Payments in Lieu of Taxes as a Supplemental Revenue Source After the Earnings Tax Elimination

Proposition A, passed by Missouri voters last November, requires that Kansas City and Saint Louis allow citizens the opportunity to vote on the continuation of their local earnings taxes within six months of the measure’s passage. Those local votes are scheduled to occur on April 5. Voters may decide to maintain their earnings taxes at that time, or they may choose to sunset it over the coming 10 years. As they weigh their decision, it is important for officials to begin considering alternative methods by which their cities can raise revenues that will fund necessary services.

Not all forms of taxation have equal effects. The efficiency of a tax system depends on a variety of factors, including the economic distortions that a particular type of tax may cause, whether a tax is flat, progressive, or regressive, the ease of collection, the difficulty of enforcement, and more. If Saint Louis and Kansas City voters choose to vote out the earnings tax, they need to consider which combination of offsetting tax increases, tax base expansions, and budget cuts will best serve the people and businesses of their communities. A number of changes would likely be required to replace earnings tax revenues. One possible replacement for a portion of this revenue is payments in lieu of taxes (PILOTs) from nonprofit agencies that do not currently pay property taxes.