Earnings tax proposed as funding fix

A state committee reviews a Columbia representative’s idea for the school funding formula.
Thursday, February 17, 2005 | 12:00 a.m. CST; updated 5:09 a.m. CDT, Tuesday, July 15, 2008

Only two weeks before a self-imposed deadline, a legislative committee charged with fixing the formula for distributing state money to school districts discussed what some members called a novel plan to replace local property taxes with a statewide earnings tax.

The plan is the brainchild of Rep. Ed Robb, R-Columbia. Robb is a former MU economics professor who specialized in governmental budgeting.

The joint House-Senate committee is trying to fix the formula, which is the subject of a lawsuit filed by almost half the state’s school districts. They charge the formula is inequitable and unconstitutional.

Lawmakers from both parties have pledged to address the formula, and Gov. Matt Blunt has promised to fix it.

Robb said the existing formula, which gives more state aid to districts whose voters approve higher property taxes, makes budgeting tough for school districts trying to anticipate how much state money they’ll get.

Robb’s proposal would create a statewide earnings tax, the proceeds of which would be distributed based upon the number of students in a school district. Special state appropriations also would be made to help cover the cost of extra requirements such as transportation or early learning and gifted programs.

The state last changed the foundation formula in 1993. Robb said changes are necessary now to address inequities in the state’s distribution of property wealth.

Engineering an equitable formula when property taxes change at different rates throughout the state is extremely difficult, Robb said.

“Trying to keep up by making changes to the formula is just going after windmills,” he said. Robb’s plan also calls for supplementing property taxes with open-ended state grants that would give local school districts more control over spending.

Although Sen. Maida Coleman, D-St. Louis, said she liked the $8 million for St. Louis schools that could result from Robb’s plan, she said she does not understand the need for a new funding method.

“There is nothing wrong with the existing formula,” Coleman said. “It’s a matter of sufficiently funding that formula. Why don’t we look into funding the plan with the money that we have?”

Coleman said she believes the committee should refrain from issuing any recommendations until it hears from representatives of the more than 500 school districts in Missouri. The committee’s current itinerary does not call for such input.

Sen. Gary Nodler, R-Joplin, said of one his biggest concerns about Robb’s plan is that income tax fluctuates over time. Robb contested that, citing data that show income taxes are much more stable than property taxes.

Nodler said he believes Robb is headed in the right direction but he doubts the legislature will have enough time to work through potential problems with the plan in light of the pending lawsuit.

Robb’s figures show that the switch to an earnings tax would generate $200 million without raising taxes on Missouri residents by expanding the tax base to nonresidents who work in the state.

Nodler said Robb might be correct in his assertion that the elimination of property taxes — an expensive tax for utility companies and many of the highest-paying corporations — could make Missouri more business-friendly. But he added that Robb failed to consider whether businesses might use loopholes to avoid paying earnings taxes.

“If you replace property taxes with income taxes, it wouldn’t take long before businesses set up holding companies in Kansas and Illinois so that they have no tax liability in Missouri,” Nodler said.

Rep. Brian Baker, R-Belton and chairman of a House committee, created to debate the joint committee’s recommendation, said he isn’t sure whether there are more nonresidents working in Missouri than Missourians working out of the state. If Robb is wrong and Missouri had a net worker loss, he said, his plan would actually reduce tax revenue.

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