Riordan Backs Tax Break to Keep HMOs

Mayor Richard Riordan’s office Thursday endorsed an immediate tax break of up to $15 million for five health-care organizations that have threatened to leave Los Angeles unless their business taxes are dramatically cut.

The mayor’s quick action was a sharp turnaround from Wednesday, when his office hedged on the issue, saying it could wait a few weeks while the city completes a preliminary comparison of taxes for all businesses in Los Angeles and neighboring cities.

But with city officials and office landlords from five other cities--Burbank, El Segundo, Glendale, Calabasas and Vernon--pursuing the HMOs with promises of lower taxes and lease rates, Riordan’s business development deputy warned that if the city waits, it “runs the risk of losing major employers.”

“We have a keen interest in seeing this being addressed as soon as possible,” said Gary Mendoza, Riordan’s deputy for business development.

The five HMOs--CareAmerica, Health Net, Maxicare, Prudential and WellPoint--employ more than 6,500 workers and generate about $23 million in tax revenue for the city.

They have teamed up to lobby the Los Angeles City Council for a new business tax formula that would save them up to $15 million annually. The proposal, however, stalled in the City Council on Wednesday when a majority of its members argued that the tax break needed further study.

Several council members said the tax break should only be considered as part of that overall tax study, which has been in the works for nearly three years.

It is unclear whether the mayor’s endorsement will move the council to act any faster on the issue. Any tax break would need council approval.

But neighboring cities are not waiting for the council to decide on the matter. The city of Burbank, for example, recently sent a letter signed by its mayor to all five HMOs, touting the benefits of relocating to that city.

“We stand ready to prepare whatever financial analysis that the HMOs might require from us in their comparison to Los Angeles,” said Chris Foss, Burbank’s economic development manager.

The HMOs join several other industries--including multimedia companies and sports franchises--that have recently tried to take advantage of the increasing competition among cities by seeking tax breaks and other incentives under threat of relocating.

The heath care organizations argue that they are simply responding to an unfair tax situation in Los Angeles. They complain that the city, through its so-called “gross receipts tax formula,” unfairly penalizes them by taxing the fees that they are simply passing on from members to doctors and other medical providers.

Two of the five HMOs complain that because of the city’s tax formula, they pay more in business taxes than they do in rent.

Because of the disagreement, the five HMOs have withheld paying $37.8 million in disputed business taxes for 1994 and 1995. Another $19 million in business taxes have yet to be collected for 1996. The organizations have been debating the issue with the city clerk while lobbying the council to change the tax formula.

The HMOs point out that they would dramatically cut their expenses by moving to the cities of Burbank, Glendale, El Segundo, Calabasas or Thousand Oaks, among many others that do not base their business taxes on gross receipts.

Several HMOs have already begun scouting office space in some of these other cities.

For example, CareAmerica faces a lease that expires next year and has hired a firm to evaluate buildings in other cities. If Los Angeles does not provide the tax relief, the HMO says, the choice to leave won’t be hard to make.

“We don’t have a choice,” said CareAmerica spokeswoman Lisa Freeman. “If we can’t get the city’s gross receipts tax resolved, we will be moving.”

Such comments were what prompted Councilwoman Laura Chick on Wednesday to introduce a motion asking the council to draft legislation that would provide the HMOs with a tax break of up to $15 million.

Chick’s West San Fernando Valley district is home to four of the five HMOs and she fears the business core of her district will become a “ghost town” unless the HMOs get the tax break.

She called Riordan’s endorsement of the tax break on Thursday “music to my ears,” but she and Riordan still disagree on when it should take effect. Chick wants to give it retroactively to Jan. 1, 1996; Riordan would like the break to take effect this year.

Other council members, however, worry that a tax break for HMOs would trigger an avalanche of other businesses seeking tax relief by threatening to relocate to adjoining cities.

An analysis by the city clerk’s business tax unit found that six other industries could claim that they too are unfairly taxed for fees that they simply pass on. Those industries include general contractors who use subcontractors on construction jobs; ticket brokers who purchase tickets and resell them to customers; and a hotel manager who operates a hotel for an owner and only receives reimbursement for expenses.

City officials said they have yet to calculate the business taxes the city would have to refund if all those industries were successful at getting the same break as the HMOs.

Chick and Mendoza acknowledged that the HMO tax break could spark such a reaction but they argue that it should not keep the city from acting on the concerns of the HMOs.

Councilwoman Rita Walters, the most vocal critic of the tax break, said that tax relief for the HMOs would open the door to other tax breaks and worsen the city’s budget problems.

She also took a shot at Riordan, saying his support for the tax break is “extremely ill-advised.”

“He hasn’t been able to manage the budget since he got into office,” she said. “It will be more difficult to balance the budget with this break.”

The tax dispute originated several years ago when several HMOs switched from being nonprofits to becoming for-profit businesses. Without a specific tax code for the industry, the city put HMOs in the highest tax bracket.

Michael Gagan, a lobbyist hired by the five HMOs to get the tax break through City Hall, said landlords, developers and other cities have been talking to the HMOs about relocating.

“They are being solicited, all right,” he said.

But Gagan insists that the HMOs are not making idle threats.

“We don’t want to threaten anyone, that if you don’t do what we want we will leave,” he said. “But our position is that we have a bottom-line decision to make.”