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.
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.
