by Vince Vasquez
Thursday, September 3, 2009
This week, the City of Los Angeles surprised residents with the results of a key program that provided temporary tax relief to local business owners. As San Diego officials review their dwindling options to plug a new fiscal shortfall, stronger consideration should be given for advancing a primed tax reform package at City Hall.
At issue is “tax amnesty,” a policy whereby taxpayers are allowed for a limited time to repay part or all owed tax debt without financial penalties or prosecution. Amnesty programs are popular with cash-strapped municipalities, who net new revenue and taxpayers through the process, as well as delinquent enterprises, which may be facing thousands of dollars in late fees and interest for unreported income or unlicensed businesses. Though they vary in size and scope – some amnesties mandate back taxes to be paid with interest, while others simply require current business license taxes to be paid – they all take a business-friendly approach to solving a problem that may be costing local governments millions of dollars in lost revenue, as the City of Los Angeles found out this summer.
This Tuesday, LA Mayor Antonio Villaraigosa announced that 8,673 businesses participated in the three-month amnesty program that ended this July, resulting in $18.6 million in paid taxes. By participating in the program and paying all outstanding principal, interest and fees owed to the City, local companies were able to avoid up to 40% penalties on the principal tax due, which in some cases was substantial. According to Finance Director Antoinette Christovale, the largest amnesty participant was a telecommunications company that paid $1.5 million. But even smaller penalties could mean the difference between shuttering a business and keeping it open, as more than 95% of businesses in America have fewer than 500 employees, and an estimated 7% of Americans are self-employed. In all, Los Angeles forewent $6.7 million in penalties for delinquent enterprises, a tally which City Hall likely lacked the manpower and resources to effectively recoup through legal action and scatter-shot bureaucratic searches.
What made LA’s amnesty success unique is that it is unprecedented for the city, and it surpassed original revenue goals by more than $8 million. Los Angeles has initiated three amnesty programs since the 1990’s, including a 2001 amnesty for business and payroll taxes that yielded more than $14 million in tax revenue and a six month tax amnesty that netted $5 million in 2002. However, this year, Los Angeles broadened the number of taxes qualified for regulatory reprieve, including the business license tax, utility taxes, a parking tax, and the transient occupancy tax levied at hotels. Los Angeles city officials also took smart steps to raise public awareness to the program, including developing a media campaign, a new Tax Amnesty Hotline, and distributing program information in Spanish, Chinese and Korean.
Praise is deserving of city employees who administered the program, as well as Mayor Villaraigosa for championing tax amnesty late last year as a method to close a massive General Fund budget gap without raising taxes. Though LA’s amnesty receipts are impressive, they are only a fraction of the actual sum owed by the business community. The City Finance Director has estimated that 20% of Los Angeles companies have unpaid business taxes or under-reported revenues, racking up a total debt of about $280 million to City Hall. Likewise, the City of San Diego sits on a multi-million dollar corporate debt, which could now be potentially be tapped to cover new liabilities for our local government.
Last month, the Fourth Appellate District Court of Appeals unanimously ruled that the City of San Diego may not charge a fee to collect the business license tax. Since 2005, the City had been unfairly charging a $25 processing fee to collect the business tax from companies and rental property owners, a run-around of a state ballot measure passed in 1996 which requires new and increased taxes to be put to a public vote. Now, as City Hall must somehow find a way to refund $6.6 million in back fees to business owners, a critical opportunity to restructure San Diego’s business tax program has opened up, which one elected official has provided leadership for.
Two weeks ago, Councilmember Carl DeMaio sent a memo to the Mayor and the Chairman of the Budget & Finance Committee, requesting consideration for a four-point Small Business Tax and Regulatory Relief Proposal he developed earlier this year, which includes an amnesty program for local businesses. DeMaio’s comprehensive proposal takes a common-sense approach to solving an ongoing compliance problem in San Diego, and improves our economic climate at an important time in our nation’s history. Though the finer details of the full proposal are being worked on at City Hall, the tax amnesty portion should be introduced and publicly discussed without delay, as it may provide new revenues to cover a significant portion of the $6.6 million fee refund owed.
Skeptics of a new tax amnesty program may take issue with making analogies between Los Angeles and the City of San Diego, as LA is by far a larger municipality (4 million residents v. 1.3 million) and places a greater tax burden upon local businesses. However, similar success stories can be found in more physically comparative communities. In 2006, the City of San Jose (population 1 million) held a 60 day business tax amnesty for new and delinquent enterprises, allowing an in-house team of eight separate city departments to aggressively promote the program. Ultimately, San Jose officials successfully generated $1.3 million in revenue from 5,253 taxpayers, exceeding their goal by 30%. More impressively, the program effectively added 3,066 new accounts to the city roll, providing an estimated $500,000 in new annual revenue.
As the San Diego City Council returns from its summer legislative recess, it should openly weigh the merits of a new tax amnesty program. Four major cities including Los Angeles, Phoenix and Tucson have already hosted tax amnesty programs this year, and the City of Oakland is currently providing amnesty for local businesses until the end of October. Bringing more businesses into the fold can keep our city fiscally solvent, and help foster a healthy economy we can be proud of.