Thoughts on KCMO's e-Tax

On Tuesday, Kansas City voters will vote on whether or not to keep the city's 1% earnings tax.

If you've been watching the commercials from both sides, you may be unsure of where you stand on the issue. It's fine. It's understandable. Even economists are divided on the merits of city earnings taxes.

The city earnings tax was originally passed in 1963 -- with a 1/2 cent earnings tax.  The tax was increased to 1% in 1970 -- in the desire mostly to increase police officers and provide city-wide tax collection. The tax is applied to incomes of all people who live or work in Kansas City, MO.

If the vote passes on Tuesday, the city will have a 10 year phase out of the earnings tax.

The impact of the earnings tax is debatable.

Since 1970, Kansas City has lost 10% of its population, with 50,000 fewer people living in the city now than in 1970. The city has also seen virtually no job growth, while surrounding communities have seen significant growth.

Those in favor of the eTax note that there are a lot of reasons for Kansas City's lost population, and jobs. Certainly the city's failing school system, and high crime rates are a contributing factor to population loss and poor job growth. Also, most cities endured high levels of flight during the 70s that caused most to have some form of population loss.

However, some have been better at reversing that trend than others.

It is also worth noting that when you look at cities with an earnings tax, most are in a similar situation to Kansas City (and St. Louis) when it comes to struggling to revitalize their urban core. Here's a look at some cities and their city-wide income tax rate. For the purposes of comparison, I'm only using cities with a similar structure to that used in Kansas City and St. Louis, larger cities, and cities that aren't mostly surrounded by other cities without e-Taxes.

Birmingham, AL - 1% income tax rate.  Has also lost a huge amount of their population and jobs. And have a high level of poverty.

Wilmington, DE - has a 1.25% earnings tax rate - and a Household Income 40% lower than the rest of the state of Delaware.

Louisville, KY - 2.2% for Residents, 1.45% fro non residents. Also not the mecca of a developing city.

Baltimore, MD - 3.05% earnings tax. Has lost nearly 30% of its population in the past 40 years, and continues to suffer from very high poverty and unemployment rates.

Detroit, MI - Earnings tax of 2.5% for residents, 1.25% for non residents.

Most cities in Ohio have an earnings tax, but Cincinnati would be notable given its proximety to the state line.

St. Louis right now is among the least safe cities in the country, has lost population and jobs.

There are a few cities that have earnings taxes with some success -- Washington DC has a scaled tax (a higher percent charged to higher incomes), and New York City also has an earnings tax. The entire metro area of Portland has an eTax, which takes away the negative aspects as there are not surrounding areas to move to to avoid the tax.

When you look at this list of cities on the list, it really is the who's who of struggling cities. Cities like Minneapolis, Dallas, Salt Lake City, Charlotte, Atlanta, etc that are going through successful revitalizations of their urban core are not on the eTax list.

Supporters of the tax note that the tax is largely paid for by out-of-town people, and that the city budget is very dependent on the budget. They also say that large companies are likely to choose their location based on other tax incentives vs the eTax.

All are true.

However, it also seems that small companies, and independent workers, tend to choose living outside of KCMO. Realators, personal accountants, investment advisers, etc -- the types of people who are largely self-employed seem to really gravitate toward the Kansas side of the state line because they can mostly avoid paying the eTax -- meaning lost jobs in the city, and lost housing sales, and sales tax revenue.

There is little doubt that long term, keeping the eTax is bad for city business. Yes, it would be great if the foks on the Kansas Side of the state line would pay for regionaly amenities (things like the airport, sports stadiums (and yes, I'm fine with sharing some of this money with KCK for the speedway and LiveStrong stadium), Convention Center, zoo and some key museums, but passing a 1/8 cent sales tax across all 5 metro counties would be a better way to do this -- and would be more palatable for Johnson Countians if we were to get rid of the 1% eTax. However, can we make up the revenue in the short term as we phase out the tax?

I'm not sure.

So here's my thought. Keep the eTax for 5 more years. Over the next 5 years, work with JOCO/WYCO, Platte and Clay and see if we can get a 1/8 cent regional sales tax passed in each county -- that will go into effect contingent upon the loss of the KCMO eTax. Meanwhile, as other taxes come due for renewal, work to move them from being 100% forced allocations, to moving a fraction of those dollars into the general fund to give KCMO more budget flexibility during tough times.  The city also needs to rework its property tax codes and remove some of the significant red tape at city hall to make it easier for small business owners to start up new businesses.

Then, in 5 years, kill the eTax, so we can join other cities in revitalizing their cities.  The new mayor and city council have a lot of work to do between now and then.

 

Comments

[kcmeesha]

thank you for the thoughtful analysis and using logic instead of emotions. if someone made a commercial using your reasoning, I would find it hard to object to.

[mark]

Rereading this post after the vote... I agree that the next 5 years should be spent looking for alternatives to the eTax, but as for your plan I think I must be misreading it. Are you saying that counties in Kansas (counties that KCMO doesn't extend into) should be funneling sales tax dollars to KCMO? I don't think that is even possible, let alone probable. How would that work? And if it were possible, what incentives do those other counties have for implementing your plan?

[Brent]

Mark -- it can be done, and has before. About 13 years ago they passed a bi-state sales tax that put money toward revitalizing Union Station (the alternative was tearing it down). We tried one other time with the stadium renovations but a poor plan was voted down.

So it's not impossible...although maybe improbable. That said, I do think that many Johnson Countians understand the importance of a vibrant core to the city - the importance of having things like a major airport, a secondary airport (which are most commonly used for Fed Ex/UPS), a major convention center and sports teams (and yes, I'd be open to including the Speedway and LiveStrong stadium as part of the plan). I think that if you passed a sales tax (this was how the money was collected for Union Station) that only went into effect if the eTax was repealed, you would have some leverage to get it passed. This would essentially spread the tax burden away from those who already pay it to the others in the county...and would help insure that we kept these regional amenities. I think it would show a bit of "good faith" from KCMO that we haven't always deserved.

There may be other options out there, and surely a group of smart people could come up with some pretty good ideas -- I just fear that no one wants to even have the discussion or acknowledge that things are very flawed with the current system.