Finance

Voters to Decide Fate of Earnings Tax

Two Missouri cities may soon be facing a huge drop in tax collections.
by | January 2011
 

Plenty of cities have seen revenues drop rapidly over the past couple of years, but few have seen voters decide to cut tax collections by a third in one fell swoop. That’s the scenario Kansas City, Mo., and St. Louis soon may be facing.

Both cities collect a 1 percent earnings tax on businesses that operate and people who work within their boundaries. In November, Missouri voters approved Proposition A, which bans other cities from imposing an earnings tax and puts the St. Louis and Kansas City taxes to a vote every five years, starting this April.

Officials in the two cities complain of being victims of “one billionaire’s civics experiment,” referring to Rex Sinquefield, president of the Show-Me Institute, a free-market think tank. (Sinquefield spent at least $11 million in support of Proposition A.) They realize they now face a difficult challenge in convincing residents not only to turn out for a special election, but also to vote to maintain a tax on their own incomes. If the earnings tax is voted down, it will be phased out over a 10-year period.

Local politicians argue that the alternatives are worse. Kansas City officials have released a “doomsday list” of potential cuts, including the elimination of 700 positions in the police department and nearly 500 from the fire department.

Leaders in both cities warn that they will be forced to raise other taxes, including sales and property taxes. These will fall more heavily on residents than the earnings tax, which is also paid by commuters. Retired residents, by contrast, don’t pay the earnings tax at all. “If you vote to repeal, you’ll be giving $100 million in tax breaks to people who do not live in Kansas City,” says Mayor Mark Funkhouser, “including $60 million to people in Kansas.”

Funkhouser faces the tougher fight. Proposition A narrowly passed in Kansas City, while St. Louis voters opposed it by a 2-to-1 margin. The measure is already having an effect on both cities’ abilities to borrow, with such a central revenue source put at constant risk. A bill has been introduced in the Legislature to put the question of maintaining the earnings tax before voters once every 20 years, rather than every five years. The bill is not expected to go anywhere, however.

“If voters repeal the earnings tax, which I do not think they will, they will obviously be saying, ‘Live without your means,’” Funkhouser says. “They’ll want us to cut, and we will cut. It’s our largest single source of general municipal revenue.”

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