Economic Development

Cut a Tax, or Kill it?

Los Angeles faces a tricky revenue decision.
by | December 2007

Assuming they approve a ballot measure in February, voters in Los Angeles will revise the local telephone tax and thus capture a significant tax cut for themselves. If they vote against the measure, however, they might get an even better deal. The reason the city council put the measure before citizens is that the tax is under scrutiny in the courts and would likely be wiped out altogether without voter approval.

Not all local jurisdictions in California impose a tax on utilities, but L.A. relies heavily on its 10 percent telephone tax, which brought in $274 million last year. Changing technologies and an IRS ruling have combined to put the city's tax in serious legal jeopardy, however.

Mayor Antonio Villaraigosa persuaded the city council to put a new telephone tax law before voters, lowering the rate to 9 percent so that it could be sold as a tax cut. If approved, the referendum would not only preserve the existing tax but also allow the city to tax any future technologies set up to deliver phone calls.

All over the country, state and local governments have been having a hard time keeping up with existing telecommunications technology. Their efforts over the past couple of years to lower rates but spread the burden more evenly from traditional phone services to cable and Internet-based providers have gotten nowhere. In October, Congress approved a seven-year extension of the national moratorium on an Internet access tax, including cable-modem service, although states successfully lobbied for a tighter definition of what Internet access means. "Even tax laws that made perfect sense in a wire-line-only world are raising real issues for governments with new and emerging technologies," says David Quam, of the National Governors Association.

Although the legal peril of the L.A. telephone tax was caused by changes in technology and the shift away from the practice of billing individual calls, the ballot measure to preserve it is based purely on old-style politics. In order to get the measure on the February 5 primary ballot, the council declared an "emergency" under a state law limiting local authority to raise taxes, meaning it will require just a majority vote, rather than a supermajority, in order to pass.

Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, predicts that the measure will pass, largely because no organized opposition has emerged with the resources to counter the city's arguments. "They're going to be promoting this to the public as a tax cut in order to get it passed," he says. "But a 'no' vote would mean elimination of the telephone user tax."


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