1 STAFF REPORT
DATE: April 12, 2022
TO: Justin Hess, City Manager
FROM: Patrick Prescott, Community Development Director Jennifer Becker, Financial Services Director
VIA: Simone McFarland, Assistant Community Development Director Mary Hamzoian, Economic Development Manager
BY: Marissa Minor, Administrative Analyst II
Susan Langford, Revenue Manager, Financial Services
SUBJECT: Discussion of a Small Business Tax Credit Program
RECOMMENDATION
Note and file.
BACKGROUND
At the July 13, 2021, City Council meeting, then Councilmember Anthony requested a first-step report on Small Business Tax Credit Programs. A small business tax credit is a government-awarded financial credit provided to different types of businesses to reduce the amount of tax paid for a specific time period. Typically, a governmental entity would implement a tax credit to attract a certain type of industry to an area, or to support a struggling industry. For example, tax credits could be awarded to ‘entertainment businesses’ or ‘small business es’ that are within the City and employ under 100 people for a period of six months.
DISCUSSION
The City’s annual bu siness tax revenue represents 1% of the City’s General Fund , collecting approximately $2 million. Burbank has a simple business tax structure where the majority of businesses pay annual taxes based on a flat rate plus a levy on the number of employees a business maintains. For example, in 2022 , a typical business with 10 employees would pay $218.35, and a business with 100 employees would pay $1,167.85.
Exceptions include:
• Residential property rentals that pay a fee of $11.30 per residential unit.
COMMUNITY
DEVELOPMENT
2 • Commercial property rentals that pay a base rate of $112.85 plus an additional fee for square footage over 5,000 square feet at the rate of $2.25 per each additional 100 square feet.
o Owner-occupied commercial properties or the portion of the commercial property occupied by the property owner that are exempt. o Residential properties with three or more units pay tax, but properties with three units where the owner occupies one unit, leaving only two available for rent, are exempt.
• Laundromats that have a tiered rate structure based on volume of business. • Vending machine businesses that pay a flat rate and additional levy for gross receipts more than $5,000.
The City of Burbank does not have a gross receipts tax. A gross receipts tax is a type of tax applied to a company’s gross receipts on goods or services, without deductions for a company’s business expenses. That means any sales from a business is taxed a specific percentage. Neighboring c ities like Los Angeles collect business taxes based on the company’s gross sales receipts1. For example, a construction business operating in City of Los Angeles would pay $153.00 for the first $60,000 or less of gross receipts plus $1.01 per $1,000 or fractional part thereof in excess of $60,000. Therefore, sales made by the seller are taxed and this represents 10% of the City of Los Angeles’ revenue.
Since businesses in Burbank do not pay a gross receipts tax or City income tax (a tax based upon income) , Burbank has a competitive edge over neighboring cities for attracting new businesses and retaining existing ones.
A Small Business T ax Credit Program would have a negative financial impact on the City’s General Fund and w ould do very little to provide meaningful assistance to businesses as the City’s business tax is relatively low.
Additionally, the City would need resources and time to publicize, educate businesses, and administer the program. The only funding source that could cover the cost would be the General Fund. Financial resources would also be needed in the Community Development Department or the Financial Services Department to have the staff capacity to administer the program. For these reasons, staff does not believe that the benefit of a potential Small Business Tax Credit Program would outweigh the loss of revenue to the City.
Since the beginning of the COVID-19 Pandemic, many State and Federal programs with the ability to assist Burbank business were implemented, including the P aycheck Protection Program (PPP) and State sales tax remittance deferrals, along with others.
The financial resources available to businesses are listed in Attachment 1.
Additionally, a limited number of government agencies offered businesses suspensions of business license fees and business taxes to provide temporary relief during the earlier
1 The City of Los Angeles offers a Small Business Tax Holiday program which exempts new businesses from gross receipts tax for three years.
3 stages of the Pandemic. A summary of some of these cities’ Small Business Tax Credit Programs are in Attachment 2. Locally, Burbank provided eviction ordinances, Burbank Water and Power late fee suspensions and financial aid to qualifying businesses , and facilitated the Small Business Assistance Loan Program, which provided $1.2 million in forgivable loans to more than 95 small and micro enterprise businesses in Burbank.
Most recently, on February 9, 2022, Governor Newsom signed SB 113 providing an additional $6.1 billion in tax relief, tax credits , and direct grants to the hardest hit business industries. This new bill includes provisions that:
• Provides a nearly $500 million tax cut for restaurants and venues; • Restores $5.5 billion in tax credits and deductions for California businesses; and • Invests $150 million in COVID-19 relief grants for California’s small businesses.
Staff is promoting these latest programs and encouraging Burbank businesses to apply.
FISCAL IMPACT
If the City were to enact its own Small Business Tax Credit Program , the City’s General Fund would lose revenue from tax credits. The total loss of revenue can only be estimated when the program limits are identified. Additionally, staff estimates a minimum of one to two full-time employee would be needed to effectively create and administer this new program
CONCLUSION
Staff does not recommend pursuing a Small Business Tax Credit Program in the City of Burbank.
The City of Burbank has long been known for its competitive tax structure and incentives that includes no city income tax, no gross receipts tax, and business liaison services. This competitive tax structure and accompanying supportive resources are a benefit to the City’s small business community and results in lower business taxes than neighboring cities. All these services are provided as a part of t he City’s unparalleled competitive structure and are funded in whole or in- part by the City’s General Fund. Furthermore, business taxes were not an issue that local business owners requested assistance with during the Pandemic.
Should the City Council decide to have a proposed Small Business Tax Credit Program, staff would need direction on the parameters and eligibility requirements to accurately calculate the loss of revenue to the City ’s General Fund as well as the cost of administering the program. Staff would present the proposed Small Business Tax Credit Program at a future City Council meeting for consideration.
ATTACHMENTS
Attachment 1 – COVID-19 Relief Programs from Federal, State, and Local Agencies Attachment 2 – Small Business Tax Credit Programs in Other Cities