Does 1% Really Matter?

One of my friends recently shared her opposition to the Proposition A in Missouri.

Vote NO on Proposition A – Losing the city earnings tax would mean eliminating 1/3 of the city’s budget with absoultely no suggestions of where to make that money up… in addition, it would take away our right to ever inact a city earnings tax in missouri again! One millionaire should not be single-handedly deciding public policy, especially BAD public policy!

I responded, somewhat satirically:

Yes, vote no! Keep the suburbs prosperous!

In response, a friend of hers made two posits:

In San Francisco it cost $5 to cross the Golden Gate bridge into the city. That’s about $1,200 a year. So if you make less than $120K, you’d be better off paying the 1% earnings tax.

St. George makes most of its money writing traffic tickets. You don’t want STL to resort to that, do you?

So, below is my response:

Tony, I wasn’t sure if your comments were directed at me or somebody else.

First, I think that comparing St. Louis City to San Francisco and St. George is like comparing an apple (STL) to a grape (St. George) and a watermelon (San Francisco).

St. Louis is roughly 66 square miles with about 356k in population. St. George has about 1,200 residents and is .2 square miles while San Fran is 231 square miles with about 815k people.  You can understand my concern about applying two fundamentally bad policies for drastically different municipal governments to St. Louis.

Nonetheless, I think that just as a $5 bridge crossing tax and a ticket frenzied police department is bad policy, so is a 1% earnings tax.  Now, by two accounts, the 1% tax in STL and KC account for 33% and 44% of each city’s respective budget.

Now, Mayor Slay’s COS claims that 70% of the tax is paid for by people who work in St. Louis, but don’t live there. Kansas City estimates that figure at 40%, but also admit it’s likely higher.

Sports figures aside (visiting sports players have to pay St. Louis taxes), it doesn’t make sense to me that non-residents consume an equal amount of services provided by St. Louis city when compared to St. Louis residents. It is asinine to tax them as if they live in St. Louis, in addition to the taxes they pay as a resident of another municipality they choose to live in. Regions that don’t impose overlapping taxes tend to be more prosperous than regions that do not.

With regard to your Golden Gate Bridge question, the correct answer would be: “I’d be better off paying neither a 1% tax to a city I don’t live in and/or not paying $5 a day to drive there.” Taxing non-residents’ income is not a smart policy for growing a city, much less a region, in my opinion. Both policies discourage businesses to locate there, and people from working there.

A policy like this has two effects that immediately come to mind.

One effect provides a disincentive to live outside of St. Louis City, which obviously makes sense. But why should a government policy try and force people to relocate? Is that what they want — more people in St. Louis? Higher consumption of government services? Sure, people will pay more in sales and other special use taxes, but a higher population in St. Louis city will lead to higher demand for land and housing, and because St. Louis isn’t acquiring new land, that means that prices for living in St. Louis will rise. And with that, they’ll only be paying the 1% they paid when they lived elsewhere, but with higher bottom-line costs of city living. Restricting where it makes sense for a potential employee to live inhibits the ability of businesses to attract labor to a city or region.

Naturally, people will determine which living area best fits their needs — and government policy like this doesn’t always lead people to think “maybe I should live in St. Louis instead of Clayton.The other effect is that it might cause people and business owners to seek work and source their businesses elsewhere. And relocate they have.  Since about 1990, Missouri’s population has grown by about 800,000, but St. Louis County’s population has decreased by 4,000 and the City of St. Louis has lost about 40,000 people.

I wonder why? Now, I’ll be careful to note that correlation isn’t always causation, but I wonder why cities/regions with income taxes tend to fare poorly when compared to cities that do not have them. (Think Texas.)

I have lived most of my life in cities that have them. Cleveland and St. Louis, sadly, are on the decline.  Both have city income taxes. Washington, D.C., where I work, wants to impose a “commuter tax” on non-residents who work in the city – which is ironic, in part, because D.C. gets the highest per-capita amount of federal tax dollars in the country.

Now, imagine how I would react if federal law were changed, and D.C. imposed a commuter tax on me, a resident of Virginia. Let’s say I make 100,000, and D.C. wants to impose a tax of 2% on my income, in effect, making me $2,000 a year poorer. Now, I am a bad example because the federal government isn’t leaving anytime soon, so I am held captive to such a tax if I want to stay in my current job — but not necessarily 100% captive. I can seek alternate employment, and historically, people are more transient over their working careers. This archaic city tax on income ignores this reality.

Let’s say that BNA, a trade publication, offers me $99,500 starting salary at their office in Virginia because they like my analysis of current events. Translated: I just got offered a raise of $1,500 because I no longer would have to pay D.C. taxes. I would be quite likely to take that job.

On a side note, D.C. doesn’t tax “commuters” because they cannot under federal law. But, they levy a lot of tickets. I’ve paid nearly $1,000 in parking tickets since I moved here in 2007, only having received one parking ticket in 25 previous years. I received it in St. Louis. (Speeding tickets now are another matter.) I would find it hard to believe that the city of D.C. would lift a finger on issuing parking and speeding tickets if they were able to levy an income tax on non-residents.

Let’s consider the decisions of the business owner to locate or grow their business. Say that, space restrictions aside, I am given the choice of locating my newly-formed technology business in one of three jurisdictions, Maryland, D.C., or Virginia. Now, imagine those jurisdictions are Illinois (Maryland), D.C. (St. Louis City), or Virginia (every Missouri jurisdiction adjacent to St. Louis City).

If I pick St. Louis City, 100% of my work force will pay that 1% tax, and that decision could limit where they choose to live.

If a guy wants to live on a farm south of Arnold and commute in, he pays the tax, but if he doesn’t want to pay that tax, he may not come and work for me.  While others might determine it’s in their best interest to live in St. Louis, but may choose not to do so for financial, safety, or other reasons.

If I chose to put my business in Maryland Heights, some people might think they want to live in the Central West End, but why would they? Who would, if given the choice, choose to pay higher taxes when there are comparable alternatives that don’t levy a 1% tax (in effect, substitute goods?)

Bottom line is: municipal income taxes are bad for attracting talented workers, and are bad for business. They’re bad for the region. What would be better, St. Louis City and St. Louis County growing together, or both of them shrinking? If you answered the former, you’d be right. But, the latter occurs for a variety of reasons, one of which is the city’s income tax.

Similarly, it’s troubling that St. Louis and Kansas City are not functioning correctly, since they rely on between 40 and 70 percent of their city income tax revenues from non-residents for what amounts to between 1/3 and ½ of their total budgets.

My conclusion is that Kansas City and Saint Louis are living beyond their means at the expense of an inefficient tax that harms them economically. And if they’re not living beyond their means, the fact remains that they’re not effectively taxing their citizens or provide services inefficiently (free zoos come to mind.) What’s worse, they’re not using those tax dollars to make their municipalities an attractive place to live and start/grow a business. Saint Louis City and County are shrinking, not growing. Population is down, unemployment is up. Is it any wonder?

In closing, why didn’t Anhueser Busch InBev jump at the opportunity to locate their global headquarters in St. Louis? Didn’t the city lose jobs after the merger? The income tax might be one reason, but it’s not the only one.

In the end, 1% really does matter. Believe it or not. 


Missourian: Proposition A raises questions about earnings tax

KMOV: Debating Proposition A… you know… the earnings tax one Questions about Propostition A and the earnings tax

Tax Foundation: County and City Income Taxes Clustered in States with Poor TaxClimates

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