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Voters will decide next move in debate over city earnings tax

This article first appeared in the St. Louis Beacon, Oct. 22, 2010 - In the divisive, sometimes heated rhetoric campaign over the earnings tax proposition on Missouri's ballot Nov. 2, three words speak volumes: Let voters decide.

That phrase is the title of the effort by proponents of Proposition A, which would force voters in St. Louis and Kansas City to decide whether the 1 percent earnings tax in those cities should continue. It would also prohibit any other Missouri city from imposing such a tax.

But opponents of Proposition A say that far from being an exercise in democracy, where voters get a say in what taxes they should pay, the proposal is anti-democratic, giving voters all over Missouri control of an issue that should be decided only in the cities with the biggest stake in the outcome.

The 1 percent tax is levied on any person who works in the city or lives in the city as well as on net profits earned by corporations as a result of work done or services performed or rendered or other activities conducted in the city. Nonprofit organizations do not pay the tax, but their employees do.

Whatever voters decide next month, the earnings tax won't be directly affected -- yet. A no vote would maintain the status quo. A simple majority in favor would force the next phase, balloting in the spring by voters in St. Louis and Kansas City.

If voters then say they want to get rid of the earnings tax, it would be phased out over 10 years. The proposal also bars an earnings tax from being imposed in any other Missouri city and prohibits voters in St. Louis and Kansas City from reinstating the tax in the future.

But even though any damage to the St. Louis city budget wouldn't start for a while if Proposition A passes, opponents to the measure aren't exactly reassured, citing the potential loss of money that pays for basic services, with no solid idea of how it would be replaced.

"If something is working, why should people change it," said Mark Jones, spokesman for the Say No to A coalition. "That just doesn't make sense. The system is providing what cities need. Why would you change that? This is a very dangerous experiment, using Missouri as a laboratory."

To those who put Proposition A on the ballot, though, the idea is simple: The earnings tax is the wrong way to fund government, and voters can be trusted to do the right thing.

"The earnings tax is an impediment to economic growth," said Marc Ellinger, spokesman for Let Voters Decide. "We have a vested interest in all Missourians seeing the economic engines of St. Louis and Kansas City grow, and when people and businesses are moving out, it raises real concerns."

What The Proposition Says

Proposition A was put on the ballot after a petition drive funded largely by wealthy businessman Rex Sinquefield, who has subsequently put more than $10 million into the campaign to get it passed. Opponents of the measure have raised far less than that, about $300,000, with much of the money coming from unions.

Several versions of the proposal were floated, but they all shared the goal of eliminating the earnings tax in St. Louis and Kansas City.

If voters statewide defeat Proposition A, earnings taxes will remain in place as they have been. If they approve Proposition A, its sets into motion two actions.

First, it prohibits any Missouri city that has no earnings tax now from enacting one. Current law would require any city besides St. Joseph, which already has authorization, get permission from the Legislature if it wanted to impose a tax, but Proposition A would remove that ability.

Second, it would force elections in St. Louis and Kansas City next spring, where voters in each of those cities would decide the fate of their earnings tax. If they choose to keep it, it would remain in force for another five years, when Proposition A would force another vote.

If they choose to get rid of the tax, it would disappear over 10 years, beginning Jan. 1 of the first calendar year after the election, at a rate of one-tenth of 1 percent a year. So if St. Louis voters were to say they did not want the tax to continue, the city would start collecting only 0.9 percent in 2012, then reduce it gradually until it disappeared altogether.

Additionally, the proposition says that no city that has begun reducing its earnings tax may stop or suspend such a reduction, with or without voter approval.


Those leading the Let Voters Decide effort argue that Proposition A would get rid of a tax that creates a disincentive for residents and businesses to locate or work in St. Louis and Kansas City.

Proponents also say that people should be able to have more of a say over the taxes that they pay, and such levies should not go on forever.

"Everywhere I go, everywhere I talk to folks, they are enthusiastic," says Ellinger, spokesman for Let Voters Decide. "They are excited they are going to have a chance to actually vote on a tax they've had to pay for 50 years."

Those pushing for passage of Proposition A acknowledge that the earnings tax is a large part of the cities' budget -- more than $137 million a year, or about one-third of the total -- but they say that phasing it out over 10 years would give city officials plenty of time to cushion the blow.

The real issue, Ellinger says, is that people are concerned about having to pay what he calls a third level of income taxes, after paying them to the state and federal governments. That extra tax, he said, keeps St. Louis and Kansas City from growing the way they should.

"St. Louis has sales taxes, Springfield has sales taxes," he says. "St. Louis has property taxes, Joplin has property taxes. Businesses are flocking to Springfield and Joplin, and they're fleeing St. Louis."

Responding to arguments made by those opposed to Proposition A, Ellinger said that it should not hurt St. Louis' ability to sell bonds; he said he was a bond lawyer for more than seven years, so he has some experience in the issue.

"If you are borrowing money for operations," he said, "you've got a systemic problem anyway. That's like borrowing money on your Master Card to pay your Visa to pay your American Express."

And he disputes the charge that the whole issue is all about a rich man, Sinquefield, trying to get his way because he doesn't like the earnings tax. Noting that Sinquefield has been active in his philanthropy to St. Louis, in areas like the symphony and chess, Ellinger added:

"I think Rex has always been willing to help the city and has been a big advocate for St. Louis."

Finally, he agrees that even if Proposition A passes, the Legislature could make changes because it is a law, not a constitutional amendment. But, he says, "if voters say we want to get rid of the earnings tax and phase it out, they ought to be respected. And the Legislature would have a pretty clear message: no new earnings taxes in other cities in the state."

What Opponents Say

Because of the way Proposition A was written, Mayor Francis Slay told the Beacon last month, he was basically conceding that it would pass and was going to concentrate all of his efforts on making sure St. Louis voters keep the tax in the spring.

That decision has not set well with officials in Kansas City, where the fight against Proposition A has been much stronger than on the eastern side of the state. St. Louis Comptroller Darlene Green, who has been the staunchest opponent at City Hall, said she wished Slay had taken more of an active role.

"I think the mayor's leadership from St. Louis would have meant a lot statewide," she told the Beacon this week. "Without his leadership, we have lost a lot regarding the educating of the public about what this means."

Green and Slay agree on one thing: They wish that the statewide vote would not take place before city officials could have more time to put contingency plans in place to replace the money that could be lost if the earnings tax is phased out.

"If there had been a plan in place that makes sense for the area and for the taxpayers," Green said, "then I wouldn't be saying this. But we're faced with the possibility of a loss of taxes that make up a third of the city's operating budget, and that would be a big concern to the bond-rating agencies if there is no plan to replace those taxes."

She notes that with both St. Louis and Kansas City bordering other states, each city has a lot of outsiders who come in each day to use its streets, police and fire protection and other services. The earnings tax makes sense as a way to help fund those services, she said.

"They're paying a fair tax on use of our public infrastructure," Green said. "That's fair. If you're not working, you don't pay it."

Ruth Ehresman of the Missouri Budget Project notes that one of the big issues that people should be concerned about is local control.

"It's muddying the waters by having people all over the state vote on a St. Louis and Kansas City issue," she said, "and it further muddies the waters to approve a blanket prohibition in other cities, even if citizens in those other cities want an earnings tax."

And the prospects of replacing lost earnings tax revenue do not present very many palatable choices, she said.

"The sales tax and the property tax are much more regressive," Ehresman said. "People with lower incomes bear a disproportionate burden with the sales tax, which is especially hard on seniors with fixed incomes who don't pay the earnings tax right now."

For Mark Jones, the spokesman for the Say No to A coalition, a big issue is Sinquefield himself and the perception he wants to use his wealth to prevent others from having control over their own government.

"Rex has money, but he only has one vote. Having a broad coalition means we can reach the members of our organizations, and that definitely lends credibility to what we are doing."

Noting estimates that sales taxes could triple and property taxes could rise by $1,500 a year if the earnings tax goes away, Jones added:

"There is no Plan B for this if they have to implement this. If Rex Sinquefield gets his way and Proposition A passes, then this goes horribly wrong, it won't affect his life. The rest of us are going to have to pay for his misjudgment."

What Others Say

No one is making public definite plans yet for how the earnings tax may be replaced if necessary, but that's not to say no one has looked at the problem.

One thorough look at a possible restructuring of the St. Louis budget was prepared last year by a group named PFM. It noted the heavy reliance of the city on the earnings tax, along with the restraints placed on efforts to raise new revenue by the Hancock amendment to the Missouri Constitution, which requires that most new taxes go to a vote of the people.

Among recommendations or options for improving the city's financial health by raising money from a wider variety of sources, it noted expanding the sales tax to cover services; reducing the number of goods exempted from the sales tax; imposing taxes on junk food, plastic bags and alcoholic beverages; imposing a 911 surcharge on wireless communications; and many others.

Joseph Haslag, who holds the Kenneth Lay chair in economics at the University of Missouri at Columbia, has studied the effects of the earnings tax and noted that if it were to be phased out, revenue from other taxes would be likely to increase, though not enough to make up all of the difference.

He has also argued that continuing the earnings tax could drive new businesses away, particularly to adjacent areas in Illinois and Kansas that do not have the tax levied by St. Louis and Kansas City.

That view is disputed by Jack Strauss, director of the Simon Center for Regional Forecasting at Saint Louis University. He acknowledges that cities with earnings taxes have lagged in economic growth, but he says that correlation does not mean that the earnings taxes are the cause.

Instead, he says, cities with earnings taxes also tend to be manufacturing cities, and manufacturing "has taken a large hit over the past 30 years."

Strauss called blaming the earnings tax for hard economic times "a red herring," and he said having to make up $13 million a year over a 10-year period would present St. Louis with an almost insurmountable problem.

"They're taking a huge gamble," he said. "I think the city would struggle for years to come up with the revenue. The people who are pushing this have identified the wrong medicine to cure the city, and the poor economic climate will just make it worse."

Strauss said that earnings taxes make sense, particularly in areas like St. Louis and Kansas City that are adjacent to other states, because they tax people who may not live in the city but come in to use its services. The alternatives -- raising sales taxes or property taxes -- are "likely to have a much bigger effect."

For his part, Haslag said in an interview that if Missouri's two major cities have to come up with plans to replace earnings tax revenue, there would be no shortage of places they could look for good ideas. The exercise, he said, could be valuable in the long run.

"It's not like city leaders would have to reinvent the wheel," Haslag said. "They have options that they look to, the best practices in other cities.

"Nobody is trying to impoverish the city. It's a legitimate question: What kind of tax structure is going to give the highest standard of living to the citizens of our jurisdiction?

"We should never be afraid of that question. It's a good question to ask."

Dale Singer began his career in professional journalism in 1969 by talking his way into a summer vacation replacement job at the now-defunct United Press International bureau in St. Louis; he later joined UPI full-time in 1972. Eight years later, he moved to the Post-Dispatch, where for the next 28-plus years he was a business reporter and editor, a Metro reporter specializing in education, assistant editor of the Editorial Page for 10 years and finally news editor of the newspaper's website. In September of 2008, he joined the staff of the Beacon, where he reported primarily on education. In addition to practicing journalism, Dale has been an adjunct professor at University College at Washington U. He and his wife live in west St. Louis County with their spoiled Bichon, Teddy. They have two adult daughters, who have followed them into the word business as a communications manager and a website editor, and three grandchildren. Dale reported for St. Louis Public Radio from 2013 to 2016.