Missouri Suffers From the Saint Louis and Kansas City Earnings Taxes

Posted on by Joseph Haslag

The Saint Louis and Kansas City earnings taxes, 1-percent income taxes imposed on those living or working within city limits, have consequences. People have ways of avoiding these taxes, and the single easiest way is through their mobility. Put another way, people choose where to work and what businesses to operate based on a variety of factors, including the taxes in competing political subdivisions. This location decision is particularly pertinent to both Kansas City and Saint Louis, because each one’s metropolitan area straddles a state line. In contrast to metro areas that lie in the center of the state, any tax avoidance in Missouri’s largest cities will have repercussions for the state coffers as well for Kansas’ and Illinois’ benefit. Thus, in addition to the losses in economic efficiency and total productivity that it brings, earnings taxes leave the state and municipal governments with a shrinking tax base and a commensurate decrease in tax revenue, affecting all Missourians.

It is undeniable that the Kansas side of the Kansas City metropolitan statistical area (MSA) and the Illinois side of the Saint Louis MSA are gaining on their Missouri counterparts. The former has made such substantial gains in the last several decades that Kansas City is approaching an even split between the two states in terms of population, retail sales, and total employment. During the last decade, Missouri’s share of total employment within the Kansas City MSA slipped down to 0.57 in 2006, from 0.59 in 1998. Put another way, Missouri would have had another 19,000 people working in our state if the employment ratio had stayed the same. While Missouri is still by far the dominant state in the Saint Louis MSA, Illinois also has gained relative to the Missouri side. The ratio of Missouri employment to total employment in the Saint Louis MSA has fallen during the last decade from 0.85 in 1998 to 0.84 in 2006, reducing Missouri’s employment by 9,500 workers. In both cities, evidence indicates that employment is seeping across state lines, taking with it opportunities for tax collection and revenue accumulation for the state of Missouri.

How much of this phenomenon can actually be attributed to the city earnings tax? Saint Louis and Kansas City are hardly the only earnings-tax-enforcing cities that are losing economic power from their base state. Cities such as Philadelphia, Pennsylvania, and Cincinnati have also seen losses in employment to neighboring states. In fact, from 1998 to 2006, every MSA that includes counties from two or more states, in which one enforces a city income tax, has seen a decline in the ratio of employment within the area subject to an earnings tax relative to total MSA employment, even while similar multistate MSAs without earning taxes have experienced, on average, a modest increase in that ratio during the same period.

An elimination of the earnings tax could have a real, quantifiable impact on the level of total employment retained by Missouri in its two largest metropolitan areas. According to our calculations, eliminating the earnings tax in Kansas City would increase the ratio of Missouri employment to total employment in that metropolitan area by over one-half of a percent, an increase of approximately 4,700 Missouri jobs. Such an injection of employment into the state of Missouri would represent an annual gain of nearly $134.5 million in total state earnings. This increase in earnings would impact the municipal and state tax coffers as well, infusing over $4 million in additional tax revenue into Missouri state and municipal governments.

Missouri would stand to gain even more from elimination of the Saint Louis earnings tax. Our calculations indicate such a change in tax policy would precipitate an increase of more than 6,500 Missouri jobs in the short run, along with nearly $157 million in additional earnings within the state of Missouri. Local governments within the Missouri side of the Saint Louis MSA stand to gain nearly $5 million dollars in supplemental tax revenue from these additional Missouri jobs alone.

Perhaps an even more salient point is that all of these figures forecast benefits for the state of Missouri and its citizens in the immediate future. If the long-term gains are nearly as substantial as the immediate gains appear to be, eliminating the earnings tax could be a paradigm-shifting change for the Kansas City and Saint Louis MSAs, and for Missouri in general. It could help stem the trend of economic activity shifting outside city limits, fleeing toward suburban and out-of-state destinations, and help preserve Missouri’s fading dominance in those areas.

The earnings tax is, even without the concerns raised here, an economic force that adversely affects the cities that levy it, their metropolitan areas, and the state. It discourages investment and cultivation in the urban core, often the part of a city with the most infrastructure and economic potential, thereby weakening the entire economic structure of a metropolitan area and a state as a whole. When these potential pitfalls are combined with increasingly appealing out-of-state commercial options, the earnings tax becomes a formidable enemy to the economic stability of a state like Missouri. It is time to consider whether the costs of the earnings tax are worthwhile. Would the citizens of Missouri be better served by a balanced playing field that allows Saint Louis and Kansas City to compete with surrounding suburban and out-of-state areas unencumbered by the economic distortions produced by the earnings tax? The economic vitality and fiscal solvency of their state may depend on it.

Joseph Haslag is executive vice president of the Show-Me Institute, a Missouri-based think tank, and a professor in economics at the University of Missouri–Columbia. Alex Schulte is an intern at the Show-Me Institute.

 

Benefits of Eliminating the Income Tax

Posted on by Abhi Sivasailam

The Sunday edition of the Columbia Daily Tribune featured an op-ed written by Dr. Joseph Haslag, Michael Owens, and Caitlin Hartsell of the Show-Me Institute.

The authors are concerned with public policy choices that can accelerate the growth rate of Missouri’s economy; they suggest that eliminating the income tax could be a positive first step.

Taking a broad view of tax structures in various states, the authors find that states with no personal income taxes traditionally grow faster than states that do levy taxes on income. The income tax–free Texas economy, for example, grew twice as fast as Missouri’s between 1995 and 2005:

Our calculations indicate Missouri’s real GDP would increase at a 2 percent annual rate if the state income tax were eliminated, as opposed to Missouri’s historic 1.3 percent growth. While a 0.7 percent increase in the growth rate might not sound like much, its impact would be significant for the next generation of Missourians. Indeed, Missouri’s real GDP gains would total $438.6 billion over this 25-year period, a substantial amount that would translate into more jobs and a higher standard of living.

The authors stress that though replacing revenue from an income tax would be a challenge, it is a worthwhile challenge for Missourians — the gains from reform in the tax system are too promising to be cast aside.

When Missourians evaluate the state’s tax climate, they should consider how Missouri stacks up to peer states. The Tax Foundation reports that Missouri’s 6% income tax is the 21st highest in the nation. This is one list that Missouri should not wish to climb.

Environmental Benefits of High-Speed Rail Overstated

Posted on by Abhi Sivasailam

Eric Morris recently wrote a post for Freakonomics that attempts to evaluate some of the proposed benefits of a high-speed rail system. In it, he cited a study commissioned by the U.K. Department for Transport, casting doubt on claims that high-speed rail will be an environmentally friendly alternative to other forms of transportation. Morris wrote:

Booz Allen considered two potential U.K. HSR lines (London-Manchester and London-Edinburgh/Glasgow). They found that the CO2 emissions required to move HSR passenger seats were about the same as those required to move automobile seats — hardly a slam dunk for rail. In fact, intercity bus came out considerably cleaner than HSR on a per-seat-mile basis.

HSR would emit less on a per-seat mile basis than air travel. But the major caveat is that all of these figures consider emissions from operations only, without taking into account the very large amount of pollution that will be created in the construction of the HSR system. […]

[Given] 100 percent rail ridership, emissions over a 60-year period would be lower if the HSR line was never built.

Keep in mind that this study focuses on high speed rail projects in England, but “given its high population density and short distances, Britain may actually be a better place for HSR than most areas of our country.”

It is worth noting that this study assumes static technological progress. This is not a fatal flaw. Assuming that technology will improve in the coming years and lead to lower environmental harm by way of trains, it is reasonable to conclude that this technological change would be widespread and trans-industrial. If historical trends are any indication, technological gains will be realized and implemented quicker and with more ease in airlines and automobiles, and at a pace that will continually outstrip the meager gains that trains will achieve.

The bottom line here is that for high-speed rail expansion to be at all environmentally friendly, ridership will have to spike to numbers that we can’t reasonably expect. This is an important realization, and is one that casts considerable doubt on claims that high speed rail is a necessary step to show true support for the environment.

High-Speed Rail Proponents Underestimate Environmental Impact

Posted on by Abhi Sivasailam

On Monday, eight Midwestern governors met in Chicago to sign a memorandum of understanding by which they committed to a widespread effort to vie for stimulus funds that will be used expand high-speed rail systems throughout participating states. The governors of Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri, Ohio, and Wisconsin were all signatories.

This policy’s price tag will be in the billions. Leaving aside ideologies about public spending, I want to first evaluate this policy in terms of whether it is viable — whether it can even achieve its stated goals. If a policy cannot even accomplish its stated goals, then peripheral discussions about whether the government should spend money, or whether the price tag is too large, become unnecessary. The primary stated values of high-speed rail policy, as I see them, are: job creation; increasing commuter ease; and, reducing environmental impact.

I would contend that the policy fails its cause in all three, and over the next few days, I will try to evaluate high-speed rail’s viability in protecting the environment, creating jobs, providing economic stimulus, and reducing travel times. Stay tuned.

Should Missouri Have a Bottle Deposit Law?

Posted on by David Stokes

Last night at the Cardinals game, a friend of mine and I discussed the bottle deposit law. It came up because we discussed how they have gotten rid of beer cans entirely at Busch this year. You can only buy your $27 dollar beers on tap or in plastic bottles. This is regrettable, because aluminum is so easy to recycle, although plastic can obviously be recycled, too. Also, I had just returned from a trip to Michigan, with its famous 10-cent deposit.

So, should Missouri institute a deposit law of either a nickel or dime? I think it should. It would be one way to encourage positive social behavior (recycling bottles) through incentives rather than directives. You don’t have to recycle if you don’t want to, it will just cost you $1.20 extra per case of beer. This is not a tax you have to pay, it is one you choose to pay, and the behavior encouraged is so simple to do it can hardly be considered onerous or burdensome. So, I say bring on a 5- or 10-cent deposit law in Missouri. Let me know what you think in the comments.

Small but Notable Government Consolidation in Kansas City

Posted on by David Stokes

It is always dangerous to talk before you have all the facts, as a certain person sharing a beer today with two Bostonians has realized, but, dammit, if it’s good enough for him it’s good enough for me. I want to direct you to an example of government consolidation in Kansas City. According to the Star, the city’s independent ambulance service is being folded into city government. I am not here to talk about the silly use of consultants, although I certainly agree with this councilman — whose point applies to corporate America as well as to government:

“I still think we’ve got the expertise in-house,” Sharp said. “We use too many consultants.”

From what I can tell and what I have learned, this seems to be a good move in KC. MAST, a regional, independent government entity, is the nonprofit company that has formerly provided this service. There are many types of these regional entities in Missouri, and some of them certainly deserve to remain independent, like MSD in St. Louis. But MAST appears primarily to serve Kansas City and surrounding unincorporated areas, like Blue Summit. Hopefully in the areas outside of KC, fully private ambulance services will begin providing services.

But back to the consolidation issue. If the city can save money on overhead, et al, by bringing one government entity under the control of another, then this will be a good thing for taxpayers. There is no compelling reason to avoid this — the need for checks and balances from separate agencies doesn’t really apply here. Plus, most people, right or wrong, probably think ambulance service is a legitimate responsibility of government, so this is not another example of the government expanding its reach. It’s just one government consolidating with another; which is fine with me as long as it saves tax dollars.

I am totally open to being corrected on any of this by our KC readers, so fire away in the comment section, if you like.

Show-Me Health Care Outing: A Newt Experience

Posted on by Josh Smith

This morning, six employees of the Show-Me Institute and one of our regular book club attendees found ourselves among 200 other guests at the futureFOCUS 2009 seminar, which featured a presentation from former speaker of the House Newt Gingrich. He made some excellent points that I can only agree with on the topic of health care, including: The public option is likely ill-considered; taxes should be lowered across the board so that individuals will have more money to buy their own health care; and, the present level of bureaucracy is to blame for much of the present cost of health care. He also pointed out that the Canadian system currently does not cover a number of conditions, for which many Canadians cross the border to get treatment; if we adopt a system similar to Canada’s, where will those people go?

Gingrich made one point I did not agree with. After pointing out that the progression of technology will afford new avenues for medical care and scientific progress, he used that as an opportunity to advocate a federally funded project that would study the brain using the latest technology, similar to the Human Genome Project or the Manhattan Project.

Overall, Gingrich was an incredible speaker, and the hour just flew by. During the Q&A, one audience member indicated his disappointment at the lack of outrage at some of President Barack Obama’s proposals. He asked, “Do you have any outrage?” Gingrich waited several beats before responding, and ultimately indicated that, yes, it’s easy to get outraged, but then you’re exhausted and you may not accomplish what you want. It’s better to remain level-headed, slow down the debate, and point out anything false stated by your opponents with calm reason.

This reminded me of a blog post I read awhile back about how anger and emotionality in politics is adaptive. It made sense for our ancestors to get excited about policy decisions, because it could literally mean life and death for the tribe. As modern individuals with the benefit of self-analysis and better reason, however, it is incumbent upon us to follow Gingrich’s great advice and make every effort to withhold anger, instead letting cooler heads prevail. It makes sense that a veteran politician would have learned this lesson already, but it was still impressive to see him articulate it so clearly.

Cutting Health Care Costs With a Chainsaw

Posted on by Caitlin Hartsell

The Congressional Budget Office (CBO) recently published a letter to the House majority leader regarding a proposal to establish a commission to cut Medicare spending. The council would consist of five medical doctors or health care experts who will suggest cuts that the president must approve.

This is the model of the public option, a top-down plan that takes the individual’s (and doctor’s) agency out of health care. As the Baby Boomer generation becomes eligible for Medicare, the program will inevitably expand — expanding a plan while simultaneously requiring cost cuts is counterintuitive. Cuts are best made through increased efficiency and better preventive care, not because a panel of five people decides to stop covering certain procedures.

The CBO estimates that $2 billion can be saved in the latter half of the next decade. However, this amount is minuscule in comparison to the $1 trillion proposed cost of the public option in that same time period.

Two of the more disturbing recommendations from the CBO letter appear on page 5:

  • Setting explicit and feasible quantitative goals for reducing outlays in the Medicare program.

  • Incorporating an explicit fall-back mechanism (such as an across-the-board reduction in payments) if goals for cost reduction are not met.

Health care costs have increased significantly since the creation of Medicare. This can be attributed in part to cost floors and the regulations imposed on doctors by Medicaid and Medicare. As it is, some doctors cannot afford to accept Medicare patients, and some are reimbursed for less than the required procedures cost. These added costs are foisted onto private insurance companies.

The Kaiser Family Foundation estimates that Missouri spent $7,029 per enrollee in 2004, slightly below the national average. Could these costs be lowered? Probably, but outright cuts to what treatments will (and won’t) be paid for will only have a dire outcome for the health care system.

Health care costs need to come down, but mandating cuts is not the best way to achieve that. Instead, increasing efficiency by lowering regulatory barriers or lowering fixed costs through tort reform, in order to lower malpractice insurance rates, would help ensure that patient needs continue to be met. Mandated cuts are just another way of imposing health care rationing.

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