St. Louis, Kansas City earnings taxes under fire

Monday, January 18, 2010 | 6:11 p.m. CST; updated 6:30 p.m. CST, Monday, January 18, 2010

ST. LOUIS — A campaign is under way to ask Missouri voters to eliminate city earnings taxes in St. Louis and Kansas City. The taxes came after World War II and have regularly come under attack in the Legislature but without much action.

A recent move to put the issue on the ballot as early as fall of 2010 is seen as the tax's most serious challenge, leaving officials in the two cities wondering how they would replace the lost income.

In St. Louis, the earnings tax generates a third of the city's revenue, or about $141 million each year. The city is already struggling to make up a $45 million budget shortfall next fiscal year.

Getting rid of the tax without finding another source of revenue would be devastating, Mayor Francis Slay told the St. Louis Post-Dispatch.

In Kansas City, the tax raises 40 percent of the revenue, or $200 million each year, and without it, the city could become "an economic basket case," John Sharp, chairman of the council's Legislative Committee, told the Kansas City Star.

About a quarter of large U.S. cities rely on an earnings tax to help pay for police and fire protection, road maintenance and other essential services. The argument has been, and still is, that those who work in the cities, regardless of where they live, should help pay for services that benefit them while they're there. Those who work in St. Louis and Kansas City pay a 1 percent tax on their earnings.

Critics have said the tax hurts cities' ability to attract business, grow their economies and compete against suburban communities that don't have the tax.

"If the goal is to make the city economically competitive, it does not work," Marc Ellinger, a Jefferson City attorney, told the Star. "If the goal is to do nothing but raise money for government, well that's a different goal."

Ellinger recently submitted various ballot question proposals to the Missouri Secretary of State's office to end the tax. He's acting on behalf of wealthy, retired St. Louis businessman Rex Sinquefield, who's bankrolling the campaign.

A decision on which proposal would be most feasible to put before voters hasn't been made yet. Petition signatures would have to be turned in by May 2 for the initiative to be on the November ballot.

Kansas City business leaders have said they fear that loss of the tax would cost the city its financial stability and credit rating.

In St. Louis, construction company president Scott Wilson fears that the tax burden would be shifted to businesses and property owners.

"Maybe in the long run it might spur economic growth, but what about the higher property taxes that homeowners and businesses might be asked to pay?" he told the Post-Dispatch.

Neither St. Louis Mayor Slay nor Kansas City Mayor Mark Funkhouser advocates repealing the tax. But both said they favor making their city more competitive or attractive to business. Funkhouser said residents complain to him all the time about the earnings tax.

But so far, neither city has come up with a way to make up for a potentially large budget gap if the tax is eliminated.

The Clayton-based Show-Me Institute, founded by Sinquefield and R. Crosby Kemper III of Kansas City, has suggested replacing the earnings tax with a "land-value tax."

Such a tax would assess real estate on its potential and location, instead of what's built on it. An empty parcel of land would be taxed the same as an adjacent developed plot.

MU economics professor Joseph Haslag, who studied the tax for the institute, said landowners would have an incentive to put the most highly valued use on their land.

The resulting economic growth would increase revenues from other taxes, and make up the shortfall, he said.

Haslag's research found that cities with the earnings tax grow more slowly than neighboring communities without it.

But Saint Louis University economist Jack Strauss said it's not likely that earnings tax has cost the city many jobs or businesses.

"My decision to move houses or jobs is not going to be motivated by 1 percent," Strauss said.


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