HomeMy WebLinkAboutA- 3 Tax Reform Choices and Azusa's Future oF
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TO: MAYOR AND CITY COUNCIL MEMBERS
FROM: RICK COLE, CITY MANAGER
DATE: OCTOBER 23,2000
SUBJECT: TAX REFORM CHOICES AND AZUSA'S FUTURE
Background: A stack of reports produced by a wide range of state commissions, think tanks and
public interest groups have all concluded that the current method of financing local governments is
dysfunctional and counter-productive. Azusa is one the majority of communities in California
disadvantaged by the lack of a fair and understandable revenue base to pay for basic services
including police, fire, libraries and parks.
Azusa weathered a severe fiscal crisis brought on by the recession of the early `90s combined with
the loss of the Fire Assessment election in 1997. Since the election in November of'97 that saw
only two of the five revenue measures adopted,Azusa has sought to live within its existing means,
while providing an expanding level of service to the community. The Administration has continued
to warn,however,that this trend can only continue as long as there is a growing economy and that
we cannot forever postpone long-overdue costs such as maintaining our streets. As we look ahead,
the City Council and the community face important choices:
• Should we ask voter approval to reform long-standing disparities in the formula for
the business license tax?
• What permanent and equitable funding will citizens support to maintain public
safety services?
• How will we catch up with up to$50 million of deferred maintenance of the city's
infrastructure (streets,public buildings, parks and other facilities)?
• How will we provide enhanced services (code enforcement, neighborhood
improvement, expanded library etc.) desired by the community?
Answers to these complex and potentially contentious questions must be attained in a bi-partisan and
apolitical fashion.It is not the intent of this discussion paper to advocate any particular position,but
merely to discuss some of the issues involving our current tax structure.
Discussion Items:
The following represent issues raised to seek Council and community direction:
AGENDA ITEM
Business license tax structure:Perhaps the most complex and inequitable examples oftax disparity
is found in the Business license taxing methodology the city has labored with for the past 10 years.
Adopted in 1990, the existing Business License Tax Ordinance provides for the taxing of Azusa
residents operating a home occupation and the payment of a business license tax on the first$5,000,
while at the same time it exempts every other form of business from paying a tax on the first$5,000.
In terms of dollars, this inequity compels Azusa home based businesses to pay $5,150 in business
license taxes, and provides $50,580 in business license tax exemptions to every other form of
business in and out of the city.
Another inequity in the existing Business License Tax Ordinance involves the exemption of out-of-
city contractors from paying a business license tax on earnings from work within the City of Azusa,
unless they renew their business license the following year. Essentially, if they do not renew, they
simply do not have to pay a business license tax on their gross receipts for work performed in the
City of Azusa the previous year. The gross inequity lies in the fact that contractors with offices in
the city are required to renew their business license annually and are compelled to pay a tax based
on their gross receipts for the previous year. This has resulted in the annual loss of approximately
$200,000 in business license tax revenues which are not paid by outside contractors. This inequity
and savings to outside contractors may very well mean the difference between the awarding of a
contract for work in Azusa by Azusa based contractors and an inequitable advantage to a contractor
from another city bidding on work in Azusa.
In still other examples of an inequitable business license tax structure, the existing code fails to
address the impact a business may have on city services and costs. In the instance of a large
warehouse which does not generate sales tax,the business may cause excessive wear and tear on city
streets which shortens the life of city streets used to access the warehouse. While the business may
pay an annual business license renewal fee of$24, it may very well be costing the city several
thousand dollars annually in road repairs. This same inequity can also be applied to apartments in
terms of their use of city services. In this latter example, we know that residential rentals utilize
approximately three times the amount of police services as owner occupied homes, account for
approximately ninety percent of all graffiti abatement costs, require far more street sweeping
services, and have a tremendous adverse impact on our schools. While residential rentals represent
48% of our housing stock, they contribute one-third the amount of taxes paid by owner occupied
dwellings,and are essentially subsidized in their fair share of city related service costs by other tax
revenues.
Non-profit exemptions: Azusa is one of the few cities that exempts non-profit institutions from the
utility tax,in addition to traditional property and business license tax exemptions. Not counting gas,
this represents uncollected revenue of$213,600 each year for electric and water alone. Clearly the
non-profit exemption principle is based upon a recognition of the intangible and indirect social and
economic contributions made by churches, schools and other non-profit institutions to the
community. But no detailed study has analyzed these impacts against costs for services and land
values to assess the net value from this exemption.
AGENDA ITEM
Utility Tax: More and more local communities have come to rely on local utility taxes, but there
is no standard formula for their application. Unlike many communities, Azusa does not charge a
utility tax against telephone services. As more and more of our economy shifts to
telecommunications delivery,equitable taxation should shift to reflect a more balanced transactional
cost to taxpayers. The estimated revenue from extending the 5 % utility tax to phones would
generate in excess of$1 million per year, the majority from business telecommunications users.
Fire service:After joining the Los Angeles County Consolidated Fire Protection District,Azusa has
since repealed the source of funding that supported fire services. Protracted efforts to redress an
overcharge for services produced several years of credits against the full cost,but those credits expire
with the current contract in two years. The ever increasing contractual costs will directly erode
funding for other community services including street repairs,police services,and park renovations.
In just 17 years,the city has seen the contractual costs go from$900,00 in 1983 to a current cost of
$2,900,000 with an estimated annual Special Tax credit of$690,000 approved by the voters.A cost
that alone is nearly twice the entire amount received as the city's share of property taxes.
Unless we discuss opportunities for greater equity, and balance in our funding sources is found, a
significant economic downturn may trigger exactly the sort of crisis that shatters community support
and credibility. By addressing these issues now, prior to their becoming a crisis, we will provide
for long-term financial stability on which all progress for Azusa depends.
Prepared by: David E. Rudisel, Acting Assistant City Manager