Cash-poor U.S. cities are trying to raise revenues by offering discounts. It’s not unlike how a struggling retailer might slash prices, but does it work for a city business model?
Consider Los Angeles. Mayor Antonio Villariagosa’s office works hard to attract new companies. Each employee is required to make five cold calls a week. They ask local businesses if they plan to expand. If so, the mayor’s rep offers to help cut any bureaucratic red tape. Or, they may try to poach companies away from surrounding cities.
“Good afternoon. I’m calling to reach out to businesses in the West Valley, and find out if there is any business assistance that our office can provide in the form of tax incentives,” says Rogelio Navar.
Companies opening up shop in Los Angeles for the first time get a business tax holiday for three years. So, new businesses don’t have to pay city hall a chunk of their gross receipts.
Matthew Karatz, Los Angeles’ Deputy Mayor in the Office of Economic and Business Policy, says “since we put the three-year business tax holiday in place, we’ve seen a 200 percent increase in the number of businesses registered here in Los Angeles since 2010,” says Karatz.
One such business is the Encore Tax Consulting Group. Armando Jamjian is the company’s managing director. He advises other businesses about exactly the kinds of tax incentives that lured his company from Pasadena to Los Angeles.
“[The tax break] was actually a big deal for us to come here because we wouldn’t have to pay that gross-receipts tax for three years,” says Jamjian. He pulls out a calculator and crunches the numbers to estimate how much money the company will save with the tax break. “It would have been about $15,000 to $25,000,” says Jamjian.
That’s all lost revenue for Los Angeles, but it may be necessary. At least, that’s the conclusion reached by other cities across the country.
“Cities are desperate. And they have to discount as much as they have. It’s clearly a rational response,” says Don Siegel, Dean of the business school at the University at Albany. “Many of these types of businesses don’t need to be located in a metropolitan area. So, in order to attract businesses to a downtown area, the cities have to offer these incentives.”
Siegel says incentives are often tailored to appeal to local businesses. For example, in Albany, New York, parking is limited. That creates a challenge for businesses. So, Siegel says, “in our city, we have special parking incentives.”
Los Angeles also has incentives related to cars. LA is cutting the business tax for new car dealerships opening in the city. Matthew Karatz with the mayor’s office says the math works out because the sales tax from new cars more than compensates for the lost gross receipts tax.
“You’re going to get six times the amount of sales tax than you would get in gross receipts,” says Karatz. The incentive seems to be working. Karatz says, “We have seen auto dealers relocate from other cities around Los Angeles, back to Los Angeles.”
But these giveaways aren’t always necessary. One Subaru dealer says he would have opened his new dealership inside the city even without the tax breaks. Of course, getting businesses to move into a city is only part of the equation. What’s to stop a company from moving again once the incentives expire? Or, perhaps the company will move to take advantage of a better incentive.
Don Siegel says the potential that a city could lose a company to rivals depends, in part, on the kind of industry involved. “For many technology-based businesses, they are quite likely to move.”
Armando Jamjian with Encore Tax Consulting says states also offer incentives to attract businesses. Louisiana offers tax credits for entertainment companies that shoot movies in the state.
“They don’t have to use all the tax credits,” says Jamjian. “They can be sold to other businesses. The oil conglomerates end up buying them from [film companies] for 50 cents on the dollar, or 25 cents on the dollar.”
Does that mean Jamjian may be tempted to move his firm again to chase the next incentive? “Now that we’ve been here almost two years, we’re staying here,” says Jamjian. Los Angeles qualifies as an Enterprise Zone, which allows Jamjian to take a state tax credit too.
At least in this case, the city’s giveaway has resulted in some economic growth. Since moving to Los Angeles two years ago, Jamjian’s firm has hired four people.