Doing Business in Los Angeles: Kosmont’s Advise to Tax Collectors

Our firm's third annual Kosmont Cost of Doing Business Survey finds a serious disparity between many of California's metropolitan industrial and commercial centers and smaller, low-cost communities that can move quickly to make themselves competitive.

This year's Survey includes for the first time extensive data from Northern and Central California as well as statistics from Southern California. The expanded Survey now includes in depth reports on business license taxes and other fees in over 200 cities and unincorporated areas in the State. 

We found a consistent pattern state­wide—smaller cities tend to charge lower business license fees. 

It is becoming apparent that companies looking for an economical, efficient home base should consider the excellent benefits that may be found in smaller but fast-growing, low cost, peripheral communities. Businesses whose locational criteria are flexible enough to move away from urban centers can decide whether the tax benefits in such peripheral towns outweigh factors such as transportation costs, travel time, labor pool availability, etc. 

In Southern California especially, there is a high correlation between jurisdictions with high business license fees and those with high utility taxes, compounding high business costs. 

We found that Northern and Central California cities levy higher local taxes than cities in Southern California. Median business license taxes are higher outside of Southern California, where more communities charge utility user taxes. However, northern rates don't hit the highs seen in a few communities in Southern California. And electricity taxes are substantially lower in the north. 

Someone who wants to build a 60,000 square foot office building in one of our state's largest cities could pay as much as $731,000 in mandatory fees. But in other cities there are no such fees.

If this building were in L.A., a tenant such as a law firm leasing 30,000 square feet, for example, would typically pay annual business license and utility taxes of $116,650. This firm would pay nothing in the unincorporated areas of Riverside County, for example, or in Santa Clara. In Northern and Central California they could find a number of large jurisdictions that offer very competitive rates for professional firms. 

Los Angeles, despite its continuing efforts to rationalize fees and control costs, is the most expensive city in Southern California in terms of average business license taxes. One challenge that will be faced by the new Los Angeles Charter Commission that will likely be elected this April will be to simplify and rationalize the City's governing structure so that costs can be reduced and the City's competitive stance improved. 

Close behind Los Angeles as expensive cities are Santa Monica, Beverly Hills, El Segundo, Culver City, and Inglewood.

In Northern and Central California, Berkeley has the dubious honor of being the most expensive business site in terms of business license taxes. Other expensive cities in the north are Oakland, Fresno, Monterey, Merced, Livermore, and Modesto. Among the cities surveyed in neighboring states, Portland, Oregon and Tacoma, Washington were found to have high business license taxes. 

The major disparities in taxes and fees make it difficult for high-cost cities to compete in the cutthroat competition for the new businesses that serve as vital sources of revenue. 

Of course, factors other than business taxes influence a company's location decision. There is prestige in some locations, concentration of suppliers in others, and variations in the quality of distribution services, the availability of labor and housing. But higher taxes and fees year after year add up, and when other factors are equal they can serve as "tie breakers" in selecting a location. 

California localities today face acute budgetary pressures, some stemming from the long-lasting effects of Proposition 13, others arising from the drive to cut taxes and fees to attract new business, and lately, from the constraints and limitations of Proposition 218. 

One problem for decision makers seeking a location is that cities and counties tend to avoid specifying their fees up front. They put their best foot forward, which is just good common sense, but it makes reading the fine print, and reading between the lines, important for business negotiators. They should always press for specifics and 'get it in writing.' 

While many, if not most, communities surveyed are willing to consider some form of relocation assistance, such incentives are rarely guaranteed. They must be negotiated case-by-case. We have observed, however, that many cities arc introducing creative mechanisms for such assistance. 

I wish there were some way to end the game of musical chairs with City A poaching from City B—or even State A raiding State B. It would level the playing field if we could rationalize our tax structures, and devise a method of allocating infrastructure costs—for airports, highways, pons, and environmental programs—on a regional basis. As it is, cities that cluster around a major metro area benefit without bearing their share of the cost from the expensive services made available to all by the central city. 

Organizational reform, such as L.A. charter reform, at all levels—city, county and state—could ultimately facilitate regional cooperation and make decentralization sensible and easier to achieve. The days of wild, headlong, unplanned, self-centered expansion are mostly gone. Local competition needs to be replaced by regional cooperation.