Earnings Tax Story
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Earnings Tax Story

Date: October 18, 2010
By: Joe Yerardi
State Capitol Bureau

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 one 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 elected to repeal the tax, it would be phased out over a decade without the opportunity to resubmit the issue.

Proponents argue an earnings tax drives businesses out of cities were the tax is applied.  Opponents argue it would deny cities revenue sources for critical city services.

While the debate has focused on St. Louis and Kansas City, it has statewide repercussions.

"It's not a St. Louis issue. It's not a Kansas City issue. It is a state-wide issue," said Jefferson City attorney Marc Ellinger, a spokesman for the 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 law 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 notes 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, however, has focused on the impact to St. Louis and Kansas City.

St. Louis Comptroller Darlene Green says 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."

Jefferson City attorney Marc Ellinger, a spokesman for the pro-Prop A group Let Voters Decide, says nothing could be further from the truth.

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

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

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

That support has been a point opponents of the measure have seized upon.

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

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

Ellinger dismissed the criticism of Sinqefield'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,'" said Ellinger. "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 annually and accounted for 33 percent of the city's general fund, would have dire 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, bringing in $203.4 million in fiscal year 2009-10.

Green also says 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 St. Louis's credit situation for Standard & Poor's, says 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, a professor of economics at the University of Missouri and Chief Economist of the conservative, Sinquefield-funded Show-Me Institute, in 2006 released a study 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," explained Haslag. He suggests that 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 professor of economics at St. Louis University who has also studied the tax.

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

Strauss explains that 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 wonders what the alternative to the tax could be.

"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 one percent earnings tax."