The Kansas City Earnings Tax Is Bad for Our Health – But Do We Care?

Posted on by David Stokes

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.

Off the Track

Posted on by David Stokes

The governor has announced that Missouri will seek additional funding for high-speed rail. This is, in my opinion, a very poor choice. Even if you accept the argument that we should spend the available money because other states will do so if we don’t (an argument I don’t accept), building high-speed rail still commits Missouri to subsiding the long-term operating and maintenance costs.

Maybe you believe that high-speed rail will make money for Amtrak — in which case, I have a bridge over the Missouri River to sell you. Randal O’Toole has written extensively on this issue, particularly in a study about the implications of high-speed rail for Missouri published by the Show-Me Institute. The Missouri Department of Transportation (MoDOT) had an earlier plan to pursue a much smaller amount of money, which would allow it to implement engineering-based improvements to the current Amtrak route. That was much better policy. It involved a (comparatively) reasonable amount of money to make direct improvements to an existing system. The new proposal to go full-bore for high-speed rail across Missouri is a decision that I believe the state will quickly and seriously regret.

Unless, of course, we don’t get the funding at all, which would be terrific.

“Eenie, Meenie, Miney, MO! This Is Where You Ought to Go!”

Posted on by Christine Harbin

As I flew back from vacation, I stumbled upon a full-page advertisement for Missouri in my in-flight magazine. Although I regularly see other states featured in articles in in-flight magazines (I discussed one about Utah recently), I haven’t seen any other states take out this kind of ad.

I don’t know whether this particular ad was bought with taxpayer money, but I do know that the state government uses taxpayer money to advertise. According to our “Show-Me: The Spending” web tool, state government agencies in Missouri have spent $223,362,918 on advertising services since 2000 (in terms of constant 2009 dollars).

Are there no better uses for taxpayer monies than paid advertising? Does seeing a full-page ad in an in-flight magazine cause any travelers to relocate their business to Missouri? Is this a successful economic development strategy?

MO In-Flight Ad

Why Spend More Than $400 Million to Subsidize Warehouse Construction?

Posted on by Audrey Spalding

From today’s Post-Dispatch: “St. Louis’ dreams of becoming a gateway for Chinese air cargo are going to need some more state funding to become reality.” Specifically, state legislators are looking to award nearly half a billion dollars in subsidy to hub-related projects.

Trade boats in Changzhou, China. Photo by Audrey Spalding.
Trade boats in Changzhou, China. Photo by Audrey Spalding.

Given the opening sentence, a Post-Dispatch reader might misinterpret the article to mean that the $480 million in taxpayer money is intended to go directly to funding the proposed China Hub itself. But, as reported previously in the Post-Dispatch, a Chinese freight affiliate has already decided to send several cargo flights to the Lambert airport each week. Later in today’s article, the actual subsidy recipients are disclosed: $60 million would go to shipping companies that export by air from Missouri, and $420 million would go to build cargo warehouses and other storage facilities.

So, perhaps a better way for the Post-Dispatch article to start would be: “St. Louis developers’ dreams of building warehouses are going to need some state funding to become a reality.”

From an economic perspective, this doesn’t make much sense. If goals* are already in place to bring in increased air freight and to increase the number of Boeing 747s traveling between Saint Louis and Shanghai, then there surely will be an increase in economic activity, along with a demand for facilities to handle the increased freight and passenger traffic. If all it takes to profit off of that is to build some cargo warehouses, why does the state need to subsidize that construction?

Here are some possible reasons that state legislators are pushing for awarding the $480 million in subsidy:

  1. There is a low chance of the “China Hub” idea actually coming to fruition.
     
    Well, then why subsidize the unnecessary construction of auxiliary cargo warehouses?

  2. It’s very difficult to make a profit in Missouri.
     
    This may well be the case. But if the state awards tax credits without a corresponding decrease in other expenditures, the tax burden for everyone else (those who aren’t building warehouses in the Saint Louis area) will rise. Because the award of $480 million to the favored few will likely result in other businesses and individuals paying even more in taxes to the state, this proposal will actually make things more difficult for entrepreneurs.

  3. Legislators want to award subsidy.
     
    It is also possible that there is no need for this subsidy, but that legislators personally benefit (increased power, campaign contributions, etc.) when they can claim responsibility for awarding millions in subsidy. And, fortunately for the legislators proposing this tax credit, there is little or no cost to them when spending $480 million in taxpayer dollars. There is a terrific branch of economic theory that examines this type of behavior in detail.

A better solution would be to reduce state barriers to trade, not increase them.

Reasons 1 and 2 are not legitimate. The state shouldn’t subsidize high-risk, unlikely projects, and legislators don’t get to spend other people’s money just to demonstrate their political heft. If subsidy is needed because Missouri puts up too many barriers to entrepreneurship, the state should remove some of those barriers instead of adding more. One idea could be to find an additional $500 million to cut from the budget (tax credits, perhaps), and reduce the tax burden for everyone.

But what about me?

Look, anyone can point out that some type of economic activity might not occur without state subsidy. That doesn’t mean that the state should throw millions at the “under-produced” project.

For example, I could say that “Audrey Spalding’s dreams of owning 10,000 pairs of shoes will need some state funding to become a reality.” The reason I don’t already own those shoes isn’t because of a market failure — it’s because I’m not willing to pay for that myself.

Similarly, developers can invest money, and take on the risk and possibility of a profit if they want to build warehouses themselves. If they’re unwilling to do that without nearly half a billion in taxpayer money, then these warehouses, like my 9,990 additional pairs of shoes, will have to wait.

Charter Schools Boost Graduation Rates and College Attendance

Posted on by John Payne

A study (non-gated, working version) in the latest Journal of Labor Economics shows that students attending charter schools are significantly more likely to graduate from high school and attend college than similar students in traditional public schools. The authors examined students in Florida and Chicago and used a myriad of controls to ensure that the charter school students it compared to other public school students were, in fact, comparable. They found that “among students who attended a charter middle school, those who went on to attend a charter high school were 7 to 15 percentage points more likely to earn a standard diploma than students who transitioned to a traditional public high school. Similarly, those attending a charter high school were 8 to 10 percentage points more likely to attend college.”

A quick look at the available evidence suggests that the same holds true here in Missouri. Although it does not contain the same rigorous controls as the study of Florida and Chicago charters, a 2010 study by the Missouri General Assembly’s Joint Committee on Education reported that seven of eight charter schools in Kansas City and Saint Louis city achieved higher graduation rates in 2009 than the surrounding school districts, and six of eight beat the state average. Critics often accuse charters of skimming off the best public school students, but in Missouri that is emphatically not the case. The charter law requires one third of charter schools to actively recruit and serve dropouts and high-risk students.

With regard to college attendance, a quick look through the Department of Elementary and Secondary Education’s data indicates that, with the exception of two schools in Kansas City, all charter high schools send graduates on to college at a comparable or higher rate than their public school counterparts. It should also be noted that if a charter is sending graduates to college at the same rate as the public schools they supplement, but have higher overall graduation rates, students who attend those schools are still more likely to attend college than are their public school counterparts.

The evidence in Missouri appears clear: Charter schools improve educational attainment for students in Kansas City and Saint Louis. Perhaps it is time to expand charters beyond those narrow confines.

The Saint Louis Earnings Tax Is Bad for Our Health – But Do We Care?

Posted on by David Stokes

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 Saint Louis 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 city.

On one hand, it is well established that the 1-percent earnings tax helps kill jobs and businesses in our state’s largest cities. On the other hand, many city officials think that their budgets would be stretched too thin without the revenues 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 Saint Louis 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, Saint Louis 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 in Saint Louis can be replaced without the catastrophic results that some are predicting.

Saint Louis County’s water utility is privately operated, and the county has already successfully privatized its pharmacy service. Saint Louis city could follow suit 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 in Saint Louis. During the 10-year phase out, city officials can work to re-enter Saint Louis County. Consolidating many government functions, like the circuit court or the Recorder of Deeds, along with a county takeover of regional infrastructure like Forest Park Parkway, could save the city significant money.

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 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 could potentially be adopted in Saint Louis to offset lost earnings tax revenue. Another strong possibility would be to increase user fees, offset by general tax reductions.

All budgets can be cut. Saint Louis should embrace this opportunity to cut unnecessary or inefficient services and expenditures. For instance, the city already has both the Metropolitan Police Department and the Sheriff’s Department, so why does it need a third law enforcement agency, the City Marshal? Every duty of that office can be transferred to the police or sheriff, and that department can be eliminated entirely, saving the city almost $1.3 million per year.

Perhaps the most important thing that Saint Louis can do is to scale back or eliminate tax subsidies that aim to lure selected residents and businesses to the city. As of 2009, Saint Louis had $683 million in tax-abated property. If the city were to cease issuing abatements the day the earnings tax began to be phased out, a large percentage of that property would return to the tax rolls during the following 10 years.

Finally, there are many nonprofit entities operating within Saint Louis. 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 Saint Louis, 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 Saint Louis 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.

$27 Million in Loans, but Who Pays for It?

Posted on by Christine Harbin

Yesterday, the Missouri Watchdog ran an article by Brian Hook about the State Small Business Credit Initiative, which will make $26.9 million in federal funds available for small business loans in Missouri. The article includes some statements by me about the differences in private and public investment. I argue that government does not vet potential investments as carefully as an individual lender does.

Government officials don’t have the ability to identify the highest uses of these funds because those officials are too far removed from the signals that the market provides. And, even if they could identify them, they are too bogged down in bureaucracy to respond quickly.

On the surface, providing loans to small businesses seems like a good thing, but when you look closer, this policy is yet another example of the government picking winners and losers in the marketplace. The governor can implement other strategies that would grow the economy better, such as reducing excessive occupational licensing requirements in Missouri, lowering the overall tax burden, and eliminating the bureaucratic barriers to starting a business.

Additionally, supporters of programs like this one tend to argue that, because federal dollars fund the program, taxpayers in Missouri needn’t worry about the cost. This money doesn’t come out of thin air. There is no such thing as a free government program. Like all other forms of government spending, federal dollars come from the pockets of taxpayers, who can’t spend it themselves in the private sector. Furthermore, as a commenter on the article points out, programs that are funded by the federal government often come with strings attached, and therefore reduce the state’s sovereignty.

The Effects of Municipal Taxation: Roman Empire Edition

Posted on by John Payne

Right now, I’m reading The Rule of Empires by Washington University history professor Timothy Parsons (who was my history advisor when I was an undergraduate there, incidentally). In it, Parsons describes how foolish economic regulations and excessive taxation in the late Roman Empire drove people from the cities:

Emperor Diocletian tried to arrest this inflationary spiral in A.D. 301 with an unenforceable decree fixing wages and basic commodity prices. Faced with significant shortfalls in the western half of the empire, tax collectors concentrated on the cities and towns, where magistrates faced fines and confiscations if they failed to produce sufficient revenues. Not surprisingly, the wealthy and privileged fled to the countryside, where the reach of imperial authority was inherently shorter.

This exodus helped ingrain feudalism in the countryside as the rich bought up large estates. For the record, I don’t think city earnings taxes, no matter how high, will lead to a resurgence of feudalism, but incentives still change the way people behave now just as much as they did 1,700 years ago. If people can avoid a tax — and the rich can avoid them most easily because of how mobile they are — many of them will do so. Although we don’t know precisely the level of taxation in Roman cities, it was almost surely higher than 1 percent. Nonetheless, all else being equal, higher taxes tend to drive people away, whether we are talking about early 4th-century Rome and Londinium (London) or contemporary Kansas City and Saint Louis.

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