KC's eTax passes by large margin, but what are (or should be) next steps?

Yesterday, Kansas City voters voted to keep its earnings tax. Keeping the tax earned a whopping 78% of the nearly 74,000 votes cast (in what was a surprisingly high voter turnout given the one-issue on the ballot and potential voter fatigue after having 3 elections in the past 2 months).

The issue is slated to appear on the ballot again in 2016.

It seems that the consensus among folks at city hall is a sense of relief that it passed. Admittedly, it seems as if there couldn't have been a worse time for the city to lose the revenu from the eTax without any programs in place to replace that revenue -- and with budgets having already been slashed by $200 million a year because of the down economy.

But what's next for city leaders?

It seems that most in political circles seem to think the status quo on the tax is A-OK. Others have gone so far as to want to petition Jefferson City to remove the requirements of Prop A so we no longer have to vote to keep the eTax.

Sadly, there seems to be no real conversation of analyzing the eTax to see if it is really a good idea for Kansas City.  Voters overwhelmingly voted in favor of the eTax because it was the only option on the table to drive necessary revenue. Being the only option on the table is different from being the BEST option. And city hall has a responsibility in the next 5 years to create the best option.

And I think most, if they're honest with themselves, will realize the eTax is not it.

Over the past 4 decades, Kansas City has lost nearly 10% of its population -- dropping from 507,087 population in 1970 to 459,787 in 2010.  This population loss is actually much worse than this in the urban core, as their losses have been somewhat offset by population gains North of the River.

Meanwhile, Kansas City has also lagged behind other areas of the metro when it comes to job growth. Over the past 15 years, the metropolitan area has grown total jobs by about 7% (compared to around 15% for the US average).  However, almost all of the job growth has been on the Kansas side of the state line -- with the Kansas counties growing by about 17%, while the Jackson County part of KCMO lost 15% of its jobs (KCMO as a whole grew by about 4.2% -- again due to gains North of the river).

Proponents of the eTax have (rightfully) pointed to other factors like crime, poor schools, and more aggressive tax incentives from the state of Kansas as the reasons for the declines in population and jobs. As with most things, there are a variety of factors at play here. 

However, it should also be nearly impossible to ignore that most other cities that have city income taxes are also struggling.  The list of cities with an earnings tax is a virtual who's who of struggling cities: Birmingham, AL; Wilmington, DE; Louisville, KY; Baltimore, MD; Detroit, MI; Cleveland, OH; Cincinnati, OH; Pittsburgh, PA;  Toledo, OH; St. Louis, MO. 

The few cities that do have an earnings tax that seem to be doing well have other factors at play -- certainly New York City is a far different situation than Kansas City, Portland has a regional earnings tax, so it remains on a level playing-field among its regional counterparts, and Washington DC gets the benefit of not having a state income tax that surrounding areas have to pay.

In fact, over the past decade, of the 6 cities that have suffered the largest population declines across the country, 5 of them (Detroit, Cleveland, Cincinnati, Pittsburgh aand Toledo) all have an earnings tax.  Only New Orleans -- whose losses are tied to Hurricane Katrina - does not. Sure, there are other factors you can point to, but the reality is, that all of these cities have struggled to replace their large industries with smaller start-up companies.

While most reports show that large corportations seldom use the earnings tax as a deciding factor in where to relocate, it is a much larger factor among smaller companies -- the type that don't get large tax breaks, or are impacting only a few employees. These are the small companies that get often unnoticed, but are the ones that often grow to become the next large companies in a city.  And KC is losing out on most of them.

According to a recent report by the Show Me Institute, they are estimating that the city's earnings tax in KC led to the city population between 1990 and 2000 to grow by 1.5 percentage points less and for employment to grow by 2.3 percentage points less due to the earnings tax (with efforts made to control for other factors).  While we can discuss whether we trust the Show Me Institute, or their methods of figuring this, I don't think those swings over a 10 year period would surprise anyone.  And in a 10 year snap shot, they seem fairly inconsequential -- but if you multiply the numbers by 4 (to include the number of decades we've had the eTax), you start seeing a pretty large shift in business from one city, to others.

These are the type of conversations the city should be having over the next 5 years -- to come up with a better solution to the eTax. Instead, I get the sense that the city will just assume everything is just great, that no changes are needed or wanted, and continue on with the status quo....which is Kansas City continuing to lose jobs and population across the state line.

A couple of months ago, the KC Downtowners Blog had a nice analogy:

"With its complete dependence on the earnings tax, City Hall is like a heroin addict. Its short-term desire for the next fix overwhelms any thoughts of long-term health. Meanwhile, the drug is slowly poisoning the body."

Woody Cozad, who has been a very vocal critic of the eTax, made similar statements in last night's concession speech of sorts:

Tonight, a small minority of Kansas Citians choose to continue with an earnings tax that is driving small businesses out and pushing homeowners away. For the first time in 40 years Kansas Citians had a discussion about whether or not the earnings tax makes sense. Thousands of Kansas Citians have decided it does not.

“No one disputes that our city would be more attractive to small businesses without an earnings tax and no one wants to cut police or firefighters. The dispute is about whether or not we can find a better way to fund our city. 125 of the largest cities have done it and Kansas City should too.

“Now that the campaign is over, our leaders have an opportunity to take an honest look at the problem without the hyperbole. The time has come for those paying in to get the same level of services that are being spent out, on both sides of the river. Tonight we extend an olive branch to our leaders. Commit to finding a better way forward and we will work with you. However if they choose to continue this regressive tax then this is not the end of this campaign; it’s just the intermission.”

Instead of acknowledging that Cozad may have a point, the Kansas City Star's Campaign manager columnist Yael Abouhalkah called Cozad "graceless" and "insulting" and the campaign to end the eTax as "snake oil" and the olive branch comment "laughable".

Hopefully the folks at city hall will engage in a real debate at city hall about the merits of the eTax vs potentially better forms of revenue generation.  My fear is that with the margin of vote, it will be easier for them to just dismiss KC's problems with growing new business and continue on with the status quo. And that would be a shame.

 

Comments

[Eric Rogers]

St. Louis is already planning on to phase out the earnings tax, and doesn't plan to vote on it again in five years.

The thing is, central cities without earnings taxes often struggle with very high property taxes. I lived in Des Moines for a bit, and they have a lot of trouble competing with suburbs because their property tax is very high. An earnings tax is one of their possible solutions for lowering the property tax differential.

Closer to home, KCK is another example of a city considering an earnings tax as a way to compete with lower suburban property taxes.

The reality is that central cities almost always have higher tax burdens, because they carry the cost of expensive things like stadiums, arenas, zoos, museums, public hospitals, etc. We can fiddle with the balance between different types of taxes, but someone will always be complaining that they rent is too damn high.

[Brent]

Eric,

I understand that if there are services that we need to pay for, someone has to pay.

But a lot of cities have figured out how to manage this and still increase business base and increase the population in their urban core.

I certainly think it's fair to ask what Minneapolis, Atlanta, Dallas, etc are doing right vs having a tax structure that is shared almost entirely by cities that are failing....

I'd rather mirror what successful cities are doing vs mirroring what is going on in Baltimore, Wilmington, Birmingham, Detroit, Cleveland, Pittsburgh and Cincinnati.

[Listen]

I think we already had a discussion about the earnings tax. It was Tuesday. Everybody said they liked it.

Weren't you listening? Or is your head so stuffed full of shit you can't hear the PEOPLE TALKING?

Your blogs posts are so routinely typical - "let's discuss this, bash The Star, let's think about doing something else even though people are OVERWHELMINGLY in favor of keeping the earnings tax" - and so devoid of real opinion that I'm surprised you're even motivated to do it.

The Star at least has the best interests of the city in clear focus. Your X-Ray vision glasses are special but they don't reflect reality at all.

Try it, or just shut this waste of bandwidth down.

[Brent]

Again, I note. There were two options on the table -- one to cut a significant part of the budget with no idea how to replace it -- the other, to do nothing.

We overwhelmingly chose to do nothing.

That's fine - -but that doesn't mean there are only two options. And if presented with other alternatives to replacing the revenue, the voters may choose different routes.

But unfortunately, many policy leaders seem unwilling to want to have a conversation about possible solutions. You seem to be in the same boat. St. Louis has decided that they are going to spend the next 5 years coming up with better solutions and then removing the tax before the next vote on it. We seem very content to do nothing. And you may not have noticed, the status quo isn't working for a lot of people in Kansas City.