surprise, 42% of Taxpayers Lumped Into Highest Catch-All Category & Pay 58% of Taxes City Tax Should at Worst be Neutral and at Best be Source of Encouragement for Business Location & Job CreationL.A.s Onerous Gross R i B i G Receipts Business Tax is an Obstacle, a Deterrent & an T i Ob l D Anachronism
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Current Rates in 15 Highest Cities in Los Angeles y p CountyProfessions & Occupations Catch-All
Los Angeles Santa Monica Culver City Inglewood El Monte San Fernando Claremont Compton Gardena Hawthorne Lomita Palmdale P l d l Bell Huntington Park Irwindale
Source: 2010 Kosmont-Rose Institute Cost of Doing Business Survey
0.507% 0.503% 0.301% 0.165% 0.147% 0.132% 0.111% 0.107% 0.101% 0.100% 0.073% 0.056% 0 056% 0.044% 0.040% 0.033% 0 033%
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Current Rates in 15 Other Major Metros in U.S. Professions & Occupations Catch-All p
City Los A l L Angeles Baltimore Boston Cincinnati Cleveland Denver Detroit Las Vegas Miami Minneapolis New Orleans Oakland Seattle St. Louis Washington DC
Source: 2010 Kosmont-Rose Institute Cost of Doing Business Survey
Gross Receipts Rate 0.507 0 507 0.000 0.000 0.210 0.000 0.000 0.000 0.000 0.055 0.000 0.001 0 001 0.252 0.216 0.000 0.000
$4,800 $7,500
$7,500 ,
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BTAC Members
Successful investment banking career spanning three decades F Founded L Angeles based middle-market investment bank G f & Co. i 1992 d d Los A l b d iddl k i b k Greif C in Prior - Vice Chairman of Sutro & Co. and Managing Director of Investment Banking Division Management Consultant with Touche Ross & Co. (Deloitte Consulting LLP) Endowment of Lloyd Greif Center for Entrepreneurial Studies at USC in 1997 Chairman Los Angeles Police Foundation Director California Chamber of Commerce & Past Chairman, Foundation, Director, Chairman, LAEDC Chairman Lloyd Greif President & CEO, Greif & Co. BA - UCLA (Economics), MBA - USC (Entrepreneurship) and JD - Loyola Law School State and Local Tax Partner with 27 years experience in KPMG LLCs Los Angeles office where he leads Pacific Southwest Income and Franchise tax practice Prior - lead tax partner for many of KPMGs audit and tax clients Co-authored Practical Guide To California Taxes: The Impact Of Economic Crisis a book on recent developments in California taxation published in May 2010 , f f f y f Member, American Institute of Certified Public Accountants and California Society of CPAs BS from Pepperdine University Accounting and MS in Taxation from Golden Gate University President and CEO of Los Angeles LDC, Inc., a U.S. Department of Treasury certified Community Development Financial Institution Responsible for infusing $250 million of capital into low income and distressed communities while stimulating new business and employment opportunities Prior Vice President at Security Pacific National Bank Past Chairman, Urban Land Institute District Council Executive Committee Trustee Community Reinvestment Fund & Member, Union Bank Community Advisory Board South Trustee, Member LA Initiative BA Loyola Marymount University (Bus. Admin.), USC Ross Minority Program in Real Estate
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BTAC Members
General Manager of Omni Hotel Los Angeles at California Plaza 25-year industry veteran having worked with such companies as Destination Hotels & Resorts, Rosewood Hotels, Hilton Hotel Corporation, Disney Hotels, The Mansion on Turtle Creek and Richardson Hotels Prior - General Manager positions at both Hilton Checkers and Millennium Biltmore Member Board of Directors of LA Inc the Convention and Visitors Bureau for Los Angeles, and the Member, Inc., Angeles Executive Board for the Downtown Central Business Improvement District Kathy Faulk General Manager, Omni Hotel BS Texas A&M Commerce (Business Administration) Partner with Kindel Gagan, a Los Angeles-based public affairs consulting firm Vt Veteran of 20 years of l i l ti and administrative service with St t of C lif i f f legislative d d i i t ti i ith State f California Specialties include water, agriculture, environment, public finance and transportation Prior principal with Rose & Kindel from 1988 through 2009, Chief Deputy Secretary of State under March Fong Eu and Chief Deputy State Treasurer under Jess Unruh P f Professor, P liti of Development at USC G d t S h l of Real Estate Development Politics f D l t t USCs Graduate School f R l E t t D l t Member, City of Los Angeles Commission on Revenue Efficiency BA, Political Science and MS, Public Administration UC Davis Senior Manager and Project Manager for Ernst & Youngs West region SALT incentives practice During nine-year tenure, has provided SALT negotiated and statutory incentives services to many of Ernst & Youngs largest manufacturing, consumer/retail and healthcare clients Prior - Senior Regional Manager with the Los Angeles County Economic Development Corporation where worked alongside State, counties, and cities to retain and attract major companies to California BS UC Berkley (Business Administration)
Sal Gomez Senior Manager, Ernst & Young
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BTAC Members
Past Managing Partner of Kirsch, Kohn & Bridge LLP, Certified Public Accountants Member of the American Institute of Certified Public Accountants and California Society of Certified Public Accountants (CalCPA) Past Member of the Board of Directors of the Los Angeles Chapter of CalCPA Current Co-Chair of the San Fernando Valley Attorney/CPA Discussion Group B d M b V ll Industry & Commerce Association and V ll Economic Development C t Board Member, Valley I d t C A i ti d Valley E i D l t Center BS from UCLA Business Administration Vice President, State Government Affairs for MPAA Has represented major motion picture studios in state and local government relations since 1997 Prior worked in the United States Senate on the legal staff of the Senate Judiciary Committee and as counsel to the Chairman of the Senate Ethics Committee Began legal career in Chicago as an associate with law firms Friedman & Koven and Sachnoff & Weaver, specializing in labor and employment law W i li i i l b d l l Serves on the Budget and Finance Committee of Temple Beth Am in Los Angeles Melissa Patack VP, State Government Affairs Motion Picture Association of BS Cornell University (Industrial and Labor Relations), JD Boston University School of Law
America, Inc.
Mel Kohn Former Managing Partner Kirsch, Kohn & Bridge LLP
Entrepreneur and real estate broker with over 23 years of experience recipient of the Distinguished experience, Realtor of the Year Award & former member, LA City Fire Commission Director, Metropolitan Transportation Authority (MTA), Past Chairman, United Chambers of Commerce of San Fernando Valley and Founding Board Member, Valley Economic Alliance President of the Southland Regional Association of Realtors, Californias largest local real estate tradegroup, and Member of the California State University Presidents Advisory Board BS California State University Northridge (Business Administration)
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Sales Taxes from Employer & Employee Purchases Unsecured Property Tax Gains Property T Gains from Increased D P Tax G i f I d Demand f C d for Commercial & Residential Real i l R id i l R l Estate More Employers & Employees Fueling Utility Tax Gains Increased E I d Economic Activity Driving Greater Income from Permits, Licenses & i A i i Di i G I f P i Li Fees, as Well as Power Revenue Transfers
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o o
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$688 $604
$21 $48 $60 $115 $42 $30 $195 $278 $317 $42 $48 $69 $131 $48 $55
$600 $500 $400 $300 $200 $100 $0 Business Taxes Worst Case Average Case $30 $18
$425
$13
$423
$34 $42 $ $80
Best Case
By Eliminating Gross Receipts Tax of $425 Million City is Million, Expected to Receive General Fund Revenue of Approximately $423 Million in Worst Case and $688 Million in Best Case Driven b R lt t I Di by Resultant Increased E d Economic A ti it & E l i Activity Employment t
Source: Report to the City of Los Angeles on Potential Revisions to the Business Tax, Charles Swenson, August 2011
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Business Taxes Make Up $425 Million of the Citys $4.3-Billion General Fund
Elimination of Business Tax Revenue is Ultimately Expected to Result in Additional Revenue of Approximately $604 Million (Average Case) Including Incremental Property, Sales & Utility Taxes for a Net Gain to LA of $177 Million
Expected to Result in Strengthened General Fund of Approximately $4.5 Billion Once Indirect Revenue Gains Take Effect
Source: Report to the City of Los Angeles on Potential Revisions to the Business Tax, Charles Swenson, August 2011
$ in billion ns
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Year 2
Year 3
Year 4
Full Reduction Rate Taxes Paid 0.000% $0 0.000% 0 0.000% 0 0.000% 0 0.000% 0 0.000% 0 0.000% 0 0.000% 0 0.000% 0 0 $0
Assuming 1/4 Reduction Assuming 2/4 Reduction Assuming 3/4 Reduction Rate Taxes Paid Rate Taxes Paid Rate Taxes Paid 0.076% $6,741,528 0.051% $4,494,352 0.025% $2,247,176 0.076% 22,762,335 0.051% 15,174,890 0.025% 7,587,445 0.095% 17,523,188 0.064% 11,682,126 0.032% 5,841,063 0.095% 43,021,922 0.064% 28,681,281 0.032% 14,340,641 0.095% 2,990,410 0.064% 1,993,607 0.032% 996,803 0.191% 8,296,382 0.128% 5,530,921 0.064% 2,765,461 0.236% 1,540,248 0.158% 1,026,832 0.079% 513,416 0.267% 10,866,500 0.178% 7,244,334 0.089% 3,622,167 0.380% 184,932,230 0.254% 123,288,153 0.127% 61,644,077 19,947,715 , , 13,298,477 , , 6,649,238 , , $318,622,458 $212,414,972 $106,207,486
All Classes (1-9) & Other Taxpayers Receive Immediate Relief in Direct Proportion to Amount of Taxes Paid in Fiscal Year 2009/2010 Provides Greatest Relief to Taxpayers Paying the Most TaxesCitys Exorbitant 0.507% Occupations & Professions Catch-All Category Service Businesses that are Highly Mobile Need to be Secured First Dollar Amount of Tax Burden Declines by 25% Each Year
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($ in millions)
$524
$604 $564
Business Taxes
$300 $200 $100 $0 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 425 319 212 106
Status Quo
Begin Phase Out of Business Tax 1 Year After Signed Into Law
Continue to See Indirect Revenue Gains from Prior Year Grow to $80 Million Begin to See New Indirect Revenue Gains of $65 Million as All Other Indirect Revenue Sources Begin to Kick In (e.g., (e g Secured Property Tax, Licenses, Permits, & Fees, Power Revenue Transfers, etc.)
Persistent Negative Image of Being Business Unfriendly Continuation of AntiCompetitive Positioning, High Unemployment & Job Contraction Business Tax Revenue of $425 Million Will Continue to Decline with Ongoing Loss of Employers & Jobs
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Licenses, Permits, Fees, etc. Starting first year of tax change and fully complete in five years Power Revenue Transfers All Others Starting one year after law is signed and fully complete in five years Starting first year of tax change and fully complete in five years
$ in millions
Secured Property Tax Unsecured Property Tax Utility Tax Sales Tax Licenses, Permits, Fees, etc. i i Power Revenue Transfers All Others Indirect Revenue Gains
Source: Report to the City of Los Angeles on Potential Revisions to the Business Tax, Charles Swenson, August 2011 and BTAC Estimates
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*Source: U.S. Small Business Administration, U.S. Department of Labor & Census Bureau
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Business Tax
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