TAX REFORM SHOULD OFFER START-UP INCENTIVES; HELPING L.A. BUSINESSES IN FIRST, RISKY YEAR VITAL TO KEEPING THEM.

Byline: Mike Feuer

LOS Angeles needs business-tax reform now, both to attract the entrepreneurs who will keep our economy growing well into the future and to ease the burden on existing businesses.

Reform should focus tax relief on businesses most important to the Los Angeles economy; it should simplify our tax code; and it should improve enforcement so that businesses who pay into the system don't subsidize those who refuse to pay their share. Reform should accomplish all this without unduly straining the general fund.

Three tax-reform proposals are competing now in the City Council; one offered by me, another by Mayor Richard Riordan and a third by Councilwoman Jackie Goldberg. The council should integrate the best ideas of each and present a comprehensive package to the voters in June.

With municipalities throughout California competing for the start-up firms that will drive the economy of the 21st century, Los Angeles should begin by offering aggressive incentives to tip the balance as new companies decide where to locate.

That's why a key element of my tax reform proposal is to exempt the first $500,000 of a start-up business's receipts. This exemption would mean that 96 percent of all start-ups would pay only a nominal $75 tax in that first, risky year, a major bottom-line incentive for entrepreneurs to locate in Los Angeles.

It is also critical to retain the businesses that make Los Angeles' economy one of the most robust in the world. My plan offers tax relief for roughly two-thirds of the city's businesses, zeroing in on those deemed most reliable by the Mayor's Office. These businesses would see their tax rate drop one bracket. Under this targeted approach, the remaining businesses would be reassigned to the rate closest to what they currently pay.

This approach preserves the city's ability to reduce rates to selected industries in the future (under state law, a city cannot raise rates without a vote of the people but may lower rates by ordinance), while limiting the immediate cost to the general fund. In fact, I would support further reductions to key businesses soon if an inclusive public debate shows they warrant more favorable treatment.

Simplification is a virtue, too, and my plan retains the mayor's proposal to reduce to eight the number of tax rates. The plan also allows nearly all businesses to report in only one rate category, rather than the multiple categories many are forced to file in now. Simplification both will reduce the cost of tax preparation and encourage greater compliance, simultaneously increasing business profitability and revenue to the general fund.

It's critical to make our tax code more business-friendly, but at the same time we need to be smart about collecting from the estimated one-third of L.A. businesses now flouting our law.

Legislation pending in Sacramento would require the Franchise Tax Board to share data with the City Clerk, enabling us to go after scofflaws directly. Armed with better information and additional tax collectors (something I've long advocated), the city could increase its revenue dramatically without raising taxes.

I also propose a one-time amnesty for out-of-city businesses (about whom the city likely won't get independent tax data) which, combined with increased penalties from noncompliance, would further boost tax receipts.

Taken together, these proposals would invigorate the economy of Los Angeles, particularly by attracting start-up businesses. For existing businesses, they offer focused, moderate reductions, saving a total of $7.6 million relative to the mayor's plan and they enable future adjustments to further encourage certain businesses. Tax simplification, better auditing, and a one-time amnesty will bring in additional revenue to offset the short-term consequences of rate reductions.

As a measured alternative to the proposals offered by colleagues, my plan promotes the long-term growth of our economy while reducing the impact on the general fund. It's now up to the council to create a unified tax reform package to put before voters this summer.