Taxes in Philly and My Talk With a City Official on the Earnings Tax
Earlier this week, I went to an after-work charity event where I was engaged by a city official who I won’t name on the earnings tax debate. It was a pleasant 10-minute talk. One of the first things he asked me was whether I knew of any cities that had gotten rid of the earnings tax once it had been imposed. I said I didn’t, but I knew of cities that had lowered their taxes, like Philadelphia. He told me that although Philly had indeed lowered it, the city is raising it again to cover a budget deficit.
Apparently, though, Philadelphia is raising property taxes instead, and keeping intact the reduction in its (still very high) local income tax rate.
His real point, however, was deeper and one with which I strongly disagree. He implied that if cities with an earnings tax are not getting rid of them, that is an indication that the tax is good or efficient. I only wish that governments acted rationally enough for that to be a plausible viewpoint. I could believe that cities keep such taxes in place out of efficiency considerations if I had even one ounce of faith in government, at any level, to get rid of a tax that was doing more harm than good, or whose original purpose had expired. You may recall that we just got rid of a telephone tax that had been instituted to fund the Spanish-American War.
I do remember that, by the mid-1990s, the federal government got rid of a luxury-item tax it had imposed in the early 1990s because it was clearly harming manufacturers of high-end goods. So, I guess there is one recent example. In the mid-’80s in Missouri, there were several examples of changes in corporate taxes, so that instead of being based on inventory or licensing rules, they became based on assessments and income taxes. (This is when the city instituted its half-percent payroll tax. I won’t say that the payroll tax is unconstitutional, but I will say that the state Constitution clearly states that every local tax has to be authorized by state law, and there is no state law authorizing a payroll tax. Draw your own conclusions.)
Those examples, however, were revenue-neutral changes that resulted in higher revenue collections over time, so I don’t think they count. Let me know whether you can think of any other examples where the government realized a tax was not working and got rid of it. In particular, let me know whether you can find one in the city of St. Louis. I will gladly revise my opinion here if I get good counter-examples.
The official then brought up the tried-and-true line that county residents who work in the city would be free-riding on city taxpayers if they didn’t have to pay an earnings tax. I have also heard Professor Jack Strauss from SLU say the same thing. Usually, a free-rider argument would carry a lot of weight with someone like me, but in this case it is absurd for two reasons. First, what the heck is the point of paying a city business license if it does not allow you to hire employees to come work on your property? City business license fees can be substantial. Companies also pay commercial property tax rates, which are higher than residential rates. The official responded to me about commercial property taxes by saying that the city had abated so many business taxes that it could not depend on property taxes. I find this a prime example of being in a hole and continuing to dig, but also a great argument in favor of land taxation, for which abatements don’t apply in Missouri.
The second problem with the county free-rider argument is that I am absolutely certain that not one city official would apply it to city residents who work in the county. Unless I hear city officials arguing to raise taxes on city residents who work outside the city (where they must be free-riding, if we are to believe the arguments of earnings tax supporters), I won’t give that view any credit. For the record, I don’t think city residents who work in the county are free-riding at all, for the reasons mentioned above.