How Would You Pivot From the Earnings Tax? Let Me Count the Ways

The Show-Me Institute has argued again and again that earnings taxes have hurt economic growth in St. Louis and Kansas City. That most American cities don't have a earnings taxes only makes pivoting away from them all the more reasonable, and while it may be news to the Kansas City Star, we've put forward a host of plans and proposals to phase it out over the last decade.

So, what would a better taxing system—one without earnings taxes—look like? And how would we get there? To my mind, there are three main policy changes to consider.

Element 1: Curb cronyism. Kansas City takes in a bit over $200 million every year from the earnings tax, and yet each year it also gives away nearly $100 million in special breaks to City Hall's favorite special interests. Giving tax incentives to crony capitalists is an admission that taxes in the city are too high; those rates should be lowered for everyone, not just for a select group of municipal insiders in the hope that the benefits will trickle down to everyone else.

Drawing down this cronyism could be accomplished several ways, including capping and, over time, ratcheting down how much property the city can abate each year, or by making blight determinations in TIF proposals dependant on poverty levels around the property in question. Whatever the reform, if a city were to reduce tax incentives as it reduced the earnings tax, pivoting away from the earnings tax entirely would become much easier. 

Element 2: Reform city spending. Cities should reexamine how they spend money, both administratively and in their provisions of public services. That includes taking another look at how government pensions are structured and moving from defined benefit plans to defined contribution plans. Doing so would promote long-term budget predictability and employee retirement security. Spending reform also includes privatizing public departments like the water department that the city doesn't have to run and would actually profit from unloading. Getting a liability off the books would be an improvement, but turning a liability into a profitable opportunity makes more robust privatization of city services a no-brainer.

Element 3: Reorient taxes. After moving away from tax incentives and reforming city spending priorities, the rest of the earnings tax "pay for" could be made through systemic tax reforms. Income taxes are more destructive to growth than sales taxes, which are more destructive than property taxes. Moving from income taxes and toward property taxes would not only ensure that municipal tax collections are more stable, but also that they city's taxes would be less economically harmful to the city and the region as a whole.

To achieve this, however, will require fixes to the city's tax incentive practices either as a precursor or as a parallel reform. If earnings taxes fall, property taxes rise, but the cronies who don't pay the taxes now also don't pay them in the future, we'll be back where we started—with an inequitable taxing system. Kansas Citians and St. Louisans deserve better than that.

Overall, St. Louis and Kansas City have taken a wrongheaded approach to tax revenue for too many years, subsidizing cronies and passing the tax burden to everyone else through earnings taxes. Rather than shifting the burdens of bad policy, the city should pursue sound policies and stable tax revenue sources that promote growth rather than undercut it. By reforming tax incentives, adjusting spending, and readjusting taxes, Kansas City and St. Louis can help to ensure they remain the economic engines the state needs.