A Los Angeles City Council committee Monday called for further study of a plan that would offer a total of $54 million in annual tax relief to tens of thousands of small businesses by 2020.
The Budget and Finance Committee instructed city analysts to report back in 60 days on how the proposal — which would allow more small businesses to apply for exemptions from the city’s gross receipts tax — would affect city coffers.
One member of the committee also questioned whether the projected loss in revenue would likely be offset by any corresponding economic growth.
The city already exempts small businesses from paying its gross receipts tax but currently considers small businesses to be those with gross earnings of $100,000 or less each year.
Under the proposal by the Office of Finance, the threshold to be considered a small business would be raised to $250,000 by Jan. 1, 2016, to $500,000 in 2018, and ultimately to $1 million by 2020.
As many as 39,000 small businesses could start receiving exemptions from the tax on Jan. 1, 2016, a number that could grow to 72,700 businesses by 2020 under the proposal.
Finance officials estimate this proposal would eventually mean providing $54 million a year in small business tax credits.
Councilman Bob Blumenfield said today losing $54 million in potential revenue for the city would be a “big deal,” especially given a recent announcement by several City Council members and Mayor Eric Garcetti that they want to dedicate more city dollars to providing housing and services for the homeless.
“We’re looking for $100 million for homelessness — that’s half the amount,” Blumenfield said. “I would want to know we are getting good bang for our buck.”
The panel’s chair, Councilman Paul Krekorian, said the city is looking at several ideas for changing the city’s tax system.
“I think it would be valuable to have these ideas assessed by the CAO (City Administrative Officer) and the CLA (Chief Legislative Analyst) for their budgetary impacts and consider them in the context of all the other business tax reforms that we’re considering both in this committee and in other venues within the council,” Krekorian said.
Los Angeles is one of a dwindling number of cities that still collects taxes based on the gross receipts of businesses, and local chambers of commerce have long sought to get rid of this tax altogether.
The tax is projected to bring $491 million into the city’s coffers this fiscal year, as part of an $8.6 billion budget.
City officials have not agreed on a plan for phasing out the tax, despite having discussed the idea for years, according to Hollywood Chamber of Commerce President Leron Gubler.
The gross receipts tax “is a job killer, and it has been for the last 25 years,” Gubler said.
The more generous threshold for qualifying small businesses that is being proposed could mean that professional service providers, such as law firms, or jewelry stores and other businesses that sell “big-ticket items,” would also be able to apply for an exemption from the gross receipts tax, according to Gubler.
Gubler said even if some businesses bring in higher gross earnings, they may only employ five to 10 people, which typically qualifies them as small businesses.
“I’m encouraged they (the City Council) are at least considering this,” Gubler said. “The business community has been crying for relief from the gross receipts tax.”
Stuart Waldman, president of the Valley Industry and Commerce Association, said the proposal would be “a good first step” toward eventually eliminating a tax that is “essentially a punishment for doing business within city limits.”
“We would like to see it eliminated altogether, and hope that’s the end game,” he said.
The plan comes after city leaders vowed to draw up a “comprehensive plan” for creating a friendlier business climate in Los Angeles, especially after voting to raise the citywide minimum wage from $9 per hour to $15 per hour in 2020.
With the wage hike prompting outcry from the business community that it would lead to job loss, City Council President Herb Wesson earlier this year formed an ad hoc committee on job creation, specifically to work on a plan that would address those concerns.
Los Angeles Area Chamber of Commerce Senior Vice President Ruben Gonzalez said this latest proposal to give tax credits to more small businesses fits the bill.
Gonzalez said small business owners exempted from paying the city’s gross receipts tax would be able to reinvest their money into their workers and toward improving their business, which would be “very much in line” with the city’s efforts to create more jobs.
The current small business exemption “has proven to be an effective tool for the city in helping maintain and grow a sector that is key to the health of our economy,” Gonzalez said.
