But what if that weren’t the case? What if the government only assessed the value of your land—and not any improvements you put on it?

That approach is called a land tax, or land value tax (LVT). By separating land from improvements and taxing them differently, governments can encourage property development. In downtown areas, often dotted with parking lots or undeveloped parcels, owners would be incentivized to build or to sell to someone who will.

This need not be an increased cost to owners. Taxes on improvements and land could be set at different rates (ideally zero for improvements) to ensure there is no net increase.

Show-Me writers have argued in favor of this approach for years:

• 2010: A Land Tax Is Preferable to the Earnings Tax
• 2010: Great Article About the Land Tax in the Kansas City Star
• 2012: Kansas City Should Expand, Not Remove, Land Taxes
• 2012: Kansas City Land Tax Should Be Expanded, Not Eliminated
• 2015: Land Taxes and Columbia
• 2026: It’s Time to Phase Out the Earnings Tax. Honestly, Nothing Else Has Worked . . .

The legislature in Kentucky, our neighbor to the east, is considering a bill that would, among other things, allow cities to separate property taxes into land and improvements.

In Missouri, such an effort likely would require a change to the Constitution. Currently, Article X, Section 3 states, “Taxes may be levied and collected for public purposes only, and shall be uniform upon the same class or subclass of subjects within the territorial limits of the authority levying the tax.” Later, Article X Section 4 defines real property as a single class with limited subclasses.

This could easily be changed, perhaps by inserting into Section 4, “Land and improvements upon land may be classified as separate subclasses of real property for purposes of taxation.”

Every city wants to spur development. The structure of our taxing system often serves as a disincentive to build. A land tax is a way for cities to encourage building and development without increasing taxes and without offering taxpayer subsidies. And it’s simple to understand and explain.

As Missouri and its cities look to encourage population growth and development, adopting a land value tax is a simple and straightforward way to do so.

The post Land Taxes: Will the Grass Be Greener in the Bluegrass State? appeared first on Show-Me Institute.

They say that the best time to plant a tree was 20 years ago, and the second-best time is now. That about sums up my opinion on the City of St. Louis’s one-percent earnings tax, the continuation of which is before St. Louis voters on the April ballot. The best time to start phasing out the earnings tax really was 20 years ago, and the second-best time is still now.

The 20 years in the saying is particularly appropriate in this case, as the Show-Me Institute released its first study on the earnings tax almost exactly 20 years ago. Professor Joseph Haslag, then at the University of Missouri, documented how the earnings tax reduces overall income and employment in the city by encouraging businesses and individuals to locate outside of the city. Additional studies conducted by Show-Me Institute analysts and others have found similar results regarding the harms of local income taxes generally.

Haslag didn’t just demonstrate the harm of the earnings tax; he also recommended a strategy to replace it in order to maintain necessary city services. Haslag suggested changing state laws to allow St. Louis to institute a land tax, which is simply a property tax on the value of the land only. Pittsburgh is one city that had beneficial results from implementing land taxation in the 1980s. Alas, while land taxes are popular with economists and fiscally beneficial, they are politically unpopular to say the least. Needless to say, land taxes have never been adopted in St. Louis (nor has state law been amended to allow them). But the harms of the earnings tax have continued to help drive St. Louis’s population and economy lower, and those fiscal harms were exacerbated during the pandemic.

An easier change (legally, if not politically) than a land tax would have been to start phasing out the earnings tax 20 years ago while increasing a combination of property and sales taxes over time to replace the lost revenues (while cutting spending where possible as well). Poor decision-making over the past two decades has made that already-difficult change almost impossible. Damaging special sales taxes such as community improvement district (CID) taxes are now ubiquitous throughout shopping areas in the city. Primarily used as a smokescreen for harmful corporate welfare, CIDs and other special sales taxes have driven sales tax rates sky high. While the sales taxes have gone up, commercial property values have plummeted. According to the St. Louis Business-Journal, downtown St. Louis office buildings have lost 19 percent of their assessed value since 2019, and even more if you go back further. The largest office building downtown, the AT&T building at 909 Chestnut, paid $5.5 million in property taxes in 2009. It paid just $200,000 in 2024. While that is the most extreme example, similar examples can be found throughout downtown.

The economic situation in the city was already bad, and the tornado that hit in May made it even worse. It was the type of disaster that could make people consider radical changes, and perhaps the land tax is the type of radical change the city needs. (For the record, the Show-Me Institute’s offices were destroyed in the tornado, and while we’re a nonprofit, our office building is subject to property taxes.)

As large parts of the Central West End and the Northside are still recovering from the tornado, St. Louis city government has commendably allowed homeowners with damaged homes to reduce their tax payments, but the long-term impacts on city tax revenues may be significant. The population of New Orleans still hasn’t recovered from Hurricane Katrina and, while the damage to St. Louis was not that severe, the risk is the same.

I suggest it is time to change state law to allow for a land tax, including on land owned by larger “nonprofits” like Barnes Hospital. The land tax could be imposed on the value of the land throughout St. Louis at a level that would gradually increase to make up for revenue lost as the earnings tax is phased out over a period of 10 years (or more). (Other changes would be necessary, including ending the tax subsidies the city gives out.) What makes land taxation so beneficial is that as homeowners and businesses rebuild their damaged property, they aren’t hit with higher taxes for the home or building. The tax is set to the land, which can’t be altered, rather than the building. So, return to the city, rebuild your home or business, make it even larger—do whatever you want—and you won’t be punished with higher taxes.

Pittsburgh in the 1970s was experiencing economic difficulties just as St. Louis is now. Land taxation helped spur investment in Pittsburgh, and it could have the same effect on St. Louis. The city has been hemorrhaging population, jobs, and wealth for decades. Honestly, at this point in its history, what does St. Louis have to lose?

The post It’s Time to Phase Out the Earnings Tax. Honestly, Nothing Else Has Worked . . . appeared first on Show-Me Institute.

The new state law creates three types of counties for property taxes:

1)        Five percent counties: These counties are made up primarily of Missouri’s smaller, rural counties. In these counties, upon local voter approval, a homeowner’s property tax liability can go up by no more than the lower of five percent or the national inflation rate during reassessment, unless voters approve tax rate increases or the homeowner improves their property. There are 75 counties in this category.

2)         Zero percent counties: These counties are made up primarily of mid-sized and suburban Missouri counties. In these counties, upon local voter approval, a homeowner’s property tax liability cannot increase at all during reassessment unless voters approve tax rate increases or the homeowner improves their property. There are 22 different listings for counties in this category.

3)         “Unaffected” counties (my term, not language from the bill): These counties are primarily Missouri’s large urban counties or counties in central Missouri, including the Lake of the Ozarks area. These 17 counties and the City of St. Louis are not included in this legislation and their tax and reassessment system will continue unchanged. It is worth noting that Jackson County, which has had by far the worst administration of assessment and tax collection in recent years of any Missouri county, is unaffected.

There are many reasons why these substantial changes to the system are bad, but the first one is that, in general, property taxes are the least harmful tax for economic growth. So, if you want to create a tax system that encourages greater economic opportunity for all Missourians, the property tax is the last tax you should focus on. Furthermore, these changes will almost certainly lead to greater governmental reliance on income taxes (mostly through the state’s foundation formula for school funding), which is exactly the wrong way to go about this.

Here is a chart I like to share. It includes four major economic studies of tax policy. The conclusions are obvious. Property taxes, in general, are the least harmful for economic growth and income taxes are the most harmful. Why Missouri would be severely limiting property taxes in many counties in a manner that will increase dependency on income taxes is beyond me. It may make for good politics. It is not good tax or economic policy.

Not all property taxes are the same, of course. Property taxes focused on the value of the land are the best, and we need to expand that (i.e., land taxation) in Missouri. Property taxes focused on homes and buildings are next best. Missouri makes heavy use of personal property taxes on cars, boats, etc., and those taxes on mobile assets are less beneficial and should be phased out. Finally, personal property taxes on business and farm equipment are harmful, and should be ended. (The final category makes up a very small part of the property tax base, so ending it would not be difficult.)

Future posts will discuss the constitutional problems with this bill, the harmful effects of favoring current homeowners over future homeowners, a discussion of Charles Tiebout and his theories, and more. For more information, please see my testimony from the special session, these policy studies on this issue of property taxes and assessments, and related commentaries.

The post Why the New Property Tax Rules in Missouri Are Bad, Part 1 appeared first on Show-Me Institute.

Listen on Apple Podcasts 

Listen on SoundCloud

Produced by Show-Me Opportunity

The post A New Way to Tax, Redevelopment Retry, and Close the Gap appeared first on Show-Me Institute.

                The problem with the city’s property tax collections is not the rate (around $7.5850 per $100 assessed value), but the fact that most of Saint Louis City is not actually paying the posted property tax rate. As this and future blog posts will detail, most of the city’s land area and much of the city’s properties either enjoy special property tax breaks or are exempt from property tax altogether.

                One type of entity that pays little or no property tax is government. This includes city, county, state, and federal government, but does not end there. In Saint Louis City, many properties are owned by other quasi-governmental bodies, including: the Bi-State Development Agency, the Metropolitan St. Louis Sewer District, Great River Greenways, the Land Reutilization Authority (LRA), the Saint Louis Convention and Visitors Commission (CVC), the Saint Louis Housing Authority, the St Louis Municipal Finance Corporation, and others. Altogether, government-owned properties make up almost 30% of all properties (by area) in the city, as the map below illustrates:

Large city parks are one reason governments own so much of Saint Louis City. But even if we take parks out of the equation, governments still own more than 23% of the city by land area and 12% of land by value. For instance, the city’s land bank, the LRA, owns more than 11,000 parcels of land, including the land on which Busch Stadium stands. Busch Stadium’s public connection is not an outlier. Many large entertainment venues in the city, including the Scott Trade Center and the Edward Jones Dome, are on public land. Different government organizations own housing complexes, office buildings, theatres, parking lots, and wharfs. Setting aside the question of whether or not all of this government ownership is justified, little if any property tax money can come from these parcels.

Check back for our next post on this issue, which will explore the prevalence of tax-exempt properties in Saint Louis City.  

The post Saint Louis Property Taxes, Part 1: This Land is Their Land appeared first on Show-Me Institute.

Boone County could cut its property tax rate. This not only would help Kraft, but all the other property owners in the county as well.

Even better, Boone County could shift away from property taxes and toward a land value tax. Land value taxes are taxes levied against the unimproved value of land and not the buildings, personal property, or other improvements on that land. A broad spectrum of economists support the land value tax versus other types of taxes because it is non-distortionary (i.e., it doesn’t alter behavior, unlike income and sales taxes).

If Boone County imposed a land value tax instead of a property tax, companies like Kraft would not face increased taxes after improving their plant. Unfortunately, only Kansas City is allowed to levy land value tax. There would need to be a change to the State Constitution in order for Boone County to levy a land tax.

Boone County (like other counties and cities) faces a difficult dilemma. It either can erode its property tax base with abatements to select businesses or risk having those companies being lured away to locations that offer subsidies. A land value tax won’t completely eliminate that problem (a jurisdiction could offer to not tax the land at all or provide that business some type of tax rebate), but it will make it more financially viable for businesses to expand facilities already present. If the State Constitution were changed, counties would have another policy option available to retain businesses other than having to resort to tax abatement.

The post Land Taxes and Columbia appeared first on Show-Me Institute.

Last week, the St. Louis Post-Dispatch reported that Saint Louis bed & breakfast owners are upset over the city assessor’s decision to assess their property (or at least the part used as B&Bs) as commercial properties. I can understand why these owners would be upset. According to the way properties are assessed for property tax purposes, if B&Bs were even partially assessed as commercial properties, the owners’ property tax bills would go up substantially.

I sympathize with any business owner that is facing a higher tax bill. However, I do not oppose this change. Saint Louis is doing the right thing here. If a property is engaged in commercial activity, the city should assess it as a commercial property. The situation is trickier with people renting rooms through airbnb. These lodgings are not necessarily full-time establishments, and so some mechanism needs to be in place to make sure they don’t get a tax advantage compared to traditional B&Bs.

Having a large property tax base is important. It’s especially important in Saint Louis because it can serve as a way to reduce (or even eliminate) the earnings tax. The Show-Me Institute released a paper arguing that the earnings tax could be replaced by a two-tier property tax (this differs from a traditional property tax in that the two-tier approach taxes the land more heavily than any improvements on the land). Even if the city sticks with a traditional property tax system, a wider base can generate more revenue to offset any reductions in the earnings tax.

Paying more in taxes is never fun, but low taxes for some shouldn’t come at the cost of a hollowed-out property tax base.

The post Shocking Support for Taxing Bed and Breakfasts appeared first on Show-Me Institute.

Here’s the kicker, though. What voters eliminated, strongly urged on by city officials who proposed it, were good taxes. What is a good tax? It is a tax that raises necessary money, is easy to collect and enforce, and does this without affecting normal economic behavior (“sin” taxes are an obvious exception to the last part.) Economists of all stripes are nearly unanimous that taxes based on land values are the premier way to fund government (especially local governments). So, what did Kansas City do as the only city in Missouri authorized to impose a land tax?

They got rid of it.

Here is the silliest part of the press conference statement:

[…] said elimination of the three small property taxes also makes the city treasurer’s tax collections easier and more efficient to administer because the city doesn’t have to calculate the small levies and each owner’s boulevard front footage.

But calculating the “small levy” is no more complicated than adding a column onto a spreadsheet. Nothing more. And the front footage totals were calculated years ago and rarely change. (Although this post is more about lamenting the loss of the land tax than the frontage tax.)

Missouri requires a reassessment system every two years for a number of tax purposes. Doing a land tax as part of that is, in fact, extremely simple.

For complicated reasons I don’t need to explain here (and don’t even fully know because we have never been able to find the court file that upheld the land tax decades ago), Kansas City is unlikely to be able to reimpose the land tax now. That is unfortunate. Raising the land tax instead of adding a new sales tax would have been the better move for long-term growth in Kansas City.

The post It’s Not A Celebration When You Engage In Poor Tax Policy appeared first on Show-Me Institute.

At least the City of Saint Louis attempts to value its land (as does Saint Louis County). Many Missouri counties do not make any distinction between the land and the building or home on a piece of property. They should. Land and improvements are separate assets with different values and should be measured independently. Valuing the land and the improvement separately makes for both better assessments and a more fair and consistent tax system.

There is often a disconnect between good economics and smart politics. That is a prime reason why land taxes — property taxes on the value of land only — are so rare in the United States. Economists almost universally support land taxes because land is immobile and non-distortionary. You cannot move it and somebody is always going to own it. Furthermore, if you tax the land and not the improvement, you encourage people to invest in their property. If you add on to your home and expand your business, you are not punished with higher taxes under a land tax.

But land taxes made for bad politics. Missouri, like most states, established its tax system when it was (and, in our case, still is) an agrarian state. Guess who dislikes taxing land instead of buildings or homes? Farmers, not surprisingly. But now beneficiaries include urban condo owners who are often not assessed anything for the very valuable land they sit upon. This can be particularly troublesome when combined with tax subsidies. Some subsidy programs only apply to the building and not the land. Cities or counties that utilize those programs but do not assess the land separately risk turning what is supposed to be a partial abatement into a full abatement. That could reduce the tax base even more than intended, with corresponding higher marginal taxes on everyone else.

Land taxation has worked elsewhere, most notably in Pittsburgh. Unfortunately, the only city in Missouri that had it, Kansas City, recently eliminated it. Lawyers and politicians, not economists, recommended that terrible decision. Nevertheless, Missouri can obtain some of the benefits of land taxation simply by requiring counties to judge the value of the land in assessments. Having more taxable value in the land will encourage investment in your property, because the value of the land will not change if you, for example, build an addition.
Missouri needs greater consistency in appraisals and assessments. All county assessors should be required to break out the land and improvement values. Furthermore, they should be required to accurately reflect the difference, as opposed to haphazardly guessing. We should not have situations where one valuable urban parcel is set at $0, and another a short distance away is set at $79,800. If we are going to rely on a system of property taxes to fund local governments, we need to make it a more accurate system.

David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post Missouri Urban Assessments Need Greater Consistency appeared first on Show-Me Institute.

Call it “the smoker’s dilemma”: Everyone knows that smoking kills, but a habitual smoker may be convinced that he needs the steadying effect of cigarettes. When voters in Saint Louis go to the polls on April 5, they will confront a similar dilemma in deciding whether to maintain the current earnings tax.

Show-Me Institute research has established that the 1-percent earnings tax hurts economic growth in our state’s largest cities. But many officials think that their budgets will collapse without the revenues they receive from it.

If voters decide to rescind the earnings tax, would Saint Louis city government collapse? No, but there is no magic bullet for replacing the revenue it generates. If the earnings tax is eliminated, it would be phased out over a 10-year period. During that time, Saint Louis could adjust to the new realities through a combination of changes.

The city of St. Louis could follow the county’s example by selling its municipal water utility to a private company. That could be worth hundreds of millions of dollars. It would give the city a quick infusion of money that would more than offset the initial hit without the earnings tax.

There are many opportunities for Saint Louis to consolidate services. During the 10-year phase out, city officials can work to re-enter Saint Louis County. Consolidating certain government functions along with a county takeover of some things like highways and bridges could save the city millions of dollars.

All taxes are not equal. As the earnings tax is phased out, it could be replaced by less harmful taxes. For years, Kansas City has charged a land tax to fund parts of its transportation system. Land taxes are property taxes based only on the value of the land rather than the building. Many economists think they are among the least harmful methods of taxation. This type of tax system could be adopted in Saint Louis.

All budgets can be cut. Saint Louis should embrace this opportunity to cut unnecessary services. For instance, the city already has both the Police and Sheriff’s Departments, 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 more than a million dollars a year.

Perhaps the most important thing that Saint Louis can do is eliminate tax subsidies. As of 2009, Saint Louis had $683 million in tax-abated property. If the city stopped issuing abatements, a large percentage of that property would return to the tax rolls during the following 10 years.

Quitting smoking may be hard, but doing so is in any smoker’s long-term interest. A 10-year phase-out period allows plenty of time for Saint Louis to kick its habit and make the changes needed to continue providing necessary services without relying on the earnings tax.

The post Saint Louis Earnings Tax Is Bad for Our Health – But Do We Care? appeared first on Show-Me Institute.

Almost every economist sees the advantage of land taxes. The general welfare calls for taxes that do the least harm in the form of affecting the quantities of goods or services that people ultimately care about. Nearly all economists agree that a land tax is one of those policies in which taxing land affects the value of the parcel, but does not affect the quantity of land. Henry George, Milton Friedman, Paul Samuelson, and Joseph Stiglitz all recognize the desirable properties associated with land taxation.

Those four famous economists come from very different angles, if labeled politically (which they would probably object to, but I digress). The Show-Me Institute has conducted analysis on the benefits of land taxation. (Please see pages 5-11 of Haslag’s study on how Kansas City can replace the E-tax.) It is poor public policy to get rid of an effective tax in favor of expanding other taxes. Why doesn’t Kansas City heed the lessons of the past and reduce more harmful taxes, like the earnings tax, in favor of increased land taxes? There is a wide body of economic research supporting that position.

The post Kansas City Should Expand, Not Remove, Land Taxes appeared first on Show-Me Institute.

The land tax’s fundamental premise is straightforward. The tax collected is the product of the rate and some measure of the land. Any improvements to the land are not subject to the tax. With such a tax in place, the price of the land will change. Indeed, the price is simply the present value of the streams of future income that the land generates. Unlike most goods, the price change accompanying the tax implementation does not affect the quantity of land available. In other words, the supply of land is inelastic with respect to price. Under this rule, landowners seek the land’s use with the highest return. That is a good thing.

In addition, land taxation is easy to implement. The Kansas City version is based on assessed valuations of land already computed by various counties as part of the comprehensive property tax system. So, take the existing assessments, set the rate, compute the tax, and collect.

Kansas City is the only local government authorized to collect a land tax in Missouri. One would assume that when you are the only city in Missouri authorized to enact a tax that economists almost universally recommend, you would want to expand it and remove other, more harmful taxes, right?

Wrong. The Citizens’ Commission on Municipal Revenue (CCMR) recently recommended eliminating the land tax and replacing it with higher sales taxes. Whatever the sales tax is applied to will undoubtedly change the prices and quantities of goods and services. (As an aside, the proposed swap is not revenue neutral. The final result would be a substantial tax increase.) The CCRM, a group consisting mostly of lawyers and former government employees, did not explain why welfare would be higher under the sales tax. Rather, they pointed to the small monies collected from the land tax, which can be addressed by raising it instead of the sales tax. Other factors rendering the land tax undesirable, in their view, are its low growth rate over time, and the fact that it is confusing. They provide no analysis as to why the growth rate is low, and we frankly disagree that it is confusing. It is a tax on the value of land. What is confusing about that?

Let us be clear. The sales tax replacement will be added onto an already comparatively high local sales tax. Thus, prices for goods and services subject to the sales tax will rise and the quantity purchased within the taxing jurisdiction will fall. Consumers will find lower-priced items in neighboring towns, including those across the state line, with lower sales tax rates. The point is that every other taxable item has a higher elasticity and therefore, will cause greater welfare harm to people. If Kansas City seeks to minimize the harm, it would raise the land tax, not eliminate it.

If eliminated, Kansas City is unlikely to be able to re-implement the land tax due to changes in state law since it was first instituted. Kansas City has a tax that other cities in Missouri should envy, and economists would almost universally encourage. And this is what voters are being asked to eliminate in August. We hope Kansas City voters think twice before replacing the least harmful taxes like the land tax with less desirable substitutes.

Joseph Haslag is chief economist and David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post Kansas City Land Tax Should Be Expanded, Not Eliminated appeared first on Show-Me Institute.

Also, is raising the sales tax the most efficient way to gain revenue for the city? Why would the city want to eliminate its land tax in the first place? My colleagues, Professor Joe Haslag and Policy Analyst David Stokes, have written about the benefits of land taxation for local governments. Kansas City is unique among local governments in Missouri because it is able to collect land taxes. There is widespread agreement among economists that land taxation causes a minimal amount of economic distortion, yet in its search for extra revenue, Kansas City looks to raise sales taxes.

When people vote on an issue, they should be equipped with as much information as possible. The situation in Kansas City is no different. Even though half a cent sales tax increase does not seem like a large amount, people should be aware that even innocuous decisions can carry with it unforeseen consequences.

The post Just Wait A Minute appeared first on Show-Me Institute.

A Kansas City citizens’ commission that the mayor appointed recently released a draft
report on changes to the city’s municipal revenue structure. Not surprisingly, this commission
that is stacked with former city and county employees avoids anything substantive or radical in
its report. When you load up a finance commission with lawyers — and do not put one
economist on it — this is what you are going to get. However, not all of the Citizens’
Commission on Municipal Revenue’s (CCMR) recommendations are bad. Indeed, there are
several good ones in the report.

Kansas City’s business and occupational license system is very complicated. The system
is unfair to businesses and city government alike. Collection costs are higher for this tax than
others because it is so complicated. The CCMR has decided to continue its work with a singular
focus on simplifying and improving the license system. It has identified the problem, and seems
serious about a solution. Kansas City would greatly benefit from these changes that would treat
businesses equally and require less work to administer.

Dedicated taxes with sunset provisions are good things. They let taxpayers know exactly
what they are voting on, and give taxpayers a chance to judge results. However, it is possible to
go too far with dedicated taxes, as Kansas City has done. For example, Kansas City previously,
and unnecessarily, chose to dedicate its entire 1 percent baseline sales tax to capital
improvements. The committee is right to suggest that Kansas City loosen the requirements for
that tax so that it can be used for more general purposes.

One of the major disappointments in the report is the refusal to take on Tax Increment
Financing (TIF). It is difficult to see how a commission tasked with reviewing municipal
revenues could overlook TIF beyond a meekly-worded warning that Kansas City carefully
evaluate future TIF projects. TIF has been abused in Kansas City and throughout Missouri. A
true analysis of municipal revenues would encourage its elimination, not gloss over it.

One of the most audacious suggestions was to tax income from non-residents earned
outside the city. Essentially, the city wants to tax the income of people who do not live in Kansas
City for work they did not do in Kansas City. To be fair, this was not included among the final
recommendations. The fact that the commission even considered ways to keep tax money it does
not have a moral or legal right to is disturbing.

One tax idea that has widespread agreement among economists is the benefit of land
taxation to fund local governments. Land taxation is fair, consistent, has very limited economic
distortion, encourages investment, and is easy to collect. Kansas City is the only local
government authorized to collect a land tax in Missouri. So, what does the CCMR want to do
with the single-best tax Kansas City enacts? Get rid of it, of course, and replace it with higher
sales taxes.

Kansas City has a tax that other cities in Missouri should envy, and economists would
almost universally encourage. And this is what the CCMR wants to eliminate. When you load up
a commission on taxation with lawyers and bureaucrats, this is what you are going to get.

The mayor wishes to enact the recommended changes by putting them on the ballot later
this year. He wants voters to approve higher sales and property taxes while removing certain
taxes. I hope the city council thinks twice before replacing effective taxes like the land tax with
higher and more harmful substitutes.

David Stokes is a policy analyst for the Show-Me Institute, which promotes market solutions for
Missouri public policy.

The post Kansas City Citizens’ Commission: One Step Forward, Two Steps Back? appeared first on Show-Me Institute.

Kansas City’s business and occupational license system is very complicated (p. 41-42). The Citizens’ Commission on Municipal Revenue (CCMR) has decided to continue its work with a singular focus on simplifying and improving the license system. It has identified the problem, and seems serious about a solution. Kansas City would greatly benefit from these changes that would treat businesses equally and require less work to administer.

Dedicated taxes with sunset provisions are good things. However, it is possible to go too far with dedicated taxes, and Kansas City has probably done so. For example, Kansas City previously, and unnecessarily, chose to dedicate its entire 1 percent baseline sales tax to capital improvements (p. 29-30). The committee is right to suggest that Kansas City loosen the requirements for that tax so that it can be used for more general purposes.

One of the major disappointments in the report is the refusal to take on Tax Increment Financing (TIF) (p. 18). It is difficult to see how a commission tasked with reviewing municipal revenues could overlook TIF beyond a meekly-worded warning that Kansas City carefully evaluate future TIF projects.

One of the most audacious suggestions was, to be fair, not included in the final recommendations.  The commission considered suggestions to end earnings tax refunds to non-residents for work out of the city (p. 26). Put another way, the city wants to tax the income of people who do not live in Kansas City for work they did not do in Kansas City.  The fact that the commission even considered ways to keep tax money it does not have a moral or legal right to is disturbing.

One tax idea that has widespread agreement among economists is the benefits of land taxation to fund local governments. Land taxation is fair, consistent, has very limited economic distortion, encourages investment, and is easy to collect. Kansas City is the only local government authorized to collect a land tax in Missouri. So, what does the CCMR want to do with the single-best tax that Kansas City enacts? Get rid of it, of course, and replace it with higher sales taxes (p. 36-37).

Kansas City has a tax that other cities in Missouri should envy and economists would almost universally encourage. And this is what the CCMR wants to eliminate.

The mayor wishes to enact the changes suggested in this report by putting it on the ballot later this year. I hope the city council thinks twice before replacing less harmful taxes like the land tax with broader, higher, and more damaging substitutes.

The post The Kansas City Citizen’s Commission On Municipal Revenue appeared first on Show-Me Institute.

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.

The post The Kansas City Earnings Tax Is Bad for Our Health – But Do We Care? appeared first on Show-Me Institute.

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.

The post The Saint Louis Earnings Tax Is Bad for Our Health – But Do We Care? appeared first on Show-Me Institute.

The post St. Louis and Pittsburgh, Lead and We Shall Follow appeared first on Show-Me Institute.

Apparently, though, Philadelphia is raising property taxes instead, and keeping intact the reduction in its (still very high) local income tax rate.

His real point, however, was deeper — and one with which I strongly disagree. He implied that if cities with an earnings tax are not getting rid of them, that is an indication that the tax is good or efficient. I only wish that governments acted rationally enough for that to be a plausible viewpoint. I could believe that cities keep such taxes in place out of efficiency considerations if I had even one ounce of faith in government, at any level, to get rid of a tax that was doing more harm than good, or whose original purpose had expired. You may recall that we just got rid of a telephone tax that had been instituted to fund the Spanish-American War.

I do remember that, by the mid-1990s, the federal government got rid of a luxury-item tax it had imposed in the early 1990s because it was clearly harming manufacturers of high-end goods. So, I guess there is one recent example. In the mid-’80s in Missouri, there were several examples of changes in corporate taxes, so that instead of being based on inventory or licensing rules, they became based on assessments and income taxes. (This is when the city instituted its half-percent payroll tax. I won’t say that the payroll tax is unconstitutional, but I will say that the state Constitution clearly states that every local tax has to be authorized by state law, and there is no state law authorizing a payroll tax. Draw your own conclusions.)

Those examples, however, were revenue-neutral changes that resulted in higher revenue collections over time, so I don’t think they count. Let me know whether you can think of any other examples where the government realized a tax was not working and got rid of it. In particular, let me know whether you can find one in the city of St. Louis. I will gladly revise my opinion here if I get good counter-examples.

The official then brought up the tried-and-true line that county residents who work in the city would be free-riding on city taxpayers if they didn’t have to pay an earnings tax. I have also heard Professor Jack Strauss from SLU say the same thing. Usually, a free-rider argument would carry a lot of weight with someone like me, but in this case it is absurd for two reasons. First, what the heck is the point of paying a city business license if it does not allow you to hire employees to come work on your property? City business license fees can be substantial. Companies also pay commercial property tax rates, which are higher than residential rates. The official responded to me about commercial property taxes by saying that the city had abated so many business taxes that it could not depend on property taxes. I find this a prime example of being in a hole and continuing to dig, but also a great argument in favor of land taxation, for which abatements don’t apply in Missouri.

The second problem with the county free-rider argument is that I am absolutely certain that not one city official would apply it to city residents who work in the county. Unless I hear city officials arguing to raise taxes on city residents who work outside the city (where they must be free-riding, if we are to believe the arguments of earnings tax supporters), I won’t give that view any credit. For the record, I don’t think city residents who work in the county are free-riding at all, for the reasons mentioned above.

The post Taxes in Philly and My Talk With a City Official on the Earnings Tax appeared first on Show-Me Institute.

As if the article was not great enough, I also want to share the remarks of commentor number 3, “jayhawk6”, who said:

Good explanation for just how the land tax works. The spiteful aspect of property taxes […] is that a homeowner can be discouraged from improving his/her home because it will raise its value and thus the tax burden.

We thank both McClanahan and “jayhawk6” for the attention and focus on this important issue. McClanahan is absolutely right when he says that a land tax should be adopted as an eventual replacement for the current property tax system even if the earnings tax is maintained. (But it should NOT be maintained.) Although, as the article explains, this would entail amending the state constitution, counties in Missouri could move in that direction simply by applying more of the current value of property to the land, and less to the improvement. Then, as the property might be improved, the taxes would rise less because the portion determined by land value would hold steady.

The post Great Article About the Land Tax in the Kansas City Star appeared first on Show-Me Institute.