Large Counties Should Reduce Their Commercial Property Tax Surcharges

In 1985, Missouri changed the way that local governments tax commercial and industrial property. Voters approved eliminating the personal property tax on business merchandise and inventory, and replaced it with a surcharge on the value of commercial real estate. That year, every Missouri county and the city of Saint Louis calculated their new respective surcharges at a revenue-neutral level of replacement for the discontinued business property taxes. Among the reasons for the change was a desire to base the tax on the value of real estate, which is more consistent than ever-fluctuating inventories. The change, passed through an amendment to the state’s Constitution, was explicit that the replacement levy calculated by the counties could not be raised. However, the change also oddly mandated that only voters — not local elected officials — could reduce the tax. So, the commercial surcharge is at odds with the mechanics of other property taxes in Missouri, with rates that fall as assessed valuations rise.

The timing of this change is important. In 1985, the collar counties around Kansas City and Saint Louis were far smaller than today. At that time, the city of Saint Louis, Saint Louis County, and Jackson County drove the state’s economy more than they do now — although their role is still substantial. Collar counties such as Platte, Cass, and Clay in metro Kansas City, and Saint Charles, Jefferson, and Franklin in metro Saint Louis, had less business and industry than they do now. Consequently, when they set their commercial surcharge rates at the revenue replacement level, those rates were, and still are, substantially lower than in Jackson County and Saint Louis. Over time, various factors — including the population growth in the suburbs, and the prohibition on local councils lowering the surcharge rate — have combined to turn the high commercial surcharges into a competitive disadvantage for our largest counties.

Jackson County set its rate in 1985 at $1.44 per $100 of assessed commercial valuation. By comparison, Cass County’s rate is much lower, at $0.54, and Platte County’s is a mere $0.36. Only Clay County bucks the trend, with a surcharge of $1.59, likely attributable to the significant inventory taxes it received prior to 1985 from the Ford plant within the county. On the eastern side of the state, Saint Louis County set a rate of $1.70 per $100 of assessed commercial valuation. The city of Saint Louis set its at $1.64, while Saint Charles set a rate of just $0.53, and Franklin and Jefferson counties have rates even lower than that.

Assessed valuations have grown enormously since the tax was introduced. For example, the commercial assessments in Saint Louis County increased by 145 percent between 1985 and 2008, from $2.5 billion to $6.1 billion, although in Jackson County they increased 74 percent between 1997 and 2007.  The surcharge rates have never been reduced to offset that rise, as happens with other property taxes. Their lower commercial surcharges are one of the reasons that collar counties, such as Saint Charles, can take a harder line on issuing tax incentives than Jackson County or Saint Louis can — their tax rates are already low enough to serve as an incentive for businesses to locate there. The combination of a high tax rate, and the difficulty involved with reducing it, puts our largest urban counties at a competitive disadvantage with the rest of the state, and hurts business growth in our major metro areas.

This is a problem, but a problem without blame. These differences were probably not a big deal in 1985, when the tax alteration had a neutral effect for Missouri businesses, more of which were located in central business districts. But it is a major problem now. Reducing rates as commercial assessments rise is simply an issue of fairness. It would not lead to any tax revenue decreases, but would simply involve treating the commercial surcharge like other property taxes in Missouri.

Another issue with reducing the tax would be, perhaps, more complicated. Lowering the commercial surcharge rate could both spur economic activity in our largest counties and reduce the perceived need for tax incentives. Frankly, from a government revenue perspective, every dollar lost to the surcharge reduction could be replaced by a reduction in the tax incentives that have been given to select businesses. This would be revenue neutral for government, and still improve the overall economic environment. I believe that reducing the surcharge rate would lead to increased government revenue in a number of ways, but one does not have to assume a change in tax revenues in order to understand the benefits of this change.

The elected officials in the city of Saint Louis, Saint Louis County, and Jackson County should place surcharge tax reduction proposals on the ballot so that voters can have a say in making their region more economically competitive. The state legislature should then authorize a vote on changing the Constitution to allow the commercial surcharge to be reduced as assessments increase, like for other property taxes. These changes would help grow Missouri’s economy, and everyone benefits from that.

David Stokes is a policy analyst with the Show-Me Institute, a Missouri-based think tank.