Tax Break Setback for Valley HMOs

A tax break that was proposed when health care organizations threatened to move out of Los Angeles suffered a setback Wednesday when the City Council decided the plan needed further study.

The tax break--which would reduce business taxes by up to $15 million annually for the industry--was proposed by Councilwoman Laura Chick, whose west San Fernando Valley district is home to four of the city’s five largest HMOs.

Chick argued that a new tax formula is needed because HMOs are unfairly over-taxed and have threatened to move to cities with lower tax rates, taking more than 6,500 jobs and millions of dollars in tax revenues with them.

“Warner Center could become a ghost town,” she said, referring to the Woodland Hills business center that houses the four Valley HMOs.

In interviews, several HMOs confirmed Chick’s warning, saying they are considering leaving Los Angeles unless the business tax rates are lowered.

But several council members said tax breaks for an individual industry should only be considered as part of a citywide tax study, which is expected to be completed in the next month. Others expressed reservations about Chick’s proposal to make the tax break retroactive to Jan. 1, 1996.

“I understand that we want to keep every business in the city but we can’t let them beat us up and say, ‘We are going to leave and take our marbles with us,’ ” said Councilwoman Rita Walters, the most vocal critic of the proposal.

Councilwoman Jackie Goldberg argued that the firms may leave Los Angeles even if the city provides the tax breaks.

“To give them $15 million a year while they figure out how to leave anyway doesn’t make sense,” she said.

After nearly half an hour of debate, the council referred the matter to its Budget and Finance Committee--with Chick’s reluctant approval. The panel is expected to consider the matter sometime next month.

At the heart of the debate is the question of how to collect taxes on the fast-growing and ever-changing industry.

The city collects nearly $6 for every $1,000 of taxable gross receipts from HMOs. But Chick and the HMOs argue that the health care facilities are unfairly taxed for fees they simply pass on from members to doctors and other medical providers. They believe the city should only tax them on the administrative fees they keep.

The HMOs also say that other cities, such as Oakland, have adopted the tax break that Chick has proposed.

Because of the disagreement, the HMOs have withheld paying $37.8 million in business taxes from 1994 and 1995. Another $19 million in business taxes has yet to be collected for 1996.

Under Chick’s proposal, the HMOs would only pay between $3.7 million and $5.4 million for 1996, depending on how the tax formula is written. That is a reduction of $13.6 million to $15.3 million per year.

The five HMOs alone contribute 6.9% of the $275 million in business taxes collected by the city annually.

Chick argued the tax relief for HMOs make as much sense as the tax breaks and incentives that the city approved last year for multimedia firms and the proposed DreamWorks development in Playa Vista.

Mayor Richard Riordan, who championed the DreamWorks and multimedia tax breaks, supports the tax relief for HMOs but does not believe it should be retroactive through 1996, said Gary Mendoza, Riordan’s deputy for economic development.

Mendoza said Riordan also agrees with council members who want to delay adoption of the tax break to consider it as part of an overall study of the city’s business taxes.

But some HMOs warn time is of the essence and that they are now being wooed by cities such as Burbank, Calabasas and Glendale, which would charge HMOs less in business taxes.

In fact, Dennis Eder, chief financial officer for CareAmerica in Woodland Hills, said he scouted office space last week in a city with more lenient business taxes.

“We need to get this thing resolved this spring,” he said. “If it isn’t resolved, we have to make a decision that is right for our organization.”

CareAmerica employs about 500 workers in Warner Center.

Patrick Garner, senior vice president for WellPoint Health Systems, was more blunt. Unless the tax formula is changed, he said, “We will move.”

Garner said his HMO pays twice as much in business taxes as it does for rent. Moving to a city with lower tax rates “would be a very easy decision for us,” he said.