Does Saint Louis Have an Illegal Tax?

On February 1, a Saint Louis City business filed suit against the city, claiming that the municipal payroll tax was illegal under state law. The payroll tax—a 0.5% tax that businesses pay on their total payroll—should not be confused with the earnings tax—a 1% income tax that all residents and nonresidents who work in the city pay (and that companies pay on profits). The suit claims that cities only have the right to levy taxes that are stipulated in the constitution. Payroll taxes are not. City officials have claimed that Saint Louis’s status as a charter city allows these taxes.

One might ask, if the city’s payroll tax is illegal, why hasn’t it been challenged before? After all, the tax has been in place since the late 1980s, ever since the city reformed its business license fees. The explanation here may come in the answer to another question: Who pays the payroll tax? The city of Saint Louis’s private-sector payroll was more than $11 billion in 2014. If all businesses paid the payroll tax evenly, the city should have received more than $56 million. In fact, the city earned only about $37 million. Most of that gap comes from the fact that nonprofits (along with government) do not pay the payroll tax. While that sounds charitable, it’s important to remember that Saint Louis City’s top employers are large, wealthy nonprofits like St. Louis University and BJC Healthcare. Small nonprofits like the Show-Me Institute have an impact as well.

But it doesn’t end there. Companies are regularly given payroll tax exemptions as part of incentive packages to keep them in the city. Anthem and Polsinelli are two such companies and are listed in the previously mentioned lawsuit. Do companies with legal departments large and savvy enough to know that the payroll tax has constitutional issues receive exemptions? Or is it simply clout that allows large companies to avoid the tax? Whatever the case, of the top ten employers in Saint Louis City in 2013, only one might have been paying the full payroll tax:

With the payroll tax, we have a policy that not only raises legal questions, but is also implemented unevenly. Does the full rate only apply to for-profit, private businesses without the clout to get a tax break or the wherewithal to make a fuss? If so, the city might want to reevaluate its tax policy, whether it is legal or not.