An interesting idea from Mayor Garcetti

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Our new mayor has an interesting proposal: Phase out LA’s notorious gross receipts business tax. This would be a wonderful development for real estate investors in the city and an even better one for small business owners generally.

What is the “gross receipts tax”? It’s a tax the City of LA charges all businesses on gross revenue. Depending on the business, this ranges between something like $1.27 / $1,000 of gross revenue (for rental real estate) all the way up to $5.07 / $1,000 (for professionals like lawyers and architects).

Why is this tax stupid? Many of the businesses that generate the largest numbers of jobs are low margin. For example: A car dealership probably makes a gross profit (revenue less the direct cost of the goods sold) of something like $250 for each new car it sells. On a $20,000 new car, that’s a margin of 1.25% (dealerships make most of their money on used cars and service). But the gross receipts tax for “selling businesses” is $1.27 / $1,000, or $25.40.

The City of LA is basically making itself a first dollar partner and taking 10% of the dealer’s margin!

For low margin businesses, losing that amount of profit to the city makes locating here stupid, which is why there are tons of car dealerships in, for example, Glendale.

In general, you want to tax the things you want less of and avoid taxing the things you want more of. Car dealerships, for example, employ hundreds of people in relatively high-wage jobs (mechanics, salespeople, etc.). We want those jobs in LA, so we ought to work on improving the business climate for those types of employers.

If you need to make up for the lost revenue, how about raising taxes on liquor, cigarettes, gasoline, fast-food, soda, etc.?

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