Monday, November 21, 2011

Cutting Taxes is Hard to Do, Especially When You Love Them

If you want to understand why Los Angeles continues to struggle through the economic recession, even as the picture brightens in other large California cities (San Diego and San Francisco come to mind), the city's gross receipts tax is a good place to start. Logic dictates, of course, that cutting taxes on business is a sensible thing to do if you're interested in seeing those companies grow and hire people. And most of the time, that logic trumps ideology: even limousine-socialist San Francisco found it in its heart to cut its payroll tax back in the spring, encouraging growing tech firms like Twitter to expand in blighted neighborhoods. Yet as this Daily News report describes, doing things that make sense is sometimes harder than it appears.

The problem with LA's gross receipts tax is, basically, that it's very effective at what it does: killing business by extracting massive sums of money from private hands. It accounts for roughly 10% of the city's general fund budget, or about $425 million a year. As such, even as businesses flee for nearby communities and the county's unemployment rate remains near 12%, efforts to eliminate the tax have proceeded slowly. Last week, the City Council embraced a plan to extend a tax holiday on new businesses until 2015, and to phase out the tax for mutual fund agents. In addition to embracing these ideas, Mayor Antonio Villaraigosa also wants to exempt new car dealers from the tax. While these are positive signs, many critics of the receipts tax view them as too little, too late.

More generally, LA's efforts to get rid of the tax raise as many questions as they answer. The government in Los Angeles is not exactly known for its commitment to tax reform, and people like Councilman Bernard Parks appear more focused on maintaining the city's current spending than on reducing it to more sustainable levels. Even if the tax holiday is implemented, what happens when it expires and LA is (presumably) still broke? Certainly, the glacial pace of plans to scrap the tax speaks volumes on its own.


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