Council asks city attorneys for analysis of payroll expense tax amid litigation risk

The Los Angeles City Council voted Wednesday to request a thorough analysis of the city’s payroll expense tax after staff described ongoing litigation that could expose the city to multimillion-dollar liability.

City attorneys told the Council the payroll expense tax was adopted to capture taxation from businesses that might otherwise be constitutionally exempt from a standard business tax, and that a lawsuit similar to one involving General Motors contends the tax scheme is unconstitutional. "If we were to repeal the payroll expense tax prior to December 31, it would limit our liability," a city attorney said during the discussion.

Councilmember Chick and others asked staff to prepare options for the Council, including estimates of revenue loss and ways to make up potential shortfalls. Councilmembers emphasized that any decision should be informed by whether the city can prevail in ongoing litigation.

The Council approved the request for analysis and committee consideration on a roll call recorded in the meeting as 14 ayes. Council discussion noted that, even if the payroll expense tax were repealed, most businesses would still pay equivalent business taxes and the short-term revenue loss might be limited, but the council would need a full assessment before taking action.

Members framed the request as a prudential step: staff should lay out the legal exposure, projected revenue impacts, and possible mitigation strategies so the Council can decide whether repeal is advisable. There was no repeal or ordinance enacted at this meeting; the Council directed staff to report back and refer the matter to committee for further analysis.