L.A.'S TAXATION 'EMERGENCY' CITY HALL WANTS TO EXPAND LEVY TO ALL TELEPHONE SERVICES.

Byline: BETH BARRETT

Staff Writer

Setting up a showdown with voters, the Los Angeles City Council unanimously declared a revenue emergency Tuesday and agreed to ask voters to approve a 9 percent telephone users' tax that would expand the levy to many new technologies.

The 14-0 vote to place the tax on the February presidential primary ballot comes amid concern that a judge could soon invalidate the current 10 percent phone tax -- which brings in $270 million of the city's $7 billion budget.

San Fernando Valley council members Dennis Zine and Greig Smith, who had questioned the urgency of the measure, met privately with Mayor Antonio Villaraigosa after learning, to their surprise, that the measure would tax new technologies such as Voice over Internet Protocol and private communication services used by large companies.

They then voted for the tax -- providing the unanimous support needed to get it on the February ballot and allow it as an emergency to pass with only 50 percent support instead of the two-thirds majority required for taxes.

The council's decision brought immediate criticism over expansion of the tax as well as the city's belated recognition that the current phone tax probably violates taxpayer protections imposed by Proposition 218.

"The phone tax doesn't do a lot to convince us the city is being fiscally managed well," said Brendan L. Huffman, president and CEO of the Valley Industry & Commerce Association.

"If City Council members knew these utility taxes might be overturned by the courts, why did they spend it? It's going to be a tough sell to Valley voters."

'Creative taxation'

City officials estimate the proposed tax -- which supporters intend to promote as a 10 percent cut -- would raise about $243 million annually. They said they don't have estimates on how much the new taxes on "emerging" technologies will raise.

The communications industry challenged the current telephone tax after the federal government last year backed off a tax that the city had levied since 1967.

Earlier this month, Villaraigosa released a report recommending the city take "emergency" action to place the telephone tax on the ballot.

A unanimous council vote was needed to declare an emergency and put the measure on the ballot, but Smith and Zine expressed strong criticism.

They questioned the urgency of the measure as well as whether it should include a higher voter-approval requirement.

On Tuesday, Zine expressed additional concern and called it "creative taxation." He also criticized several exemptions, including a 5 percent rate for telemarketers.

"I'm of the belief (the proposal) should be candid and forthright; not smoke and mirrors, bait and switch," Zine said in an interview before the vote.

But Zine and Smith flip-flopped after holding a last-minute private meeting with Villaraigosa, saying he convinced them that the city would be in serious financial trouble without the tax.

"We can't be fiscally irresponsible," Zine said, adding that public safety and other services could be slashed without the tax revenue.

Smith said that in the closed-door meeting, the mayor argued for the tax -- including its expansion to new technologies -- and was upset the council hadn't gotten a more complete briefing earlier.

City Administrative Officer Karen Sisson, the mayor and Councilman Bernard Parks, chairman of the Budget and Finance Committee, all defended taxing new communications technologies.

"Everyone who makes a phone call should be treated equitably," Sisson told the council.

Parks said the city always has made efforts to capture new technology within the tax base. Cell phone service, for example, now accounts for about $162 million of the $270 million in annual telephone tax revenue.

"You just move so the tax base continues to grow," Parks said.

Still, despite the expansion of tax to new services, the vast majority of phone users should see a reduction in taxes, insisted Matt Szabo, the mayor's spokesman.

"The loss of $270 million would have a devastating effect on critical services. The mayor believes the voters should have an opportunity to vote on critical services while lowering their phone tax," Szabo said.

Exemptions in the measure, meanwhile, also will be reviewed and could be changed at a later election. Chief Legislative Analyst Gerry Miller said raising the rates now would offset the message that the tax is being reduced.

Criticism arises

Councilman Richard Alarcon worried that taxing telemarketers at their current 5 percent rate could doom the measure with voters.

Business and other groups also criticized the action, which follows the city's recent negotiation of a five-year contract that gives most municipal workers a nearly 23 percent raise at a cost of over $200 million.

Transfers worth tens of millions of dollars to the city's general fund from the Department of Water and Power also are in jeopardy pending a court action.

Bob Stern, president of the Center for Governmental Studies, said taxing new technologies would make up for some of the touted rate cut.

"Obviously they're looking for new forms of revenue by people who don't have as much of a lobbying arm," Stern said.

Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, said whether the measure actually cuts taxes is questionable.

"It sounds like they're trading back and forth and people could end up paying about the same amount," Vosburgh said.

In a memo to council members, Sisson said loss of the tax would likely mean a combination of cutting services, raising fees and laying off employees.

"Potential service reductions will involve several essential services in the areas of public safety, community services, recreation and cultural programs, transportation services and general city support," the memo read.

Of the city's $6.8 billion budget, only about $3.6 billion is considered unrestricted to pay for various services, with the telephone users tax accounting for about 6 percent of that.

beth.barrett(at)dailynews.com

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Telephone tax

9 percent for new technologies such as Voice over Internet Protocol (or VoIP) services

9 percent for traditional and wireless phones

9 percent for private communication services such as T-1 networks used by large companies

5 percent for telemarketers

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Telephone tax (see text)