City Council Grants Tax Breaks to HMOs

With a surprising lack of discussion after months of conflict, the Los Angeles City Council approved new rules Tuesday that will knock millions of dollars off the tax bills of five health-maintenance organizations that had threatened to pull out of the city over the issue.

The council amended the tax code to allow the HMOs to pay taxes only on income from work done within the city limits, exempting income from any work performed by doctors and clinics outside Los Angeles. That revision--which comes a year after the HMOs threatened to move their headquarters out of town unless their tax burden was significantly reduced--will result in a collective drop in their annual taxes from $25 million to $7 million.

“This was, more than anything, about bottom-line common sense and putting some flesh on the bones of [being] business-friendly,” said Councilwoman Laura Chick, the measure’s sponsor, whose west San Fernando Valley district is home to four of the health-care companies that lobbied for change.

“The city is taking the right steps to be more business-friendly to a growing industry,” added Todd Thakar, a vice president with one of the HMOs, Prudential in Woodland Hills. “We’re committed to L.A.”

In contrast to the hourlong debate on the matter two weeks ago, when Chick postponed a vote to ensure her proposal’s success, the legislation passed Tuesday 12 to 3, without a word uttered by the council in favor or against. But afterward, Councilwoman Jackie Goldberg reiterated her stand against extending tax relief to companies that until a few years ago operated on a nonprofit basis.

“Nobody put a gun to their heads” to convert to for-profit status, she said. “With that should come the tax liabilities that for-profits like them are charged.”

Goldberg, who represents the Hollywood area, acknowledged that earlier this year she helped spearhead legislation that gave a tax break of up to 80% to multimedia businesses, many of which are located in her district.

“The difference is that those were always for-profit. It was a business for which L.A. was trying to be a leader and bring in new jobs,” she said. But she added that, in a departure from her outspoken criticism of the HMO proposal in council chambers two weeks ago, she had “less vehemence about it” Tuesday after being more fully briefed on the issue.

Councilman Joel Wachs, who also voted against the proposal, expressed reservations about singling out the HMOs for preferential treatment at a time when the city, at the mayor’s direction, is trying to revamp the entire tax code.

“Instead of biting the bullet and coming to grips with a review and overhaul of our tax system, we tend to pick out an industry when they cry out for help,” Wachs said. “I don’t think that’s fair to all the other industries and businesses . . . who may be also affected but [are] not lobbying us for special favors.”

Proponents noted that under the original tax code, the five HMOs, which employ about 6,500 people, would together account for nearly 10% of the city’s entire gross tax receipts. To protest what they viewed as a disproportionate burden, the five companies--CareAmerica, Health Net, Maxicare, Prudential and WellPoint--withheld nearly $57 million in taxes for the years 1994 to 1996.

In the package approved Tuesday, the HMOs will pay the city about $8 million in back taxes and interest, applying the new formula retroactively, said Michael Gagan, the companies’ chief lobbyist.

The new tax structure does not change the companies’ actual tax rate, which remains at the top level, $5.91 per $1,000 in gross receipts, despite the HMOs’ push for a lower rate of $4.14. By contrast, multimedia businesses were allowed to drop from the highest tax tier to the lowest rate of $1.18 in their tax-cut package this year.

But the agreement with the HMOs does break out the considerable work performed by their independent contractors--both physicians and clinics--outside Los Angeles and exempt that income from the levy. It will also generate an additional $4 million or so in taxes each year from HMOs that are based outside the city but work with medical providers here, Gagan said.

“That puts us on a level playing field with outside HMOs that do business with the city and up till now escaped with paying almost no taxes,” Gagan said.

Although his clients had threatened to pack up and move to neighboring cities, the five companies are now staying put, with a few of them recently signing leases for at least 10 years. Prudential has also opened a new regional center in downtown Los Angeles with 1,000 employees.

“In our dealings with the city to come downtown, we relied in good faith--maybe a little blind faith--that we would get tax relief,” said Thakar of Prudential. “That was a significant factor in our decision.”

Now the firms are turning their attention to the city’s tax reform study to press for lower tax rates, he said.