In hopes of retaining businesses currently in Los Angeles and luring those mulling a move, Mayor Antonio Villaraigosa on Friday signed a three-year extension of the New Business Tax Holiday.
The tax holiday exempts businesses from the city’s business tax for their first three years in Los Angeles. Originally drafted in 2010, the holiday has helped attract companies like Google, automaker BYD, Beverly Hills BMW, Farmer’s Insurance, Tom’s Shoes and Coda, an electric car maker, the mayor said.
“Let’s be honest … we used to have an attitude in this city that people just had to be in L.A.,” Villaraigosa said. “And what we realized over time is that they don’t. We have to work to get their business. We have to fight for our businesses, and we have to do everything we can to advocate for them.”
He said the tax holiday was introduced in 2010 to create a level playing field for the city. Villaraigosa said the city’s gross receipts tax was “out of whack and needed to change.” At the time, Los Angeles County was dealing with a 12.5 percent unemployment rate.
“We’ve seen what’s happened,” Villaraigosa added. “We’ve had a 150 percent increase in the number of businesses that have come into the city since the tax holiday. It’s just been a game-changer.”
He said the city is focused on job creation, and that he hopes L.A. eliminates the gross receipts tax in the relatively near future.
“Now, we’re in the worst recession since the 1930s, so we’re not doing that tomorrow, but we do need to put a path forward where we eliminate that gross receipts tax,” Villaraigosa said. “It’s out of whack. It’s an important opportunity for us to attract more businesses.”
The press conference was held at the office of HKS Los Angeles in Westwood, where the company relocated after leaving Beverly Hills. City Councilman Eric Garcetti, 13th District, who authored the extension, said the gross receipts tax can be especially adverse for companies like HKS, an architectural firm that manages pass-through revenues and is essentially double-taxed.
“It is the worst system we could have,” he said, adding that the tax holiday extension is approximately the 10th piece of legislation the city has passed recently to address the gross receipts tax. “We want you to spread the word that Los Angeles is open for business. We want you to come here. We want this to be not just business friendly, but the most business friendly city in America.”
City Councilman Richard Alarcon, 7th District, authored the original tax holiday. He compared two businesses with the same amount of gross receipts — $1 million — but one business yielded $900,000 in profit.
“That puts a business that has, say, $500,000 in profits, at a gross disadvantage,” Alarcon said.
He referenced his father’s small business in Sun Valley, which operated for approximately 45 years.
“I used to watch him pay the bills. …I knew when he was having a tough time paying those bills,” he said. “Business wasn’t happening, and he was having a tough time. Sometimes, the amounts that would trigger his ire were very small.”
Alarcon said those incremental costs can affect decisions when considering whether to relocate to a particular city. He agreed that the city should look into eliminating the gross receipts tax.
“Some day, we won’t call it a holiday because every day will be a business tax holiday in Los Angeles,” Alarcon said.
The city has had “great success” attracting businesses since the tax holiday was established, City Councilman Paul Koretz, 5th District, said. He said HKS fits the profile of the businesses that officials want to entice, having worked on Dodger Stadium and the W Hotel in Hollywood.
“I think the reasons are obvious why this business tax holiday works,” Koretz said. “It gives businesses a chance to establish themselves … without having to pay these taxes for several years.”
Villaraigosa said HKS was initially reluctant to move to Los Angeles, but made its new home in the Oppenheimer Tower on Wilshire Boulevard. Scott Hunter, managing director and principal of HKS, said the tax holiday played a role in the company’s decision.
“We’ve had to grow and change and evolve our business over the last few years, as the economy has been on a bit of a rollercoaster and has especially hard-hit our industry,” he said. “We feel it is something that presents challenges for companies such as ours, where at some points 50 percent of our income actually is a direct pass-through to engineers and consultants that we work with. So, then we’re taxed on the full amount and then our consultants also get taxed on the same thing. We’re happy and honored and pleased to work with the city to take advantage of the three-year tax holiday.”
Villaraigosa said the incentives that come with bringing in new business have outweighed the money generated through the gross receipts tax, but it hasn’t gone way beyond what the tax would have generated for the city. The city hasn’t conducted a study, but an earlier report showed how L.A.’s gross receipts tax was considerably higher than the rest of the region, he said.
“It was clear that it was hurting business’ willingness to come to the city,” the mayor said.
Officials added that the city would be bringing in “electronic plan check”, which allows developers to submit electronic forms as opposed to printing thousands of sheets of paper for various departments. Villaraigosa said the city has also reduced the number of departments that new businesses must work with to get permits. For example, it once took 18 months to open a restaurant in Los Angeles, but now it can be done in six months, he said.
“Those are the kinds of things we’re doing to be more nimble, to cut red tape, to open the city for business,” Villaraigosa said.