Candidate Garcetti Plays the Numbers Game

PERSPECTIVE - Politicians are always promising new jobs or improved revenues.

All of the candidates for mayor of Los Angeles are in favor of eliminating the business tax on gross receipts as a means of promoting economic development.  The tax has already been eliminated for all new-car sales in the city.  

The mayor and City Council believe new-car dealers will be enticed to establish themselves in Los Angeles, leading to an increase in sales tax revenue which will far surpass the lost business tax revenue.

The same outlook holds for a complete elimination of the gross receipts tax for all businesses.

There is no doubt businesses will benefit, but will the city’s revenue from other sources improve enough to offset the loss of 10% of the general fund attributable to the business tax, or about $440 million per year? 

Eric Garcetti said the city has lost up to $60 million per year in potential sales tax revenue due to the exodus of almost 100 dealers over the last 25 years. I saw another projection of $43 million.  

It’s tough to estimate. Garcetti is presenting a theoretical number.

How many of the sales from new or returning dealerships will come at the expense of existing ones located within the city limits?  Most consumers have no dealer loyalty.  They will buy from whichever one offers the best deal. 

Although it is reasonable to assume purchases from new local dealers will detract somewhat from neighboring cities, the auto industry is highly competitive - there are many factors that figure into pricing other than the impact of the gross receipts tax (equal to 0.127% of sales – a fraction of 1%)….and buyers do their homework. There is no telling how other cities will respond to LA’s move, much less how dealers outside our borders will alter marketing and sales strategies.

The estimate is further complicated by where the purchaser lives, because that determines the overall sales tax rate. Also, how quickly can we expect dealers to set up shop in the city, to the extent they do?

One can only imagine how much more complex calculating the benefits of eliminating the business tax across the entire spectrum of products is.

I am glad our city leaders and candidates are considering revamping the tax structure; I am not pleased by how Garcetti, in particular, is presenting it.

The impact is far from a sure thing.  The timing  of the business tax elimination could crater the general fund if the loss in gross receipts revenue and the additional sales tax are not in sync.

Garcetti makes it sound as if the benefits are immediate and certain. Our city has a history of being too optimistic in its projections.  Garcetti is part of that history.

Garcetti, like fellow candidate Wendy Greuel, would rather bank on unsubstantiated revenue claims than face the reality of restructuring the employee compensation programs absorbing 85%-90% of the general fund. But that would mean jeopardizing their public union support.

I hope this issue is a major talking point in the controller’s race, too.

 

(Paul Hatfield is a CPA and serves as Treasurer for the Neighborhood Council Valley Village.  He blogs at Village to Village, contributes to CityWatch and can be reached at: [email protected]) –cw

 

 

 

 

 

CityWatch

Vol 11 Issue 3

Pub: Jan 8, 2013