The Kansas City Earnings Tax Tortoise Versus the St. Louis Earnings Tax Hare

Posted on by David Stokes

When the pandemic struck and remote work took over, two city tax policies diverged in an asphalt jungle. Kansas City decided, as it should have, to continue refunding non-residents their earnings tax money for work performed outside of the city, which quickly became a lot of money. St. Louis City decided to illegally alter its earnings tax policy and continue to collect the earnings tax from people working outside of the city for a business located in the city. This decision was terrible for a number of reasons, and a judge recently ruled in favor of taxpayers who contested it. The city should change its policy now, though one member of the board of aldermen advises the city: “[A]ppeal it [the judge’s ruling] for the next 1,000 years.”

Even though all Kansas City did was follow the law, I still praised the city multiple times for its policy when compared to St. Louis. But now it appears that Kansas City may have a trick up its sleeve. Instead of denying taxpayers their proper refunds for remote work—which would be illegal—perhaps you just try to make it really, really hard to claim the refund in the first place. Instead of “you can’t have your refund,” it is now, “you can have your refund after you jump through this flaming hoop with a leg of mutton in your mouth.” Kansas City’s new ordinance now applies the state rules for property tax appeals and refunds to the earnings tax. There was no need for Kansas City (or St. Louis) to do that; city leaders simply want to keep more of the money.

There are important differences between property tax and earnings tax appeals. With property tax protests, the government must put the money aside and can’t spend it. For earnings tax refunds, the city government already has the money (from withholding) and people are seeking to get some of it back. Most disturbingly, based on my reading of the Kansas City ordinance (68.393),  it seems that taxpayers will have to file a lawsuit if they want to get their lawful refund (correct me if I’m wrong). If Kansas City law says you must follow the state procedure, and state procedure requires a lawsuit, then you must file a lawsuit.

From RSMo 139.031(2):

Every taxpayer protesting the payment of current taxes under subsection 1 of this section shall, within ninety days after filing his protest, commence an action against the collector by filing a petition for the recovery of the amount protested in the circuit court of the county in which the collector maintains his office.  If any taxpayer so protesting his taxes under subsection 1 of this section shall fail to commence an action in the circuit court for the recovery of the taxes protested within the time prescribed in this subsection, such protest shall become null and void and of no effect.

There is nothing wrong with Kansas City clarifying its refund procedure considering the dramatic increase in remote work. But the old process worked just fine. If refunds took a little longer in 2021 and 2022, that is understandable. Hopefully Kansas City will create rules like the informal property tax appeal system in St. Louis County to simplify the overall process for everyone’s benefit.

But if Kansas City really is trying to dissuade taxpayers from applying for a refund by making it so difficult and expensive to go through the process for what would usually be a modest amount of money, that is unconscionable. The St. Louis rabbit got trapped in a court case and appears to be losing. I guess the Kansas City tortoise is trying a different strategy.

It just goes to show that you should never say anything complimentary about local government in Missouri. They always prove you wrong in the end.

Show-Me Minute: Land Banks Must Be Defeated

Posted on by David Stokes

 

The state legislature in Missouri is currently considering legislation to dramatically expand the authority to institute land banks to municipalities across the state (the state legislature must approve all new land banks in Missouri). The state legislature should reject this legislation. If such legislation is enacted, counties and municipalities should reject the establishment of land banks. Land banks may sound good in theory, but in political and practical reality they have been a major failure.

The Promise of ChatGPT with James Pethokoukis

Posted on by Susan Pendergrass

Susan Pendergrass speaks with James Pethokoukis about why advancements in A.I. are cause for optimism, not hysteria.

James Pethokoukis, a columnist and an economic policy analyst, is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.” He is also a columnist for The Week and an official contributor to CNBC.

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Produced by Show-Me Opportunity

We Need LETRS, ASAP

Posted on by Avery Frank

Governor Parson discussed in his state of the state address the importance of serving our future generations with educational policies. With only thirty percent of Missouri fourth graders scoring proficient in reading, it’s clear that Missouri needs to do better.

Thankfully, Senate Bill (SB) 681 was passed last year in part to help target foundational reading for students K-3. The bill required comprehension reading examinations to begin in kindergarten instead of third grade in order to more quickly identify children who are struggling, and also provides training for teachers in “evidence-based reading,” or phonics. Additionally, the bill requires that schools provide any student diagnosed or at risk for dyslexia with evidence-based reading instruction.

The program used to train teachers is called Language Essentials for Teachers of Reading and Spelling (LETRS). LETRS builds off of recent literature illustrating the importance of phonics in reading. Experts in linguistics, neurology, and psychology have highlighted the differences in a child’s ability to learn to speak and to learn to read. A child naturally learns how to speak, as human brains are hardwired to be able to learn a language at a young age. However, the same does not translate to reading. Think of history: literacy rates were around 12 percent worldwide in 1820; in modern times it has flipped, with illiteracy rates around 14 percent.

LETRS is designed to connect sound recognition with visual components (letters in words) and capitalizes on the ability of phonetic instruction to pair a child’s natural, hardwired skill of speaking with a complex and unnatural skill of reading (phonemic awareness).

The KIPP Victory Academy in St. Louis had started emphasizing phonics prior to the passage of SB 681 with the goal of boosting reading. According to a recent report from the St. Louis University Prime Center, KIPP enjoyed the highest ELA growth scores in the state between 2018 and 2021.

Given the evidence in the literature and the promising results from schools such as KIPP, one question lingers: why are we not placing even greater emphasis on the issue? Any K-5 teacher is eligible to undertake the LETRS training program, and the state has allocated funding for 15,000 Missouri teachers. Yet, only 9,000 teachers have begun training—and we don’t know how many of those 9,000 actually completed the training. There are an estimated 23,000 K-5 teachers in Missouri. I acknowledge that many teachers may already employ similar strategies and do not want to waste 160 hours completing the LETRS program. I also acknowledge that the rewards for completing 160 hours of training may seem a bit meager to some—you can earn up to $2,000 for completing the entire program, which comes out to $12.50 per hour of training.

From a budget standpoint, if you gave all 15,000 teachers the maximum $2,000 reward for completing the LETRS training program, it would cost $3 million. Conversely, if most of the recommendations from the recent blue ribbon commission were implemented—raising teacher salaries to $38,000, funding the career ladder program, and tuition assistance—the cost would be $91.5 million. Why are we not talking about investing more in a program that we know helps kids learn how to read instead of talking about spending nearly $100 million on unproven wish-list items that are not directly tied to better outcomes for Missouri students?

School Closings Shed Light on an Important Principle

Posted on by Maria Rivero

Recently, the La Salle Charter School in North St. Louis announced its decision to close. As a state-funded and privately operated middle school, La Salle set out to “educate and support the whole child” and set them up for success in high school. Unfortunately, La Salle was not able to achieve the standardized test scores required by the sponsor, the Missouri Charter Public School Commission. When asked what went wrong, the school explained that it was hit by the perfect storm: students arrived at La Salle grade levels behind where they should have been, and the COVID-19 pandemic only made things worse.

A few months ago, the Archdiocese of St. Louis announced the closing of two high schools in the fall, citing a lack of funds to remain open. Being very fond of the education these schools provide, students, parents, and alumni rallied together to save their schools and were able to secure the funding needed to remain open, independent of the archdiocese.

The closing of a school is almost always heartbreaking news that nobody wants to hear. However, I do believe that school closures shed light on an important principle that is (in some cases) being enforced: students deserve to go to high-quality schools, and only those schools that offer the best value and fulfill their students’ needs will survive.

Through market forces, this happens organically at a private school—parents will not pay to send their kids to a school that isn’t meeting their academic or social needs. If enrollment declines sufficiently, the school will eventually see no other option but to close. Charter schools also face closures, as schools that aren’t performing well will likely experience declining enrollment and will not continue to receive funding from the state. Because of the possibility of closure, private and charter schools have an incentive to improve academically and fulfill the needs of students.

Traditional public schools, on the other hand, have very little incentive to improve academically. Unless the situation becomes truly dire, public schools continue to receive funding despite their failures, and many students are left behind in the process.

Show-Me Institute analysts recently developed a piece of model legislation that would help address the incentive problem for public schools by allowing parents to send their kids to any public school in the state. Creating a true marketplace in education is one of the best ways to ensure our schools improve and kids in Missouri get the best education possible.

The Latest GDP Report: What Does It Mean for 2023?

Posted on by Aaron Hedlund

While Washington, D.C., is seized by speculation surrounding debt ceiling showdowns and the specter of government default, other recent news—namely, the latest report from the Bureau of Economic Analysis on the nation’s gross domestic product (GDP)—provided some welcome but qualified good news on the economy. According to the report, inflation-adjusted (real) GDP grew by 2.9% on an annualized basis in the fourth quarter of 2022, which modestly exceeded consensus expectations. Moreover, unlike the third quarter data—which showed growth despite a large decline in private domestic investment—each of the topline spending categories showed growth in the fourth quarter, albeit meager growth in some cases.

First of all, consumer spending is holding up. After only growing by 1.3% in the first quarter of 2022, it ended the year growing at a 2.1% clip—hardly robust, but clearly in positive territory. Consumers have been slammed by high inflation and eroding purchasing power for the better part of two years, but the steady job market and still-elevated checking account balances of households have managed to keep them afloat. Unfortunately, so too has rapid growth in credit card utilization, which may act as a source of financial vulnerability for consumers going forward as they grapple with continued interest rate hikes. Transitions into credit card delinquency are already on the rise, driven especially by households in the 18–29 and 30–39 year age ranges.

Switching gears, gross private domestic investment declined notably in the third quarter of 2022 (9.6% on an annualized basis) but increased by 1.4% in the fourth quarter. On the surface, this turnaround is good news. However, peeking beneath the hood reveals some reasons to be cautious. Most strikingly, residential investment fell by 26.7% as the housing market gets pummeled by the rapid rise of mortgage rates over 2022. In the first week of January 2022, the average rate for 30-year fixed-rate mortgages sat at 3.2%. In the last week of December, it was at 6.4%. Such a huge increase in rates translates to a jump in monthly payments of over $800 for someone buying a $400,000 house with a 20% down payment—making it more difficult to qualify for a loan.

Looking beyond the housing market, nonresidential fixed investment increased by an anemic 0.7% on an annualized basis in the fourth quarter after growing by 6.2% in the third quarter, a sizable deterioration. As a result, fixed investment overall fell by 6.7% on an annualized basis in the fourth quarter, which is even worse than the 3.5% decline in the third quarter. So how is it, exactly, that private investment still increased by 1.4% overall? The answer: inventories increased, which is far less important for economic growth in 2023 and beyond than businesses confidently investing in new factories and capital.

So what does all this mean for 2023? Unfortunately, not much. The good news is that the economy is not crumbling—at least not yet. And there are also reasons to be hopeful that the Federal Reserve’s interest rate hikes are finally breaking the back of inflation despite the federal government’s fiscal profligacy since the beginning of 2021. However, interest rates are still on their way up, consumers are borrowing more, gas prices are on the rise again, and the housing market is stalling out, with very real prospects of modest to moderate house price declines in at least certain pockets of the country. None of these trends bode well for consumer sentiment or small business optimism. But there’s still a chance that the Federal Reserve can manage to thread the needle, and divided government in Washington, D.C., means that more blowout inflationary spending packages are less likely. It’s certainly something worth crossing our fingers about.

Federal Lawmakers to Consider (Longshot) Income Tax Repeal Bill

Posted on by Patrick Ishmael

It’s tax season—that magical time of the year when we revisit our past year of income and find out whether we owe the government more money, or whether we overpaid and are owed a refund. Fun times. But if some members of the U.S. House of Representatives have their way, your income tax calculations will get way easier—because the income tax wouldn’t exist:

Republicans in the House of Representatives will vote on a bill that would abolish the Internal Revenue Service (IRS), eliminate the national income tax and replace it with a national consumption tax.

Fox News Digital has learned that the House will be voting on Georgia Republican Rep. Buddy Carter’s reintroduced Fair Tax Act that aims to reel in the IRS and remove the national income tax, as well as other taxes, and replace them with a single consumption tax.

The vote on the bill was made as part of the deal between House Speaker Kevin McCarthy, R-Calif., and members of the House Freedom Caucus and was pushed forward in his quest for the gavel last week.

Am I saying there’s a chance?! No, not really. The Senate and the president will almost certainly reject abolishing the income tax, and it’s not entirely clear that even the House has the votes to pass it through the chamber. Then there’s the sticky issue of repealing the 16th Amendment, which enabled the national income tax; if this law were to pass, you’d need to repeal the amendment so that we won’t someday end up with both a sales tax and a renewed income tax! Details, details.

But is a national move away from the income tax the right idea? Undoubtedly. Income taxes are destructive to growth at all levels of government, and as Institute analysts press for the elimination of Missouri’s income taxes, our federal counterparts should consider similar tax reductions and reform. Whether this latest effort is the best approach or even has a snowball’s chance of success remains to be seen, but I’m glad the conversation is at least being had. It’s overdue.

Education, Health Care, and $1,000 in Bitcoin

Posted on by Elias Tsapelas

David Stokes, Elias Tsapelas, and Patrick Ishmael join Zach Lawhorn to discuss which bills are moving in Jefferson City, a recent court decision on the City of St. Louis’ earnings tax, and the impeachment of the mayor of Cool Valley, Missouri.

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Produced by Show-Me Opportunity

The Right Way to Expand Broadband

Posted on by David Stokes

In his state of the state address, Governor Parson touted broadband expansion in Missouri and proposed spending significantly more money to go further. From the speech:

Last year, we made one of the largest investments in broadband expansion across our state. Thanks to our efforts, nearly 70,000 under-served homes and businesses across our state Now have broadband. But we know we can’t stop now. That is why we are investing an additional $250 million dollars to do even more. If we can put electricity in every home, we can do the same with broadband today. We are not done until every home, every school, every business, and every farm has access to quality internet.

Most Missourians have access to high-speed internet. For those who don’t—who are primarily in very rural areas—the lack of internet can indeed be an issue. Using federal stimulus funds intended for broadband expansion in Missouri to address that problem is fine with me, but it needs to be done the right way.

What is the right way? It’s to focus on the small number of Missourians who truly have little to no internet access. What is the wrong way to address it? The wrong way is to allow the money to be used by cities and towns to create their own municipal internet companies that will compete with the private sector in communities that the private sector is already serving, like in Marshall, Missouri.

Government-owned networks are subsidized by taxpayers by definition and they have often been a failure when tried around the country. Kentucky is the poster child for this at the state level. Local government in Missouri should not be in the broadband business except as a provider of last resort. Local government is poorly suited to providing services in a rapidly changing, highly technical field like broadband and internet services. For most of Missouri, the private sector has been providing perfectly fine internet services for years. Having cities or counties create their own, taxpayer-subsidized, tax-exempt internet companies will easily be a net negative throughout Missouri.

Get it, “net negative?”

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