Kansas City and St. Louis Receive D’s in Fiscal Health

Posted on by Corianna Baier

Kansas City and St. Louis City ranked poorly in Truth in Accounting’s Financial State of the Cities 2021 report, meaning they are in bad fiscal shape and have high amounts of debt. While this might not be surprising, we should certainly be concerned about these poor scores. The fiscal health of our cities can have real negative impacts on taxpayers.

Truth in Accounting’s report ranks the country’s 75 most populous cities by their taxpayer burden (or surplus for a few cities), a number calculated by dividing the money needed to pay the city’s bills by the estimated number of city taxpayers. A larger taxpayer burden means a larger rank number.

According to the report, Kansas City went into the pandemic in poor fiscal health, with a $1.7 billion debt burden. This equates to a taxpayer burden of $11,300 per person and lands Kansas City at 57th in the country. St. Louis City is in even worse shape. Financial decisions have left St. Louis with a debt burden of $1.3 billion and a taxpayer burden of $14,600 per person. St. Louis ranks 63rd out of the 75 cities in the report. Missouri’s two largest cities both received a D grade for fiscal health.

All the cities on this list, including Kansas City and St. Louis, have balanced budget requirements, meant to “prevent elected officials from shifting the burden of paying for current-year services to future-year taxpayers.” As explained in the report, “if a city has a balanced budget requirement, then spending should not exceed earned revenue brought in during a specific year. Unfortunately, in the world of government accounting, things are often not as they appear.” Cities can do things such as keeping pension and other employment compensation costs out of the budget to give the illusion of a balanced budget. For example, Kansas City has $870 million and St. Louis has $380 million in underfunded pension benefits for city employees, so they each clearly need to be contributing more each year to the city pension funds to achieve true financial stability (as well as moving forward, not backward, with pension reforms).

Times are tough for individuals, businesses, and governments, but we shouldn’t forget the importance of accountability and balancing the budget. Truth in Accounting has released this report in previous years, and St. Louis and Kansas City have continuously ranked in the bottom third of cities. Show-Me Institute researcher Patrick Tuohey wrote this years ago and it still holds true: Instead of chasing shiny new projects and schemes, policymakers “should focus on the less glamorous but more important task of regaining sound fiscal footing.”

Sleepless in Sedalia – Or Further Discussion of Online Sales Tax Issues

Posted on by David Stokes

Online sales taxes are one of those things where the more you study it the more questions you have. It’s like absurdist architecture, or the Green Bay Packer’s coaching decisions. This is the second in a series of posts that asks some important questions about how an online sales tax would be implemented in Missouri, which is very likely to happen. The important thing is to have it done right, and not just take our current, awful sales tax system and expand it significantly.

Expanding the sales tax base to include all online goods should not be done in a manner that would entice cities to depend even more on sales taxation and make rates higher. As part of expanding the tax base, Missouri should reform the system. The pertinent question is how to determine the tax rate. Does the location of the seller, shipper, or buyer matter most? There are arguments for and against all three possibilities. For in-state sellers, it would be fairly simple to just use the seller’s sales tax rate. But many sellers would be out of state, so participating in a multi-state agreement would be a requirement (and I could support that).

Setting the rate by the location (or nexus) of the in-state shipper may, overall, be the easiest, except for the fact that all of the harmful incentives we have had with shopping centers (tax subsidies, high rates, etc.) would be transferred over to logistics centers—a trend we are already seeing. A city with a large logistics park would simply set a very high sales tax rate in that area to make non-residents pay for as much of the city’s services as possible. That would be repeating the mistakes we have made under the present system.

Determining the rate by the address of the buyer would be preferable for fiscal discipline (voters would be approving the taxes they have to pay, like property taxes), but without a simplification of the rate system that could make for complicated collections. Our many cities, numerous city sales tax options, and many special taxing districts would make it very hard to determine a precise tax rate for everyone. There need not be only one answer to these questions. A hybrid decision is possible, and perhaps necessary.

Would additional taxes from obscure special taxing districts also be collected as a part of this? Are they technically use taxes or sales taxes? If it is a use tax (as I think a basic reading of the rules says it would be), then the special taxing district taxes might not have to be collected. If it is a use tax, does the typical $2,000 resident exemption (Missourians only file a use tax return if they accumulate $2,000 in taxable purchases on items that use taxes apply to in a given year) still apply? If that exemption applies—and, again, a basic reading of the law says it should—how could a seller possibly know where you stand on the exemption as a buyer? Do you need to apply for a refund from the state at the end of the year? That could be an enormous amount of paperwork for all involved to properly account for that exemption. Would it be better to eliminate that exemption and lower the rate to account for that?

The various bills that have been introduced attempt to cover some of these questions, but major bills like these are likely to be heavily amended if they are passed, so I think these questions are still fair. And the Packers should have gone for that touchdown . . .

SMI Podcast: School Choice Week Update with Dr. James Shuls

Posted on by Susan Pendergrass

In this episode, Dr. Susan Pendergrass and Dr. James Shuls celebrate National School Choice Week and provide an update on some key legislation.

James V. Shuls is an assistant professor of educational leadership and policy studies at the University of Missouri St. Louis and a Distinguished Fellow in Education Policy at the Show-Me Institute.

Local Government Is a Managerial Convenience to the State, Not a Blank Check

Posted on by Patrick Ishmael

With the Missouri Legislature back in session, important proposals are already on the move in both chambers. Educational choice appears to be on a fast track of sorts in the Senate, an urgent reminder that Missouri’s kids are suffering as many district schools remain shut down in the face of the coronavirus pandemic.

But education reform is just one iteration of a bigger idea: that the state has an obligation to step in to protect the rights of Missourians when local government bodies fail to do so. Yesterday the House Special Committee on Small Business held hearings on a wide array of COVID-related legislation. These bills would limit what local government could do in picking winners and losers among Missouri businesses, whether by shutting them down or dramatically limiting their operations for public health reasons. As we’ve said before, living in Chiefs Kingdom doesn’t make you Kansas City’s peasant, and having a small business in Missouri doesn’t make you a second-class citizen to big box stores and casinos.

Now many local administrators are crying “local control!” to defend their policy decisions from last year and to push back on these proposals as they pick up steam. Yet, shouting that “local control” is important doesn’t change what state subdivisions really are: managerial conveniences to the state. And when managers fail, the boss—here, the state—has to step in.

Local government exists not because it is categorically more efficient and effective in carrying out state priorities. It exists because there is a reasonable expectation that on most issues it will be. After all, local knowledge often has benefits to administration, but sometimes that just means more bureaucracy as we’ve seen in the explosion of administrators in both health care and education. “More administrators” sometimes just means “more administrators” and not “better administration.”

And that’s what mayors, county commissions, and a host of other local government jobs are: administrators. Where the state hasn’t spoken clearly, their role is to execute policies that don’t undermine the rights provided to Missourians who happen to be within the borders they administrate.

To fail to uphold state rights and adequately manage local privileges isn’t just some opportunity for a natural experiment, with local administrators ruling as they will. When a failure of local administration is identified, the state is duty-bound to consider intervention, and perhaps even intervene, to protect the rights and interests of Missourians in those districts.

That’s why I have to smile when I read about big Missouri cities and counties that intermittently extol the virtues of “local government” as a defense against state reform.

When Kansas City mayor Quinton Lucas pumps up the importance of local control to defend his COVID shutdowns and then advocates not only for a statewide mask mandate but for a national one (!) too, his local control argument is actually about his preferred ends of “local control” in a specific instance, not the means of “local control” as a general rule. Legislators should learn this well in the months ahead because local officials will be using “local control” as an argument to fight reform.

One final note:

The relationship between local governments and the states is not the same as the relationship between the states and the national government. States create or enable the creation of local governments as subsidiaries to their control. States created the national government as a co-sovereign. “Local control” is not the same as a “state’s rights” argument, nor should anyone conflate the two.

I’m thankful that the legislature is already queueing up a round of legislation to curb the excesses and rights violations that happened last year in Missouri. I hope legislators ensure local government is properly restrained in the future.

More to Be Done on LIHTC

Posted on by Elias Tsapelas

2020 was a big year for Missouri’s low-income housing tax credit program (LIHTC). In September, the governor and Missouri Housing Development Commission (MHDC) revived the state’s program for subsidizing the construction and rehabilitation of low-income housing after a three-year hiatus (read more about the program and how it works here and here). And by the end of the year, more than $14 million in new LIHTCs had been awarded. We’re told the program has been reformed and will work better than ever before. But will it?

Prior to being halted in 2017, the state’s LIHTC program was plagued by several serious problems. As I’ve written many times before, Missouri’s program was one of the biggest in the country and was repeatedly shown to be ineffective, costly, and utterly lacking in accountability. Sufficiently addressing each of the program’s shortcomings has proven to be elusive for the state’s elected officials, with legislative attempts to reform the program failing over the past three years. Absent any legislative action, the governor and MHDC decided to bring the program back on their own terms by administratively implementing changes.

The MHDC’s changes include a yearly cap on state credits, a scoring rubric for project applications, and a new pilot program that allows more credits to be redeemed over the first five years (of ten total) of the project. At first glance, the changes seem to touch on each of the major issues with the program outlined above. But do they make the program worthy of taxpayer expense?

In theory, the yearly cap should make the program less costly because Missouri used to match each federal LIHTC on a dollar-for-dollar basis. A cap would mean that is no longer possible. The scoring rubric could add some accountability by showing how the chosen projects stack up against those that aren’t awarded funding. And the pilot program should make the credits more enticing to investors, and in turn, increase the value for which they can be sold.

After details of the revived program were made public, an optimistic real estate developer was quoted saying he expected the new state LIHTCs to sell for roughly sixty cents on the dollar. It is important to keep in mind what this means: Developers are happy to trade each taxpayer dollar they receive for a little more than half its value. How can LIHTC be a good investment for Missourians if the people who profit off the program believe what they’re receiving is worth much less than what state taxpayers are paying? It will be some time before there are enough data to determine the full effect of these changes, but even if this estimate of improved sale value is proven true, Missourians would still be receiving a very poor return on their investment.

The program’s revival is certainly a good deal for already-wealthy developers. But shouldn’t the governor and MHDC instead ensure that Missourians have an affordable housing policy that’s good for everyone?

New Summary of Minimum Wage Research Shows Negative Effects

Posted on by Michael McShane

A nationwide $15 minimum wage appears to be under discussion in Washington. While they are mulling it over, policymakers might want to check out a new paper published by the National Bureau of Economic Research.

Titled “Myth or Measurement: What Does the New Minimum Wage Research Say about Minimum Wages and Job Loss in the United States?” it surveys the existing research on the effects of the minimum wage.

What does it find? According to the authors:

Our key conclusions are: (i) there is a clear preponderance of negative estimates in the literature; (ii) this evidence is stronger for teens and young adults as well as the less-educated; (iii) the evidence from studies of directly-affected workers points even more strongly to negative employment effects; and (iv) the evidence from studies of low-wage industries is less one-sided.

Labor economics isn’t my field of expertise, but from an outsider’s perspective, raising the minimum wage doesn’t look good!

Taxable Sales Down in Many St. Louis Areas

Posted on by Corianna Baier

Most of us know that when you shop, the price on the tag is not the price you pay at the register. Sometimes these prices aren’t even close (especially in Missouri) thanks to sales taxes. With a state sales tax, local sales taxes, and special taxing districts, Missouri governments collect a lot from taxable sales. However, sales taxes are a volatile form of revenue. It can be risky for governments to rely too much on sales tax revenues because they can drop drastically during economic downturns. This article from NextSTL helps illustrate this problem.

The article compares 2019 and 2020 taxable sales throughout the St. Louis area. Most of the St. Louis area saw a decline in taxable sales when comparing the second quarters of 2019 and 2020. St. Louis County taxable sales were down by just over 10 percent, while St. Louis City taxable sales were down by over 25 percent. The image below from the NextSTL article shows the change in taxable sales by zip code. Notably, taxable sales were down 89 percent in the Downtown zip code, 76 percent in the Airport zip code, and 75 percent in the Downtown West and Midtown zip code.

Taxable Sales/Use % Change Apr-Jun 2020 v 2019

This makes sense—a lot of these zip codes rely on visitors, bar and restaurant patrons, and office workers spending their money away from home. All these things became rarer during the economic shutdown.

So what is one takeaway from the pandemic? Our governments need to take a hard look at how they are generating revenues. If revenues are unpredictable, promised public services can be compromised.

The City of Lake Ozark Should Consider a Local Fuel Tax

Posted on by Jakob Puckett

The City of Lake Ozark is looking for more funding for road improvements. A local fuel tax could be the answer.

The city claims it needs $3 million to repair an important local road but lacks the funding to do so. The city’s leaders are considering a transportation development district (TDD) to raise money for the road through an extra sales tax, which would effectively subsidize road maintenance via shopping. My colleague David Stokes has already written about why a TDD is a poor remedy for this problem.

Fortunately, there is a better solution—local fuel taxes. Fuel taxes can be an economically sound and fair way to raise money for roads. They ensure that those who benefit from the roads also pay for them.

As the National Surface Transportation Infrastructure Financing Commission has noted, funding roads through methods not related to their use (such as sales taxes) promotes inefficient vehicle and travel choices. This, in turn, leads to faster road deterioration, wasted fuel, traffic congestion, and air pollution. If the sales tax (via the TDD) is a ploy to get tourists to help foot the bill for road maintenance, it should be noted that the same tourists would also pay the fuel tax. However, fuel taxes connect the cost of driving and the cost of using the roads.

Local fuel taxes allow localities to raise money for roads within their jurisdictions. When enacted, an additional fee is added to the price at the pump in a given jurisdiction. And since the Missouri Constitution requires that money raised from local fuel taxes be spent only on road construction and maintenance, it reduces the risk of this revenue being spent on other, potentially wasteful projects.

One potential challenge is that local fuel taxes can be tough to enact. The Missouri Constitution requires that local fuel taxes be passed with a two-thirds majority among voters. If it chooses to pursue it, Lake Ozark would be one of the first localities in Missouri to enact a local fuel tax. Foristell tried to enact one several years ago, but the measure fell just short with 65 percent voter approval. However, it was able to pass a 1 cent local fuel tax the following year.

Ultimately, before sales or other tax increases, local fuel taxes are an option worth considering as a fair solution to the City of Lake Ozark’s funding predicament.

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