Earnings Taxes and St. Louis’s Catch 1%.
A version of this commentary was published in the St. Louis Business Journal.
As voters in the City of St. Louis prepare to vote on whether to retain the earnings tax in April, the city is in a tight spot. The city and school district need more revenue, which comes about through more taxes. But because taxes are high and a detriment to growth (especially the one-percent earnings tax), businesses are not locating in the city and the economy is not growing. So, to attract new businesses and convince current ones to stay, the city selectively gives out generous tax incentives. These may attract some businesses and residents, but because of the incentives, they don’t provide the tax revenue that the city was after in the first place.
Are you with us so far? Count us among those who agree that poor public schools and a high crime rate are harming the City of St. Louis more than taxes. But if the economy were growing, City Hall and the board of education would have more money to hire more police officers and teachers. It’s as if St. Louis is in its own Catch-22: a problem or situation where every solution is impeded by other conflicts. Call it our Catch 1%.
St. Louis’s “solution” to the problem of losing businesses and residents over the past couple of decades has been to offer generous tax benefits to every politically influential Milo Minderbinder who asks for them. Last year alone, there were 70 million uncollected tax dollars because of various subsidies. That approach has been a failure. It has led to substantial tax subsidies for developers who do not need them, such as the St. Louis Cardinals and their Ballpark Village development. They succeed while paying significantly reduced taxes. Their subsidies have helped them drive out smaller competitors (e.g., Mike Shannon’s) who paid taxes, but now no longer do because, well, they are closed. The use of tax subsidies actually leads to a reduction in tax revenues. That’s Catch 1%.
The same thing goes for the idea that tax subsidies are intended for blighted sections of the city. Clearly, there are parts of St. Louis that are struggling, and these areas might well benefit from the use of tax subsidies. But for the most part they aren’t getting them. Why not? From an economic development official’s point of view, the incentives are misaligned. If you have tax dollars to invest, why not direct them into a thriving area surrounded by other successful businesses? You’ll look that much smarter when the development succeeds—even if it would have been just as successful without the government handout. The projects that truly need the incentives aren’t the sure things . . . and that’s the whole point of the incentives—to bridge the gap between failure and success for a project in an economically depressed area. But in St. Louis, the less a project needs a tax subsidy, the more likely it is to get one. That’s Catch 1%.
So here we are, giving out tax incentives to people who don’t need them in places that don’t need them and still funding city government with an earnings tax that limits economic growth. Could the City of St. Louis operate without the earnings tax if the residents and voters wanted to do so? Of course. Most large cities in the United States do not have local income taxes. One problem (of several) with the tax subsidies and abatements the city gives away is that they make it impossible to rely less on the earnings tax and more on local property taxes, which is how many comparable cities fund their local services. Nobody says it will be easy to phase out the tax, which brings in an estimated $159 million per year. But if voters decided to end it, during the 10-year phase-out period an overall effort toward ending corporate welfare, raising alternative (and less economically harmful) taxes, budget cuts, continued pension reforms, service sharing with other governments (as in re-entering St. Louis County), and privatization efforts (e.g., the water utility) would allow St. Louis to continue to fund necessary services. It bears repeating that most comparable cities, including Chicago, Memphis, Omaha, Tulsa, and Nashville, fund their local services without local income taxes.
As St. Louis City voters prepare to decide the fate of the one-percent earnings tax in April, they do not have a simple choice. But the way the city has been operating for years is not working. The population is still declining, crime rates are high again, and the schools are failing too many students. If the city continues to go along as it has been for years, managed decline is about all we can hope for. Perhaps it is time to break out of the Catch 1% the city is in and do something radical.