Unregistered Businesses Cost City Millions Annually In Lost Sales Tax Revenue

Desperate to make the American dream a reality, thousands of undocumented immigrants like Ignacia Cruz open unregistered businesses every year in the underground economy.

Unable to apply for wage-earning jobs due to their legal status, they become their own bosses — hawking flowers from freeway ramps or, like Cruz, selling potato chips and candy to neighbors from her home.

The city says these mom-and-pop enterprises and other businesses, including those run by legal immigrants, cost the city up to $39 million a year in lost sales tax revenue.

Eager to recoup the money, the city next year will adopt a “don’t ask, don’t tell” outreach effort that will mostly target immigrants to encourage them to register their businesses and pay taxes — whatever their legal status.

“Our goal is not prosecution. It’s to collect revenue to pay for public services,” said Yusef Robb, a spokesman for Mayor James Hahn.

The city’s program is similar to a handful of other federally and privately funded programs and courses encouraging immigrant entrepreneurs to join the formal economy.

Directors of the programs are taking the approach that for better or worse the immigrant businesses are here to stay, so they may as well be taxed.

The Van Nuys-based Valley Economic Development Center offers a federally funded BizWorks program, which it reserves for legally documented immigrants. It also provides a financial literacy course — teaching small businesses how to open bank accounts and keep records — for everyone.

Roberto Barragan, director of the VEDC, estimates immigrants make up about 80 percent of the city’s new entrepreneurs.

“These people are setting up businesses anyway,” Barragan said. “The real challenge is convincing them it’s not difficult (to register with city, state or federal officials). The IRS does not care if you are legal or not, they just care if you pay taxes.”

Cruz, a 38-year-old mother of five who’s lived in the United States for 15 years, set up a small shop a year ago in the two-bedroom apartment she shares with her husband and children. At first she sold candies to the neighborhood children and later microwave popcorn.

Now she has three white plastic shelves filled with potato chips, candies, gum and other treats. She never knew how to apply for business permits until she took a VEDC-sponsored class. She is trying to register with the city, fearing if she is not registered health inspectors could shut her down.

“I want to pay taxes because it will benefit me,” Cruz said one afternoon as a steady stream of neighborhood children handed her stacks of quarters and dollar bills for sweets.

“For me it’s important. If I wanted to go out on the street and sell, they would be able to take anything away from me. I want to pay taxes because I will benefit.”

But the VEDC course can only accept a handful of people like Cruz — a tiny fraction of the entrepreneurs in the underground economy. And its other classes aimed at getting immigrants out of the underground economy has graduated just 200 people.

Critics opposed to any attempts by public agencies to legitimize the activities of undocumented workers say the effort is pointless.

Ira Mehlman, a spokesman for the Federation for American Immigration Reform, says collecting taxes from undocumented immigrants would only cover a fraction of the tens of millions of dollars spent on medical care, schooling and other services for illegal immigrants.

“A street-corner vendor does not have private health insurance. Sure, it would be better if you can collect a few bucks in taxes, but it’s not the answer to the problem,” he said.

U.S. Rep. Elton Gallegly, R-Thousand Oaks, says the answer is to stop programs that act as a magnet for immigrants and enforce employer sanctions.

“We have the laws, but we have to have an administration that has the will to enforce them,” Gallegly said.

Immigration is a political hot potato nationwide. Trying to tiptoe around the issue, President George W. Bush is expected to announce a plan this week that would allow workers in the United States illegally to join a new temporary worker program and not lose their jobs.

The administration said getting undocumented workers to come forward would bring them into the tax system and “out of the shadows,” as one official put it. It would also guarantee them wage and employment rights without guaranteeing them a green card. Immigrants would be expected to return to their country of origin when their temporary visa expired.

Political observers say politicians prefer such temporary stabs at immigration reform rather than a more radical approach.

“I don’t think people quite know how to deal with it,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “It’s controversial and it almost immediately becomes emotional.”

Entrepreneur programs are mostly federally funded and are therefore not supposed to be offered to illegal immigrants. But officials at the U.S. Department of Commerce’s Minority Business Development Agency’s district office said there’s a good chance that many of their workshops aimed at getting small businesses off the ground are attended by undocumented immigrants.

“We cannot ask if they are legal or illegal” when they come into the workshops, said Maria Acosta, Los Angeles area district director for the U.S. Department of Commerce’s Minority Business Development Agency.

She said the agency does verify citizenship if any federal loans are issued.

The agency devotes an estimated $2 million in funds to develop minority business training, but she said over the last year the push has been to train high-income businesses rather than the low-income ones that mostly populate the underground economy.

To register a business or even pay federal taxes does not require citizenship or even residency. But many Latin-American immigrants are scared off by a fear of encountering the same cumbersome registration processes they had in their home countries.

As a young girl, Cruz and her mother sold fruits from a stand in front of their home in Mexico City. The family never applied for health or business permits because it was too difficult and bureaucrats were too corrupt, she said.

Daniel Flaming, president of the Economic Roundtable, a nonprofit public policy research organization that is about to release a city-sponsored report on the informal economy, said undocumented workers make a huge contribution to the regional economy.

“Everyone has an interest in them being able to pay taxes, participate as consumers, to participate in the robust economy and to have payroll benefits that pay for their eventual retirement. The government has been slow on the uptake on this issue.”