Saturday, March 26, 2016

Dispelling some myths about the earnings taxes in St Louis and Kansas City

The cities of St. Louis and Kansas City are alone among their neighboring cities in levying a 1 percent tax on earnings. Given the ease with which people can change where they live and/or work within a metro area, it’s not difficult to see how the taxes put St. Louis and Kansas City at a disadvantage relative to their neighbors. Specifically, in some empirical research that I did a couple of years ago, I estimated that St. Louis lost 14,700 residents between 2000 and 2010 because the city levied an earnings tax when its neighbors did not. For Kansas City my estimates indicated that population growth over the period was 18,700 lower than it would have been in the absence of the tax.

More accurately, what the study found that these were the effects of not having the same tax structure as the average city in the United States. Because of the relative harmfulness of earnings taxes, most cities are relatively reliant on property taxes. In 2011, on average, property taxes accounted for 17 times the amount collected in earnings taxes. But in St. Louis and Kansas City, earnings taxes accounted for 2.5 and 1.6 times the revenue collected from property taxes. In short, my implicit policy proposal is that St. Louis and Kansas City would not have lost these thousands of residents if they had been like most cities and not taxed earnings.

These findings are very similar to those from an earlier paper of mine, as well as from a paper by Joe Haslag at Mizzou. All three papers offer detailed descriptions of our research methods and data, so I think I speak for Joe in saying that it would have been great if our research had resulted in an intelligent debate about the relative merits of various tax systems. Despite the fact that our research was laid open for all to see, no one has refuted our findings. It’s possible that some researchers have tried and failed, but such research would never see the light of day. It’s also likely that professional economists simply have little to gain from engaging in local policy debates instead of scrambling for journal publications.

At any rate, I think it’s fair to say that there has been no serious attempts at addressing the question of whether or not St. Louis and Kansas City should keep their earnings taxes despite the significant population losses they cause.  Instead, the counter-arguments, which have most often been made by editorialists and politicians, have tended to be equal parts hysteria, ignorance, and hatred. Given that residents of the two cities will vote on April 4th on whether or not to keep their earnings taxes, the hysteria, ignorance, and hatred have been appearing with increasing frequency in the editorials and news stories of local media outlets.

It should be noted that there are some perfectly respectable and intelligent arguments for keeping earnings taxes: They are more-stable sources of revenue, the two cities have too many non-profits (hospitals, churches, universities, etc.) who are typically exempt from property taxes, and the taxes are more fair and equitable. Although some have made these arguments, including the city of St. Louis itself and at least one St. Louis alderman, I haven’t found them to have been at the forefront. I don’t happen to buy these arguments, but that’s not the standard for respectability and intelligence.

An editorial in the St. Louis Post-Dispatch provides a handy compendium of the state of the public debate against the repeal of the earnings tax. Because it’s an almost perfect representation of the hysteria, ignorance, and hate surrounding the issue, I’ll use it to address the most common myths and misrepresentations that have been made. The lines from the editorial are in italics, followed by my responses.

1. (Q)uirky beliefs of one very wealthy man.
The belief that it is harmful for a city to impose an earnings tax when its neighbors do not ought to be a fairly standard belief for anyone with any competence at economics or math.
Along these same lines is the claim that it is perfectly normal for earnings taxes to be levied by cities. For example, the city of St. Louis has claimed that 1,000s of jurisdictions have earnings taxes. Even if we ignore the sleight of hand in using the word “jurisdictions” rather than “cities”, this claim completely misses the point. The vast majority of these jurisdictions are in one state, Pennsylvania. And, while technically true, the fact is not relevant because the question is not whether or not a city has an earnings tax, but whether it has a tax that is higher than what is levied by surrounding areas.
I should note the stupidity of attaching relevance to the wealth of someone putting forth an idea. But such is the vitriol routinely spat out by the Post-Dispatch editors at those who disagree with their progressive mission. Hate is not a substitute for reason.

2. In St. Louis, the $162 million in e-taxes is 33 percent of the general revenue budget. Plus, (y)ou want to see a real exodus, fix it so there won’t be enough money for cops or firefighters.
Technically, the 33% number is accurate, but it’s just not particularly relevant. As is usual, the number is accompanied by a list of the good things that are paid for with money from the general fund, with the implication that these things will somehow disappear if the e-tax were to be repealed. All of this is a bunch of hooey, for several reasons:
  • The idea is for the city to replace the e-tax with other revenue sources that are much less deleterious to the city’s health.
  • The percentage of general revenue funded by the e-tax is simply not that important. It might be important to know the percentage of the city’s total spending that is paid for with the earnings tax, which is a a not-so-scary 15 percent. At any rate, the distinction between the general fund and the other 52 percent of the city’s revenue is largely artificial. About $143 million dollars of the city’s revenue from outside the general fund was used to help finance spending on departments also financed by money from the general fund. 
  • Similarly, despite claims to the contrary, it is simply untrue that money outside the general fund is not discretionary from the city’s standpoint. Receiving money that has strings attached, such as federal grants to purchase fire equipment, frees up money to pay for anything else. In other words, the city’s budget is fungible. So-called “tied” money simply pays for one thing you want, allowing you to pay for another thing you also want.

3. About 55 percent of the e-tax revenue in St. Louis comes from nonresidents. If it goes away, the whole load of replacing it would fall on residents.
This statement belies a complete misunderstanding of how tax burdens are distributed, which has little to do with who physically pays a tax. Once taxes are levied, the prices of the taxed items change and the distribution of the effects depend on a variety of factors. Take, for example, a tax on the value of an office building. Although he physically pays the tax, the owner of the building does not bear the entire burden of the tax. Rents will be adjusted to pass on all or some of the tax to renters. The companies renting the space will not bear all of the taxes either because they might pay their workers less and/or charge their customers more. Unless all of the owners, workers, and customers are city residents, some or all of the burden of the tax will be shifted onto nonresidents.
It should be noted that the advantage of property taxes over earnings taxes is that the latter is a direct tax on those who live or work in the city. It is because of this directness that earnings taxes have larger negative effects on population and employment than do other taxes.

4. Who knew it was the earnings tax and not white flight that emptied out the city?
This sentence is simply an especially stupid non sequitor. No one has said that the earnings tax is the sole cause the decline of St. Louis City. What has been said is that it is one of the contributors, to the tune of 1000s per year. In fact, my own research says clearly that 1/2 of the decline between 2000 and 2010 is due to the tax. Given that there there should have been natural population growth as has occurred elsewhere, I suspect that other factors are responsible for several times the effect of the earnings tax. The existence of even worse things does not preclude fixing this one thing.

5. It would be one thing if Sinquefield had a reasonable plan for replacing the e-tax revenue. He doesn’t. It would be phased out over 10 years and replaced by … well, he’s vague on that.
It’s not clear why a private citizen should do the job of the mayor, who is supposed to be the one who prepares the city for eventualities. Even so, it is simply false that Sinquefield, or the Show-Me Institute, has not put forward alternatives. In fact, Patrick Ishmael recently wrote a piece called How Would You Pivot From the Earnings Tax? Let Me Count the Ways. See also Joe Haslag’s two very detailed pieces How to Replace the Earnings Tax in Saint Louis and How to Replace the Earnings Tax in Kansas City. Given the obviousness of these titles, any 10 year old with access to Google could have found these pieces.

6. The mayor acknowledges that earnings taxes might be a disincentive to living and working in the city, but he says studies show higher sales and property taxes are bigger disincentives.
There are simply no such studies. They do not exist. Because there are few cities dumb enough to levy earnings taxes when their surrounding areas do not, little effort has been expended estimating their effects. The studies cited above are the only ones that actually do this and, as already stated, my 2014 study estimates the effects of having an earnings tax relative to the average tax structure of other cities. Thus, what research there is finds that earnings taxes are more harmful than the average mix of taxes.