The Law of Incentives

A story in the St. Louis Business Journal (the first few paragraphs of which are available for free online) reports that two of the area’s largest law firms, Thompson Coburn LLP and Armstrong Teasdale LLP, are considering moving from downtown St. Louis to Clayton. These considerations will potentially move more than 1,000 jobs from the city to the county. Despite the fact that comparable office space costs 23 percent less downtown than in Clayton, those involved in the decision suggest that “employee satisfaction and location” are enough motivation to move.

Although Clayton is probably closer to home for many St. Louis lawyers, there are relevant costs that certainly factor into any moving decision. The most obvious disincentive for high-earnings professionals, like lawyers, to work in St. Louis city is the earnings tax. A detailed case against the earnings tax can be found on the Show-Me Institutes’s website. In short, the earnings tax imposes costs on being productive and promotes this westward migration that the city ardently fights. If either of these firms moves, the earnings tax will continue its distortionary effects without yielding some of the revenues it was engineered to extract.

One potentially disastrous fix to retaining economic activity in the city would be the use of tax incentives. Others have articulated the negative effects of using tax credits, especially as they pertained to the recent “mega-project” proposal in Kansas City. These same arguments hold true in St. Louis.

If St. Louis officials intervene in the law firms’ decision making, they will have two readily available options. Potentially, they could see instant results and help the city’s long-term prospects by eliminating the earnings tax. Hopefully, they won’t settle for preferential tax treatments that leave local business owners and taxpayers worse off for benefits that they don’t have access to.