Earnings Tax Study

jefferson · PostMar 08, 2006#12006-03-08T15:24+00:00

A new study just released concludes the earnings tax causes companies to relocate to the suburbs or avoid the city all together, while also slowing wage growth.

Earnings tax hurts city, study says

By Eric Heisler

ST. LOUIS POST-DISPATCH

03/07/2006

St. Louis' earnings tax helped precipitate the city's economic decay, says a new Missouri think tank that will begin pushing today for the tax to be shelved.

"We're not saying the earnings tax is the only cause, but we are saying it's a major cause" of St. Louis' decline, said Rex Sinquefield, president of the Show-Me Institute, which will release a report from a University of Missouri economist, backing up its claims.

Professor Joseph H. Haslag links earnings taxes to slower growth and lower incomes in U.S. cities that levy such taxes. He theorizes that employers have left or avoided some older cities to evade earnings taxes.

full article here

well, duh...

debaliviere · PostMar 08, 2006#22006-03-08T15:56+00:00

Are they planning on proposing alternatives to the earnings tax?

jefferson · PostMar 08, 2006#32006-03-08T16:01+00:00

I don't know, good question. From the article, it looks like a few cities have worse ones than St. Louis:

Here's how St. Louis' earnings tax compares with some other U.S. cities:

Indianapolis 0.7%

Kansas City 1%

St. Louis 1%

Cincinnati 2.1%

Detroit 2.75%

New York 3.65%

Philadelphia 4.54%

It says Philadelphia is planning to replace at least part of its tax with revenue from casinos.

mill204 · PostMar 08, 2006#42006-03-08T22:47+00:00

I found some relevant information to this topic from the Stl Post-Dispatch (link). The article is an interview with Darlene Green, the St. Louis Comptroller dated 1/20/2006. An excerpt...

There's been some talk that if St. Louis were to reduce that tax or to suspend it for a year or two, more employers might move into St. Louis. Is that realistic?

It's not. Thirty percent of our budget goes to public safety. That just happens to be a match there. And you can just imagine all your police, all your fire. ... You wouldn't want to jeopardize those services.

Why is the city so dependent on the earnings tax?

In most cities' budgets, when you talk about 30 percent of the budget, 40 percent of the budget, what makes it up is usually their property tax. Unfortunately for St. Louis, we don't have the property tax at that level. Our property tax brings in roughly 12 percent (of revenue).

Will that proportion increase?

That is the hope. We have $371 million in assessed value in the city that is abated. That will come back on the tax rolls over time.

jefferson · PostMar 08, 2006#52006-03-08T23:23+00:00

With city residential property doing much better in the last few years, you would think property taxes could start to account for a larger portion of the city's revenues, and that the earnings tax could be phased out. It's extremely tough to get rid of a tax once it's in place. As the article points out, the City (and central cities in general) need to realize their not in the dominant position to attract business like they were immediately following WWII, when most of these earnings taxes were put in place. As you can see above, Philadelphia is looking to scale back their earnings tax; I would suggest that St. Louis look at doing the same in order to remain competitive.

jcity · PostMar 09, 2006#62006-03-09T04:17+00:00

Detroit, Philadelphia, St. Louis... How interesting these are all cities that have declined over the last 50 years. Only New York, which was so huge, powerful, etc. was able to withstand the negative effects of additional taxing. People say "It's only 1%", but when I hear of businesses REFUSING to even consider the city, it's often the EARNINGS TAX that's brought up.. Less taxes on business = MORE BUSINESS. Do people really disagree with this idea?

drdrew · PostMar 09, 2006#72006-03-09T04:45+00:00

Yes. It's a balance that has to be struck. High taxes are opressive and stifle business, but if taxes are low or nonexistant, government loses the resources to make this a place that is attractive to businesses and residents. The taxes are simply the fee that business pays to government so the government can take care of the infrastructure and services that business shouldn't be bothered with. You can never say that it is always better for business to reduce taxes, or to raise them for that matter. You just have to look at the situation.

doug · PostMar 09, 2006#82006-03-09T04:47+00:00

Instead of removing the tax, cut it in half.

conurbation · PostMar 09, 2006#92006-03-09T05:23+00:00

If you don't remove it entirely it will serve no purpose. One way to make up some of the revenue would be to actually have City residents pay for their own trash and water services. Why should nonresidents subsidize these services? Anybody know how much of the budget goes towards those subsidies?

MattnSTL · PostMar 09, 2006#102006-03-09T05:25+00:00

^But city residents do get a water bill. It's one flat fee based on certain factors and no meter, but there is definately a bill.

jefferson · PostMar 09, 2006#112006-03-09T05:34+00:00

DrDrew wrote: You can never say that it is always better for business to reduce taxes, or to raise them for that matter. You just have to look at the situation.

True, but the point is having a tax labeled an "earnings" tax. Obviously all cities have to have ways to bring in the revenue, but Philidelphia's being wise enough to scale theirs back and replace it with revenue from casinos. St. Louis should get rid of this tax and replace it with revenue from somewhere else. I actually favor phasing it out over a period of years, maybe down to 0.75% for few years, 0.5% for a few, then just abolish it completely. According to the interview above, the city receives 30% of its revenue from the earnings tax, I think it needs to be weaned off slowly. Increased revenue from the City's resurgent residential market could help make up the difference.

It's ironic to say it this way, but I don't think the City can "afford" the earnings tax any longer.

brickandmortar · PostMar 09, 2006#122006-03-09T05:45+00:00

Property owners in the City pay for trash, sewer and water. Most residences don't have meters and get charged a flat rate. I believe water is priced on the length of property that fronts the street. I think it's amazing how much my friends in St. Louis County pay for water considering we have a couple of the largest rivers in the world flowing by. For example, I know my previous landlord paid around $100 for three months of water for a two family flat.

As far as earnings tax, I don't care. 1% isn't that much for me and if it wasn't collected the City would be doing a lot worse. Nearly a third of the City budget is funded by the earnings tax and unless there was another means to fill the hole if the tax was cut, I'm against getting rid of it.

mattonarsenal · PostMar 09, 2006#132006-03-09T05:53+00:00

From the article:

The report also compares the 23 U.S. cities with earnings taxes to other American cities. One finding: Having a 1 percent earnings tax caused a city's per capita income to drop 5 percent, relative to the surrounding metropolitan area.

I question the methodology. I bet the 23 cities are all older industrial cities that would have declined with or without the tax.

We read a whole book in a class at SLU about the urban dilemma of declining tax bases. Simply - people and businesses leave, tax revenue goes down, services go down, more people and businesses leave OR taxes go up and more people and businesses leave. Look around the St. Louis area the worst municipalities have the highest taxes - not because they want to but they are caught in a vicious cycle.

The book was very heavy on numbers and the cities that were able to cope the best were the cities that were able to charge an earnings tax.

One of the conclusions we came to was that St. Louis would have been up s**t creek without the earnings tax.

Also...

The Show-Me Institute is a non-partisan group whose work focuses on "free markets and individual liberty."

This group definetly has an agenda, and its not necessarily and urban one.

jefferson · PostMar 09, 2006#142006-03-09T12:39+00:00

MattonArsenal wrote:One of the conclusions we came to was that St. Louis would have been up s**t creek without the earnings tax.

This may have been true, and cities like St. Louis could afford a tax like this when everyone lived in the suburbs and worked downtown. But companies have too many choices about where to locate today, and an extra 1% tax is a turnoff to many. I think cities like St. Louis can make it up with increased property tax receipts from their reviving real estate markets and spread the rest out over other industries like entertainment (casinos/pro sports events). I think phasing it out should be seriously considered.

I agree any group who says it focuses on "free markets and indivividual liberty" sounds like its critical of government and taxes to begin with, but that doesn't necessarily mean they came to the wrong conclusion.

buckethead · PostMar 09, 2006#152006-03-09T16:46+00:00

The reality of the tax situation is that people ARE choosing to NOT live in or move their business to the city because of the city tax.

debaliviere · PostMar 09, 2006#162006-03-09T16:48+00:00

Does anyone think that the psychological effect of reducing the earnings tax from 1% to 0.5% would be enough to convince more firms to locate in the city?

buckethead · PostMar 09, 2006#172006-03-09T16:56+00:00

from mayorslay.com today-

Thursday, March 9, 2006

Earnings Tax

I agree with the conclusion that the City?s earnings tax, a one percent local tax levied on those who live or work in the City, is a disincentive to some residents and businesses.

I favor eliminating it. Frankly, almost everyone does.

St. Louis collects the earnings tax to recognize two important realities:

(1) a City with a small area, without the current ability to annex its neighbors, cannot pay for its public safety costs and infrastructure by relying on property and sales taxes; and

(2) the historic segregation of the poor, young, and old in the City places extraordinary responsibilities ? and burdens ? on the government.

Expand the City limits and tax base to ? say ? 270, and the need for the earnings tax would disappear. Conversely, spread the costs of social services evenly throughout the region, and the need of the earnings tax would disappear.

Barring these commonsense, but unlikely, events, I am working with other City officials to re-examine every current and potential source of revenue. Our first commitment is to maintain or improve City services by continuing our unprecedented renaissance.

At this point, I can?t tell you that the earnings tax will or will not survive our scrutiny.

doug · PostMar 09, 2006#182006-03-09T17:23+00:00

YES EXPAND THE CITY LIMITS, PROBLEM SOLVED!

buckethead · PostMar 09, 2006#192006-03-09T17:50+00:00

stlpcsolutions wrote:YES EXPAND THE CITY LIMITS, PROBLEM SOLVED!

Well, since that's not going to happen there should probably be a backup plan.

jefferson · PostMar 09, 2006#202006-03-09T17:51+00:00

DeB, I think reducing it to 0.5% would help, but the psychological effect of an earnings tax is still there. I think slowly phasing it out would be the best option, allowing the differences to be made up by tax revenue from the city's increasing success with high-end residential properties. Then you start looking at entertainment; if St. Louis could land an NBA franchise, or any future casino revenue, or start landing some bigger conventions, it would help as well. The City is getting revenue and facing competition from different places than it was 50 years ago, tax policy needs to change with the times.

jmedwick · PostMar 09, 2006#212006-03-09T19:17+00:00

Well, I really doubt that simply reducing it from 1% to .5% would change the outcome that people are being taxed and dislike it.

What I think is an intersting twist is that clearly the city needs to have the tax revenue. With its small boarder and concentration of poverty, the earnings tax is the city's way of getting people who use city services (like infastructure) but don't live in the city to pay their fair portion. So on some level the earnings tax makes sense.

Yet, on the practical level it does not, as it discourages some residents and job from moving into the city. I am all for droping the tax if the city can find a way to live without it. But I think there is an opertunity to use the tax in a more visible manor to improve the quality of city living for those who live in the city and for those who stay from 9-5.

My strange soultion. Even if the city finds a way to reduce its dependence on the earnings tax, it should not be eliminated. Since the purpose of the tax is to pay for service provision, lets see the city funnell some of the 130 million a year it collects directly into improving the city's transportation. This could take the form of light rail, streetcars, fixing pot holes, sidewalks, streetscapes, you get the idea. Imagine 130 million a year going to a full build of the north and southside lines? or a street car down grand or to SOulard... bike trails... Chouteau's lake and greenway? new city parks? full downtown street scaping?

The tax is visible but what it is used for is invisible. Like it or not, people have the preception that the money is used to fund red tape or failing social programs. Let fix that image. Lets use the earnings tax in a high profile manor to make the city more attractive to companies and people.

jefferson · PostMar 09, 2006#222006-03-09T21:44+00:00

great idea Jmed, 130 mil. a year would completely fund many of the things you're talking about, although I'd still be in favor of at least reducing it to 0.75 or 0.5% (65-100mil/year); once you start talking about less than 1%, I think people would be less uptight about it, and it?s still a sizable chunk of money. A small public relations campaign to let people know it's going to something sexy like streetscapes, streetcars, or Chouteau's Lake, as well as maybe relabeling it a "city improvement" or "transportation improvement" tax or something, would help people get over it too. I don't think people mind taxes like this if the result is something concrete that they can see and use. Personally, I?d be happy to pay it if that were the case.

threeonefour · PostMar 10, 2006#232006-03-10T06:49+00:00

JMedwick wrote:Well, I really doubt that simply reducing it from 1% to .5% would change the outcome that people are being taxed and dislike it.

What I think is an intersting twist is that clearly the city needs to have the tax revenue. With its small boarder and concentration of poverty, the earnings tax is the city's way of getting people who use city services (like infastructure) but don't live in the city to pay their fair portion. So on some level the earnings tax makes sense.

Yet, on the practical level it does not, as it discourages some residents and job from moving into the city. I am all for droping the tax if the city can find a way to live without it. But I think there is an opertunity to use the tax in a more visible manor to improve the quality of city living for those who live in the city and for those who stay from 9-5.

My strange soultion. Even if the city finds a way to reduce its dependence on the earnings tax, it should not be eliminated. Since the purpose of the tax is to pay for service provision, lets see the city funnell some of the 130 million a year it collects directly into improving the city's transportation. This could take the form of light rail, streetcars, fixing pot holes, sidewalks, streetscapes, you get the idea. Imagine 130 million a year going to a full build of the north and southside lines? or a street car down grand or to SOulard... bike trails... Chouteau's lake and greenway? new city parks? full downtown street scaping?

The tax is visible but what it is used for is invisible. Like it or not, people have the preception that the money is used to fund red tape or failing social programs. Let fix that image. Lets use the earnings tax in a high profile manor to make the city more attractive to companies and people.

I enjoy reading your posts and I like your ideas- including this one. It's a nice change of pace after reading the mindless blather on the Post-Dispatch blogs.

I think stl555 has a good point about using a portion of the tax for infrastructure improvements like those you suggested, while reducing the amount of the tax to 0.75% or 0.50%. I don't know if it's enough to shift public opinion, but the idea of reducing a tax amount AND using it for more "sexy" infrastructure improvements like light rail, streetcars, Chouteau's Pond, etc. would woo some skeptics at least.

And even at that reduced amount, there would be enough money to make some tangible progress toward those goals over a reasonable timeframe (especially when the possiblity of federal matching funds is taken into account for some of these improvements).

I think we'll see the day when the city is able to wean itself from its dependency on this particular tax, but like many of you I think public opinion would change if people could see tangible results that would have a direct impact on the quality of life for those that live, work, and play in the city.

jefferson · PostMar 10, 2006#242006-03-10T17:40+00:00

There seems no easy way out of city?s tax problem

By David Nicklaus

ST. LOUIS POST-DISPATCH

03/09/2006

St. Louis? earnings tax has long been a pet peeve of certain corporate executives. And a new study backs their hunch that it destroys jobs in the city.

Criticizing the tax is the easy part. Replacing the $130 million that it contributes to the city budget is far more difficult.

Former Mayor Clarence Harmon was the last politician to try. In 1997, he appointed a committee to study ways of replacing the tax, but the committee quickly said it couldn?t be done.

Francis Slay, the current mayor, is willing to go at least as far as his predecessor. He posted a statement Thursday on his Web log, saying he favors eliminating the earnings tax.

Read more

jmedwick · PostMar 10, 2006#252006-03-10T19:03+00:00

A very interesting article and I am glad that the city is taking this time to really look at its overall tax and fee structure. I can't imagine a better time to reconsider the tax system than when the city is already on the upswing. Maybe a good reworking will make the city more atractive to businesses. Or maybe it will step in for the single tax property tax system to encourage density.

One of the most underate parts of taxing is the importance of visiblity. This is one reason (the other being inelastic demand) for the sucess of the tax in rasing revenue. I have often thought that the higher the visible the tax you pay (like income taxes or property taxes vs. sales taxes) the more anger those taxes engender. The city earnings tax is highly visible and therefore is perhaps psychologicaly mover emphasized as a negative.

Hopfuly the city will look long and hard about weening itself from dependence on the tax, as once it doesn't need it then it can be the flexable revenue source for high visiblity projects i described above. And even better it can be lower. I mean .5% that raises 50 million can still build alot of track and pave alot of streets.