City Delays Decision on Giving HMOs a Tax Break

After an hour of contentious debate, the Los Angeles City Council put off a decision Wednesday on whether to reduce the tax burden of five major health-maintenance organizations by millions of dollars, opting to study the issue for two more weeks.

Although Councilwoman Laura Chick urged quick action to revamp the HMOs’ tax structure, she bowed to a request to delay the matter after some of her colleagues objected to what seemed like a hefty tax break for one particular industry.

Under the proposed restructuring, the companies would collectively pay only $7 million a year in city taxes, contrasted with $25 million under the current system.

“To me, that’s an $18-million tax break,” said Councilman Mike Hernandez, who initially stated his opposition to the proposal but then asked Chick to postpone it. “It is a tax break for big business.”

Chick, whose West Valley district is home to four of the HMOs, acknowledged she “was concerned” the votes were not there for the proposal Wednesday and agreed to the delay.

“What I didn’t want to have happen was for it to go down,” she said, adding that she is “totally confident” the measure will pass once her fellow council members have been fully briefed on the proposal.

At issue is an overhaul of the way taxes are computed for the HMOs, which threatened to move over the issue and have been withholding full payment of their taxes--about $57 million for the years 1994 to 1996--until the dispute is resolved. After months of negotiations, the HMOs and city staff members hammered out a formula that would preserve the city’s highest business tax rate but apply it only to work performed within the city. Work provided by contract clinics and doctors outside Los Angeles would be exempt from taxation.

The result would be a cumulative tax burden of about $7 million annually, or $2 million more than the five HMOs have been willing to pay up till now.

“The beauty of this methodology is that it taxes us on in-city business, not out-of-city business. The city sees the fairness of that,” said Michael Gagan, a lobbyist for the five companies--CareAmerica, Maxicare, Health Net, Prudential and WellPoint.

But Councilwoman Jackie Goldberg said she was uncomfortable that the HMOs, which until several years ago were nonprofit organizations, seemed to want to have it both ways: to make a profit, but avoid paying the taxes that other businesses pay.

“Nobody forced these HMOs to be for-profit,” she said. “They chose it.”

Chick, who has received political donations from some of the HMOs, said the companies would still be paying the top business tax rate in the city--$5.91 per $1,000--even though they had pressed for the lower rate of $4.14. The formula merely changes the way that the companies’ taxable receipts are counted.