The Kansas City Earnings Tax Is Bad for Our Health – But Do We Care?
Call it “the smoker’s dilemma”: Everyone knows that smoking kills, but a habitual smoker may be convinced that he requires the steadying effect of cigarettes. He tells himself that he could lose his job, or worse, if he were to quit cold turkey. When voters in Kansas City go to the polls on April 5, they will confront a similar dilemma in deciding whether they wish to maintain the current earnings taxes in their cities.
On one hand, it is well established that the 1-percent earnings tax helps kill jobs and businesses in our state’s biggest cities. On the other hand, many city officials think that their budgets would be stretched too thin without the revenues that they receive from the earnings tax — even though it comes at the expense of the city’s long-term economic vitality.
If voters decided to rescind the earnings tax, would the Kansas City government collapse? No, it wouldn’t — but there is no magic bullet for replacing the city revenue that it generates. If the earnings tax is eliminated by voters, there would be a 10-year phase-out period. During that period, Kansas City could adjust to the new realities through a combination of consolidation, privatization, service cuts, alternative tax increases or user fees, and scaling back tax subsidies. I have no delusions that this would be easy, but the earnings tax can be replaced without the catastrophic results that some are predicting.
Kansas City has already successfully privatized its animal shelter, and could continue that trend by privatizing its municipal water utility, which could be worth hundreds of millions of dollars. Many Missouri residents receive their water from private, regulated utilities, which provide service just as well as public utilities. Privatization of the water utility would give the city a quick infusion of money that would more than offset the initial revenue rollbacks following an eliminated earnings tax. Privatization would also place the utility’s assets onto the property tax rolls.
There are many opportunities for consolidation and regionalism in the Kansas City area. The relatively new regional jail partnership has demonstrated the cost savings that can come from Kansas City and Jackson County working together. According to reports, that consolidation has saved area taxpayers almost $3 million per year.
Taxes do not all have equal economic effects. As the earnings tax is phased out, other forms of taxation that are less distortionary and economically harmful taxes could be increased to replace city revenue. For years, Kansas City has charged a land tax to fund parts of its transportation system. Land taxes, which are property taxes based only on the value of the land rather than the building, are thought by many economists to be among the least harmful methods of taxation. Within certain constraints, this type of tax that could be increased in Kansas City to offset lost earnings tax revenue. Another viable switch would be to increase user fees for items such as trash collection, offset by general tax reductions.
All budgets can be cut. Kansas City should embrace this opportunity to cut unnecessary or inefficient services and expenditures. For instance, the city has budgeted $461,708 this year for lobbyists in Jefferson City and Washington, D.C. Representing Kansas City is a role that should be filled by the city’s elected officials and staff, not outside lobbying firms.
Perhaps the most important thing that Kansas City can do is to scale back or eliminate tax subsidies that aim to lure selected residents and businesses to the city. As of 2009, Kansas City had $739 million in tax-abated property within Jackson County alone. If the city were to cease issuing abatements and other subsidies, a large percentage of that property would return to the tax rolls during the following 10 years.
Finally, there are many major nonprofit entities operating within Kansas City. If the earnings tax were eliminated, it would be neither improper nor unusual to institute payments in lieu of taxes (PILOTs) with which the city would ask nonprofits to pay a portion of the property taxes they would otherwise owe but for their tax-exempt status.
Quitting smoking may be hard, but doing so is in any smoker’s long-term interest. In the same fashion, making beneficial changes and sacrifices now will be difficult for Kansas City, but the long-term rewards are worth it. Immediate difficulties can be overcome if citizens and leaders are willing to be creative, embrace change, and undertake the hard work of democracy. A 10-year phase-out period for earnings tax elimination allows plenty of time for Kansas City to kick its habit and make the changes required to continue providing necessary public services without relying on the earnings tax.
David Stokes is a policy analyst at the Show-Me Institute, an independent think tank promoting free-market solutions for Missouri public policy.