Six months into his administration, Mayor Eric Garcetti has avoided setting big goals or launching major initiatives, preferring instead to focus on the “basics” of delivering city services.

But Garcetti's upcoming budget will include a proposal to phase out the city's business tax – his most ambitious effort to date. Garcetti has made jobs his top priority, and has argued that eliminating the city's tax on gross receipts would help spur the local economy.

The proposal, however, faces uncertain prospects at the city council.
“On the surface, I'm open to that,” said Council President Herb Wesson, when informed Thursday of Garcetti's intention to push for the tax phase-out. “The mayor and I will talk. A lot will depend on how you set up the phasing.”

The business tax brings in more than $440 million per year – roughly 10 percent of the city's budget. Garcetti believes that phasing out the tax over 15 years will foster economic growth that will offset the loss in revenues – though that is a controversial claim.

Rick Cole, the deputy mayor for budget and innovation, said this week that he estimates the cost of the first year of the phase-out will be $29 million. That would increase the city's projected deficit from $242 million to $271 million.

Cole said that Garcetti's budget, which is due to be released on April 21, will adopt the proposal of the Business Tax Advisory Committee, which proposed the phase-out in its report in 2012. The plan assumes that the revenue decline will be offset by gains in sales tax, property tax and other revenue streams. If it is not, the plan includes triggers that would suspend the phase-out.

The city first imposed the tax 78 years ago, and city officials have been talking about getting rid of it for almost as long. The tax is levied on any business operating in the city with more than $100,000 in annual revenue, though the city has made certain exemptions over the years. Most recently, the council exempted any new businesses in the first three years of operation. The tax is frequently cited as a reason for businesses to move to other cities in L.A. County.

“We have the highest gross receipts tax in the county,” Cole said. “It puts us at a competitive disadvantage to surrounding cities.”

But while there is broad opposition to the tax, it has never been eliminated because of concerns about replacing the lost revenue.

“[Wesson] has always been supportive,” of getting rid of the tax, said Andrew Westall, Wesson's assistant chief deputy. “The question is how do you offset the revenue the city gets.”

Councilmen Mike Bonin and Joe Buscaino both said they support the mayor's plan. Others are not so sure.

“I want to see the whole package,” said Councilman Jose Huizar. “Then I'll be in a better position.”

“We either need to eliminate it or replace it with something that's fair,” said Councilman Paul Koretz. “The mayor is a big proponent, and I assume he'll provide the leadership. Almost everybody is open to the concept.”

At a budget town hall on Thursday, Garcetti also unveiled another new proposal. He told an audience at Holman United Methodist Church in South L.A. that he intends to raise $20 million to fund a summer jobs program to employ 10,000 young people.

Update, 5:25 p.m.: In an interview this afternoon, Councilman Paul Krekorian, who chairs the council's Budget and Finance Committee, expressed strong reservations about Garcetti's plan.

“I'm skeptical,” he said. “I have yet to see evidence that reducing our budget by $400 million will produce revenues that exceed that amount.”

Krekorian also questioned the common wisdom that the tax is driving away jobs, noting that L.A. County has been adding jobs at a slower pace than the city even though it has no business tax. He also said he doubted whether companies would make decisions to locate in L.A. if the gradual elimination of the tax were contingent on increases in other revenue streams.

“I can't imagine there are many businesses that will make decisions about siting their operations based on something that's conditional,” Krekorian said.

“I share their concern about creating jobs – certainly that's very important,” he said. “But I think we have to be very targeted and strategic in how we do that.”

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