Lesson From the Election: Examine Claims on Both Sides of Tax Issues

This article first appeared in the St. Louis Beacon.

In the recent election, a surprising number of tax issues were passed by the voters. Perhaps the most discussed of these was Proposition A. Passage of Prop A raises sales taxes by a fraction of a dollar. Much of those new funds are earmarked to restore many public transportation services that were shut down because of budget shortfalls.

Reaction to the outcome was predictable. Tea Party sympathizers viewed the results with outrage, though they couldn’t seem to muster enough votes to defeat the proposition. Supporters claimed victory for the people, especially those who rely on subsidized public transportation for work or school. Both positions have some validity.

Public services like mass transit simply are not cost effective. If they were, a private firm would probably be offering the services. But that does not mean that they offer no public benefit. Numerous studies show that, for the poor, the disabled and the young public, transportation is a vital service for gainful employment. If there are few job opportunities in the inner city, how do those people get to the jobs in the county? At entry-level wages, making a 50-mile round trip by cab is prohibitively expensive.

The dialogue about Prop A revealed efforts at misinformation. One anti–Prop A pundit argued that if passage helps one family get to work but, because of the higher tax, five families are unable to meet their monthly mortgage payment, then on net it is harmful. That would be true if based on fact. While making a good sound bite, I seriously doubt that there is evidence to support such hyperbole.

Such exaggeration is not unique to this one tax issue. The ongoing debate over the Saint Louis city earnings tax is another example of an issue where misdirection should not guide policy.

Two analyses are being publicized in the swelling debate over the earnings tax. Several years ago, the Show-Me Institute published a study examining whether an earnings tax affects economic growth. The question asked was very specific: Does an earnings tax like that of Saint Louis city drive businesses to the surrounding area? In other words, does the tax diminish the economic growth of Saint Louis city relative to its neighboring cities and counties?

The analysis, conducted by Joseph Haslag, a professor of economics at the University of Missouri–Columbia, found that the answer is yes. His statistical analysis of more than 100 similar municipalities showed that having an earnings tax is likely to push businesses out of the taxed area into nearby untaxed municipalities. This finding helps explain the slow growth of Saint Louis city relative to the county.

But this conclusion was recently dismissed in a study conducted by Jack Strauss, director of the Simon Center for Regional Forecasting at Saint Louis University. Writing in the Kansas City Star, Strauss and his coauthor argue that earnings taxes have no negative effect on economic growth. Does this mean that cities like Saint Louis could increase the tax without limit and not face negative repercussions? That is absurd, but it is consistent with Strauss’ finding.

There is another, more subtle, reason to suspect the applicability of the Saint Louis University study as a foundation for tax policy by cities like Saint Louis. Strauss’ investigation essentially tests whether an earnings tax by a city located within a metropolitan area impacts the aggregate growth of the entire region. In other words, does the earnings tax in Saint Louis city affect the economic growth of the 15-county metropolitan area?

That is not the question addressed in the Show-Me Institute study.

Basic economic theory predicts that if the city significantly raised its earnings tax, businesses would likely move to nearby cities or counties within the metro area. If this is true, Saint Louis city loses economically — Haslag’s finding. But this scenario also explains Strauss’ findings: The economic impact of the city’s tax increase simply washes out across the region.

Simply put, Strauss’ study focuses on the wrong geographical area. Even so, his analysis will provide those who favor the city’s earnings tax with false support.

If the policy discussion is how to improve Saint Louis city’s future economic condition, let’s first get the facts straight. As we witnessed in the debate over Prop A, unfortunately facts lose to exaggeration when the topic is taxes.

Rik W. Hafer is distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.