Harlan: Business tax spike would not hurt city

Late in the evening July 17, after the Costa Mesa City Council voluntarily handcuffed the community to an unconscionable contract with Newport Banning Ranch LLC, the council quietly tightened its grip by purposeful inaction.

This time, the council majority chose not to put on November’s ballot a proposal to adjust the city’s business license tax. This inaction effectively prevented the community from voting on an opportunity to increase the city’s revenue. The result is that we will not get to consider this issue again for at least two more years, in the 2014 general election.

Costa Mesa’s business license tax has not changed since 1985; not surprisingly, it’s the lowest among Orange County cities. Generally based on a sliding scale tied to gross receipts, Costa Mesa businesses pay between zero and $200 (the maximum for businesses grossing more than $500,000).

This tax applies to about 9,000 general businesses, and the city collects about $800,000 annually. That’s less than $90 per business. In fact, almost 65% of these businesses gross less than $200,000 annually and pay only $65 each year.

By comparison, Newport Beach and Santa Ana, which have different methods of calculating taxes, annually collect about $4 million and $9 million, respectively.

So what’s wrong with adjusting the tax, so it reflects today’s economics, not those of 1985?

At first, it appeared that the council recognized the importance of making an adjustment and bringing Costa Mesa into the 21st century. The council had directed staff and its consultant to review best-practices locally, and recommended a handful of options to modify the business license tax and increase the city’s revenue. The recommendations included different tax structures that would provide annual net revenues from $1.4 million to $3.4 million.

But that’s as far as it went. On July 17, we heard from our councilmen — businessmen by trade — that increasing the tax would be an undue burden on existing businesses and stifle our community’s economic growth. That’s totally bogus.

New businesses certainly do not choose to locate in Costa Mesa simply because of the business tax. It may be a small factor in the decision-making process, but it’s not the determinative one. More importantly, existing businesses do not consider locating elsewhere because the tax may be marginally higher.

Are tenants going to leave South Coast Plaza simply because the business tax is increased? No. South Coast Plaza is a premier shopping destination, and businesses pay a premium — higher rents, top quality tenant improvements, well-trained staff — to be there. I highly doubt Nordstrom is going to clear out because its $200 business license increases to $10,000 (the proposed maximum for businesses with more than $25 million in gross receipts).

Many businesses, like Nordstrom, Volcom, or even Skosh Monahan’s, have made a considerable investment in Costa Mesa because we are, for the most part, a community of value. Businesses choose to locate here because Costa Mesa offers critical ingredients to their success. For retailers, in particular, this means having a large customer base, available skilled labor, and locations that are safe, attractive and accessible.

But being the cheapest place to do business — as suggested by our current business license tax — is a race to the bottom, not a sound economic development strategy. The practical reality for Costa Mesa is that we have to look seriously at increasing our revenues; that’s a vital component of economic development.

Why, then, would our councilmen object to raising more revenue? Clearly we need it to pay for all of their proposed infrastructure improvements, nuisance motel purchases and unnecessary and growing legal fees. Or maybe we actually need more general funds to pay for what is immediately valuable to both residents and businesses — namely, our public safety.

Two years ago, the council begrudgingly voted to put an increase of the city’s transient occupancy tax, another severely low tax that hadn’t been changed in decades, on the ballot for the community’s consideration. Why is this situation any different? Why are these councilmen so afraid to put this one on the ballot?

If it’s such a bad idea, surely the informed citizens of Costa Mesa will recognize it has no merit and vote it down. Why not give us the opportunity to exercise our local control and determine what is best for Costa Mesa? Isn’t this the promise of the council majority’s proposed charter scheme?

I don’t know what would be the right adjustment to the business license tax — that’s the tough policy question the council is charged with determining.

I’m sure, though, that our council, able staff, and the business community could sit down and discuss a reasonable way to collectively improve our city’s fiscal health and continue to add value to the Costa Mesa community.

But we can’t wait until 2014.

JEFFREY HARLAN is an urban planner who lives on the Eastside of Costa Mesa.