Friday, February 13, 2015

Los Angeles: when cutting business taxes makes sense

As a progressive Democrat, you might not normally expect me to be in favor of cutting business taxes. One exception? My home city of Los Angeles and "gross receipts tax" it imposes on businesses. The gross receipts tax is, well, pretty gross. It taxes businesses not on their profits, but simply based on how much they collect on their invoices. Simplistically speaking, all business that collect, say, $1 million in invoices are taxed on that basis, regardless of how high their operating expenses are.

Needless to say, this unfairly penalizes businesses in industries with low profit margins, as well as businesses that invoice for a high amount of passthrough expenses. Let's take the marketing research industry, for instance: standard practice for focus group facilities is to pay the people who come in to do their focus group projects, and then invoice the clients for the amount of money they spent. In some cases, the incentive money can comprise the majority of the invoice, and yet it's a passthrough expense: the facility makes no money on it, but because it still counts toward gross receipts, the city can assess taxes on it. This leaves the facility two options: either to eat the cost of paying taxes on money it doesn't make, or to try to make up the difference by raising prices elsewhere and thus putting it at a competitive disadvantage. In either case, it makes operating a service business within Los Angeles more uncomfortable than it should be, and in the marketing research industry, the gross receipts tax has been a factor for focus group facility owners in whether to locate a business within Los Angeles proper, or pick a neighboring city like Santa Monica or Culver City instead.

Thankfully, Mayor Eric Garcetti is changing that. From a recent release:

Now, I'm not suggesting that this tax cut will end up paying for itself. But eliminating the gross receipts tax and replacing it with something that is less punitive towards businesses with a lower profit margin will definitely increase business development and reduce any competitive disadvantage Los Angeles faces compared to its neighbors.

Combined with the minimum wage increase that's on track for passage, it looks like the city's economic future is getting brighter for everyone under Mayor Garcetti's leadership.


Phil Perspective said...

And businesses will pay their fair share, how? I bet you know the reason behind a gross receipts tax. It's probably the hardest tax to dodge as business. At least it would seem to me that's likely the case. Besides, businesses are always going to whine about the taxes they pay, even if it's a pittance. Just look at the large multinationals now.

Unknown said...

I agree to some extent, but the way the city currently administers the gross receipts tax is unfairly punitive. I would be fine with a gross receipts tax that exempted pass-through expenses or purchases made on behalf of clients that had nothing to do with revenue generation. But as it stands now, the tax is punitive and anti-competitive--and that's why a progressive Democratic mayor and an overwhelmingly Democratic city council passed it.