Proposition A raises questions about earnings tax

Wednesday, October 20, 2010 | 5:47 p.m. CDT; updated 11:51 p.m. CDT, Wednesday, October 20, 2010
The proposal would allow Missouri voters in St. Louis and Kansas
City to hold a referendum on keeping the tax levy in 2011 and every
five years after. The earnings tax only exists in the two cities and is a
1 percent tax on businesses and individuals who live or work
there. The policy would also prevent other municipalities in Missouri
from even voting to impose this type of tax.

JEFFERSON CITY — To its supporters, Proposition A is about giving local voters a say in how they're taxed. To its opponents, the measure is an effort to deny local voters that right.

This November, Missouri voters will have the chance to weigh in on the ballot measure, which seeks to limit the ability of cities to enact earnings taxes.

The tax exists in only two cities — St. Louis and Kansas City. The cities levy a 1 percent tax on the incomes of businesses and individuals working or residing in the city.

If passed, Proposition A would ban any other city in the state from adopting an earnings tax.

For St. Louis and Kansas City, it would require a referendum on the tax every five years for it to continue. If voters in either city elect to repeal the tax, it will phase out over a decade without an opportunity to resubmit the issue.

Proponents argue that an earnings tax drives businesses out of cities where the tax is applied. Opponents argue that it would deny cities a revenue source that funds critical city services.

Although the debate has focused on St. Louis and Kansas City, the measure has statewide repercussions.

"It's not a St. Louis issue. It's not a Kansas City issue. It is a statewide issue," said Jefferson City attorney Marc Ellinger, a spokesman for pro-Prop A group Let Voters Decide.

That's just the problem, says Dan Ross, executive director of the Missouri Municipal League, who complains that the measure would lock into the statute a ban on potential revenue sources for cities and towns throughout the state.

"This isn't about an earnings tax," said Ross, whose organization represents hundreds of cities and towns across Missouri. "It's about local control."

He noted that any cities considering the tax are already required to petition the state legislature to authorize such a move.

"It's a solution to a problem that doesn't exist," Ross said.

Much of the debate surrounding the proposition has focused on the potential impact on St. Louis and Kansas City.

St. Louis Comptroller Darlene Green said Proposition A would take the authority to determine tax rates out of city voters' hands.

"Local residents should be in charge of how they are taxed," she said. "This is an ill-conceived proposition that would threaten the credit of St. Louis and Kansas City by putting revenues the cities have been receiving since the 50s in jeopardy."

Ellinger said nothing could be further from the truth.

"There's nothing in our measure that repeals the earnings tax," Ellinger said, referring to the referendums the proposition would mandate be held in Kansas City and St. Louis. "If our measure passes in November, it stays on the books. They just have to let their voters renew it every five years."

The financing of the measure has become as big a story as the issue itself.

Retired St. Louis millionaire Rex Sinquefield has given more than $10.7 million in support of Proposition A. He accounts for almost all the funding behind Let Voters Decide, the group leading the campaign for the issue.

Opponents of the measure have seized that support.

"It's been conceived by a millionaire at his whim to ask the state's voters to decide a local issue," Green said.

Sinquefield has refused requests for interviews about Proposition A or his personal financing of the measure.

Ellinger dismissed the criticism of Sinquefield's role in the campaign.

"He's been a very generous contributor, but 210,000 voters across the state of Missouri signed petitions — put their names out in the public domain — to say, 'We want to vote on this,'" Ellinger said. "Voters ultimately get to decide what they want to do on this matter. As much as anyone puts into an election, the voters get to decide."

Green has warned that the elimination of the tax, which last year brought in $143.6 million and accounted for 33 percent of the city's general fund, would have grave repercussions for the city's residents.

"Citizens depend on the trash pickup, the repair of potholes, making sure there is public safety, police, fire," Green said. "People who live and work in the city depend on these public services, and these would be drastically reduced if the earnings tax is repealed because that makes up one-third of the city's annual revenue."

The tax accounts for 44 percent of Kansas City's general fund, and brought in $203.4 million during the last fiscal year.

Green also said the uncertainty caused by the referendums would cause credit ratings agencies to downgrade the city's credit rating. That, in turn, would scare off business investment. 

"With a vote every five years, how could that be a dependable revenue stream when the citizens could decide yes or no?" she asked.

Corey Friedman, a credit analyst who has evaluated the St. Louis credit situation for Standard & Poor's, said the ramifications aren't so cut-and-dry.

"It depends how they'd address it, whether there's a revenue source to replace it and what budgetary measures the city would have to take," Friedman said. "The thing we'd want to see would be how they replace those revenues."

Joseph Haslag, an MU economics professor and chief economist for the conservative, Sinquefield-funded Show-Me Institute, released a study in 2006 that concluded an earnings tax redistributes jobs and investment from a city to its suburbs. His study compared economic conditions of cities with those found in their suburbs.

"Cities with earnings taxes on average have smaller city economies relative to their (suburban) economy," Haslag said. He suggests workers will choose to live and work in the suburbs of cities with earnings taxes in order to avoid the tax, thus stunting growth in the cities themselves.

That's a tough sell for Jack Strauss, a St. Louis University economics professor, who has also studied the tax.

"Very few people would move for 1 percent," he said.

Strauss said cities with earnings taxes tend to be older, manufacturing-heavy towns that reached their economic peak decades ago, while cities without the tax tend to be newer, less dependent on declining industries and still have room to grow. He says that accounts for the disparity in economic data for cities with and without earnings taxes.

Beyond that, Strauss said, he is not sure what could provide a viable alternative to the tax.

"It's three times the amount they get in sales tax," Strauss said, referring to the revenue derived from the earnings tax. "There's going to be very little alternative probably but to raise retail sales taxes. They estimate those are going to increase to 12 percent. That's going to cause a lot more damage than a 1 percent earnings tax."

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