One of the fascinating features of Proposition A is the discussion it has produced about the proper scope of democracy.
Much of the opposition to Proposition A focuses not on the economics of the earnings tax, but rather on the fairness of allowing earnings tax policy to be determined by Missouri residents that do not live in cities that currently or will ever levy an earnings tax. The premise of these arguments is that, for myriad reasons, local control of local policy is valuable.
Certainly, there are sound reasons to advocate for local control, but there are also meaningful reasons to allow citizens across Missouri to influence some forms of local policy. To see this, it is useful to begin with an exploration of the economics of the earnings tax.
The economic case against the earnings tax is compelling. In theory, the earnings tax operates like any other income-based tax. On the margin, an earnings tax reduces incentives to work and invest and strengthens incentives to relocate outside and away from the municipalities levying the tax.
The theory is well supported by empirical evidence, which suggests that cities that levy earnings taxes enjoy lower levels of growth than cities that do not. Research shows that cities that impose earnings taxes have slower rates of real income growth for their citizens and experience slower rates of population growth relative to surrounding suburbs.
Of course, if earnings taxes are eliminated in these cities, the resulting lost revenue may need to be replaced.
The key disadvantage of the earnings tax is that it is an inefficient mode of collecting taxes. With the earnings tax eliminated, more efficient modes of taxation can be introduced to collect tax revenue at a lower cost and with fewer harmful distortions.
In sum, theory and empirical evidence imply that the earnings tax negatively affects the growth of cities such as St. Louis and Kansas City.
If these cities existed in relative isolation from the rest of the state, then the costs of the earnings tax would be borne almost entirely by the residents of the cities. This, however, is not the case.
The reality is such that Kansas City and St. Louis are powerful centers of economic activity and important drivers of economic growth within the state. Moreover, these cities are border cities. This means that when these cities enact burdensome policies that stifle growth, it is likely that jobs, investment capital and potential state tax revenue will not just be chased to neighboring cities, but to neighboring states.
If earnings taxes stifle growth, and if the cities that have these taxes are economically powerful border cities, then earnings tax policies implicate not just the cities that enact them, but the state as a whole. This implies that the earnings taxes levied in the state currently impose costs on individuals who are unable to vote or exercise alternate means of influence to eliminate them.
Proposition A is an implicit admission that the economy of the state is, in some ways, a common-pool resource for the state’s residents. Surely, opponents of the initiative are correct that local control of local policy really is valuable. However, given that the effects of the earnings tax spill over local boundaries, it may also be valuable to allow other affected citizens to vote.
This includes citizens who work in St. Louis and Kansas City and consequently pay earnings taxes but do not live in either city, having little power to shape policy. It is not immediately clear which value ought to take precedence. It is clear, though, that there is a case to be made that Proposition A is right to involve citizens across the state. "Let voters decide" isn’t just a catchphrase. It is recognition that all of Missouri’s residents are stakeholders in the state’s economic vitality.
Abhi Sivasailam is a student of economics at MU.