Commentary: Wealth and earnings tax

This article first appeared in the St. Louis Beacon, Sept. 15, 2010 - F. Scott Fitzgerald once wrote that "The rich are very different than you and me." Hemingway replied, "Yes, they have more money."

There is truth in both statements, which we can now see in politics. The very wealthy can finance their own campaigns: Michael Bloomberg, Carly Fiorina, Meg Whitman. They do not have to expend time and energy on fundraising.

Now we also see billionaires attempting to influence policy by funneling behind-the-scenes cash to groups and causes. In a recent New Yorker, Jane Mayer discussed the fabulously wealthy Koch brothers. Known for their philanthropy to many cultural institutions, they have funded many anti-Obama efforts, including tea party groups.

Missourians are experiencing a similar phenomenon. The very wealthy Rex Sinquefield is trying to eliminate income taxes at the state and local level.

Sinquefield is also a philanthropist. He has established a state-of-the art chess club in the Central West End that delights everyone who enjoys chess. He is also encouraging many youngsters to participate. Said to be a sincere and pleasant person, he also has a strong libertarian philosophy. Low tax, little government.

He believes, along with the libertarian scholars at the Show-Me Institute he established, that St. Louis city's earnings tax impedes growth. He is taking steps that he hopes will lead to its elimination.

An item on November's ballot would prohibit any municipalities from ever adopting an earnings tax in the future. It requires that St. Louis and Kansas City residents (Kansas City also has this tax) vote every five years on whether to retain the earnings levy. Sinquefield created and financed the initiative drive that put this measure on the ballot.

Although St. Louis is a home rule city, the state retains jurisdiction over which taxes a city may use. In 1949, the Legislature passed enabling legislation; and soon thereafter St. Louis voters enacted this tax. The earnings tax on those who live or work in the city is levied only on earnings, not on pensions, bank interest or dividends. It does tax the earnings of sports figures and visiting entertainers for the dates they perform in the city.

But the state can intervene. Dillon's Rule, referencing a famous 19th century court case, says cities are creatures of the states. We see that with the earnings tax and state control of the police. Home rule has distinct limitations.

In St. Louis, the earnings tax makes up almost one-third of general revenue. General revenue funds police, fire, streets and traffic, sanitation, parks, etc. Although the city receives money from other sources, those funds are earmarked for specific purposes and cannot go into general revenue.

Many have complained that the earnings tax drives businesses from the city and places the city at a comparative disadvantage. Surrounding jurisdictions do not have such a tax. Despite complaints about the tax, no one has yet offered a viable alternative mechanism to raise the funds the city needs.

Missouri is well known for being an anti-tax state and not a fan of the large city. Therefore, the November initiative is expected to pass handily. Then the ball will be in St. Louis city's court.

Although the mayor and others have expressed concern about the abolition of the earnings tax, there appears to be little organized effort to defeat the November ballot measure. Interestingly, Sinquefield, either directly or through PACs he has created, has poured cash into the coffers of many candidates, locally and in the state. Missouri no longer has campaign finance limits on state and local races, so he can be as generous as he likes. Few of us have the resources to replicate his giving.

If the statewide measure passes, the city would have to vote on whether to continue the tax. If voters wish to retain the tax, the matter would have to be voted on again every five years. If residents decide to end the tax, it will be phased out over 10 years. Using today's revenue forecast, that would be a $13 million cut the first year, and an additional $13 million cut for each of the following nine years.

What about revenue alternatives? Those who would remove the earnings tax have put forward none.

Unlike other levels of government, cities provide basic housekeeping functions. All bureaucracies could eliminate some things or find efficiencies somewhere else. But removing the earnings tax would not reduce inefficiency: It would mean major layoffs and safety risks unless other revenue sources are found. City voters would have to enact an alternative, whether a property tax, sales tax, etc. Our recession, second only to the Great Depression, has already led to new fees and cuts.

Great wealth is influencing the electoral and policy agendas. City residents will have to debate whether these influences are benign or not.