Mayor Seeks Immediate Tax Break for 5 HMOs

In a sharp turnaround, Mayor Richard Riordan’s office Thursday endorsed an immediate tax break for five health care organizations that have threatened to leave Los Angeles unless their business taxes are dramatically cut.

Riordan’s office had earlier hedged on the controversial tax break, 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 building owners from Burbank, El Segundo, Glendale, Calabasas and even Vernon actively 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, which employ more than 6,500 workers and generate more than $23 million in taxes annually, 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 be considered only as part of that overall tax study, which has been in the works for nearly three years.

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.

In planning circles, an effort by one municipality in a region to woo business from another is referred to as poaching. But according to analysts, it is a tactic that is increasingly disparaged.

UCLA professor Allen Scott, who specializes in regional planning and local economic development, said poaching became increasingly common during and after the late 1980s, with the tightening of regional economies.

“It’s a game that can only fail,” Scott said. “It leads to a process of mutually predatory actions on the part of different municipalities in which nobody wins except the people appropriating the profits from the businesses.”

The trend nowadays is cooperation, not competition, said Donald Borut, executive director of the National League of Cities in Washington, D.C.

“It’s essentially tax-base theft from one community to another,” said Borut. “More and more, communities are realizing that the strength of the central city is essential to the suburbs around them.”

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

The five HMOs--CareAmerica, Health Net, Maxicare, Prudential and WellPoint--argue that they are simply responding to an unfair tax situation. They complain that the city--through its so-called “gross receipts tax formula”--penalizes them unfairly by taxing the fees that the HMOs 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 business taxes for 1994 and 1995. Another $19 million in business taxes have yet to be collected for 1996.

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

Time is of the essence for Los Angeles because 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 already hired a firm to evaluate buildings in other cities. If Los Angeles does not provide the tax relief, the firm promises that 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 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 Thursday “music to my ears,” but she and Riordan still disagree on when the tax break 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.

In fact, 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 they simply pass on. Those 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 his own 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 will open the door to other tax breaks that will only 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.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Turf Wars, Tax Wars

Five health maintenance organizations, four based in Woodland Hills, have threatened to pull out of Los Angeles unless they receive tax breaks of up to $15 million annually.

The Competitors

Private developers or municipal governments are already vying for the HMOs. Possible destinations: Burbank, Calabasas, Glendale, El Segundo and Vernon.

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What’s at Stake

The five HMOs employ more than 6,500 people and contribute more than $23 million in taxes to Los Angeles each year. They occupy more than 30% of Warner Center office space.

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Mayor’s Response

Mayor Richard Riordan, saying Los Angeles can’t afford to lose the companies, Thursday endorses giving the HMOs significant tax breaks.