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On the April 5 ballot: Dissecting the earnings tax issue

Both sides in the earnings-tax campaign are mailing fliers.
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If you are a wage earner and live or work in the city of St. Louis, you pay the city’s 1 percent earnings tax. No exceptions.

Ads and fliers that claim otherwise are “a big lie,’’ says Mary Ellen Ponder, chief of staff to Mayor Francis Slay. 

The ads and fliers come from the group, Vote No On The E-Tax. It is running a vigorous campaign to persuade St. Louis voters to decide on April 5 to phase out the city’s earnings tax, which has been in place since 1959.

The Vote No group’s spokeswoman, Stephanie Lewis, says it stands by its message that the city’s earnings tax unfairly targets the working poor, and that city officials have allowed some corporations to avoid some of their earnings-tax burden. 

Slay contends the group is mischaracterizing the earnings tax, and misleading city voters about what would happen if the tax — which provides one-third of the city’s general revenue — is repealed. 

“Losing that tax would be devastating to the city of St. Louis,’’ Slay said. “Losing it without a plan to replace it would be irresponsible and reckless.” 

He notes that St. Louis residents would be hit hard by any replacement tax because almost 70 percent of the city’s earnings tax income comes from people who do not reside in the city of St. Louis.  That means city residents would have to shoulder almost all of the burden for any alternate tax increases that would replace the earnings tax.

Slay, Comptroller Darlene Green and Board of Alderman President Lewis Reed — who rarely agree on anything — are on the same page when it comes to the financial fallout should city voters fail to reauthorize the tax on April 5:

Without the earnings tax, they say, city government would not have the money to pay for basic services, including police and fire protection, trash collection and maintenance of its parks, including widely used Forest Park.

Ponder contended that the police budget — the city’s largest expense — would likely have to be slashed in half.

The man behind the opposition’s effort

The opposition’s $2 million campaign is financed by one donor, financier Rex Sinquefield, who believes that income taxes — state or local — stifle job growth. Sinquefield previously has proposed, for example, that the state of Missouri replace its income tax with a higher state sales tax. 

In fact, city voters will be reconsidering the earnings tax solely because of Sinquefield’s success in 2010 in financing a statewide ballot measure that bars any Missouri communities outside of St. Louis or Kansas City — which already had an earnings tax — from putting such an income tax in place. 

And St. Louis and Kansas City must put their earnings tax before voters every five years. If voters reject the tax, it would be phased out over 10 years.

The city's pro-earnings tax effort centers on city officials, including the 28 aldermen, meeting with neighborhood and community groups around the city to lay out the stakes, as they see it. Slay's campaign operation has donated some money to a pro-tax campaign, but his political arm isn't discussing whether there will be a TV or radio ad campaign to counter the hefty one now underway by the Vote No group.

Slay indicated that city officials, unlike their counterparts in Kansas City, aren't hitting up corporations and others to donate money for a massive, last-ditch ad blitz. The mayor noted that Sinquefield can write more million-dollar checks, and said there was no way the city and its allies could match that.

City officials are heartened that in 2011, the first time St. Louis voters examined the earnings tax, almost 90 percent voted to keep it. But in 2011, there was no major opposition and Sinquefield opted not to get involved in the city vote.

Note: The breakdown below is for the city's general fund, which basically pays for the operations of city government. It does not include restricted grants and other special funds.


Earnings tax versus property tax

St. Louis’ earnings tax has been in place since 1959. Percentage-wise, it’s one of the nation’s lowest. Baltimore, New York and Philadelphia are among the cities with higher earnings tax rates. 

Slay says St. Louis and Kansas City — which faces a similar anti-earnings tax effort — are among about 4,000 cities and municipalities around the country that impose an earnings tax.

The mayor and his staff cite various studies that conclude that taxes on earnings or income are fairer, and often more broadly based, than alternate taxes on property or sales. 

Paul Payne, the city’s budget director, says the city’s property tax rate would have to be increased by close to 60 percent to compensate for the lost earning-tax income.

Payne also noted that the Missouri General Assembly would have to approve such a dramatic property-tax hike, as would city voters.

Nahuel Fefer, Slay’s special assistant on economic policy, points to a Brookings Institute study that examined 30 years of various taxes. The study concluded that property taxes hurt economic growth and that income taxes actually contributed to positive  growth.

Not everybody buys that argument. Brenda Talent, chief executive of the Show-Me Institute — a free-market think tank partially funded by Sinquefield — cites the institute’s own studies that concluded that the earnings tax hurts the city’s competitiveness.

Speaking in general, Talent said, “Taxes on the production of income are really adverse, compared to taxes on consumption.”

During an appearance on St. Louis Public Radio’s Politically Speaking podcast, Talent said that property taxes or consumption taxes — such as sales taxes — were a better alternative. She also proposed that the city could save money if it got rid of the tax breaks it now grants some corporations to entice them to move to the city or expand.

In addition, Talent suggested that the city consider privatizing some services, or sell off city property, to raise money and reduce costs. The Show-Me Institute is not involved in the April 5 vote.

Slay said higher property taxes would hit hard elderly or low-income St. Louis residents who own property. “They don’t pay the earnings tax on their Social Security or pensions,’’ he said. But they would pay the higher property taxes.

Vote No group cites corporate incentives

Vote No’s fliers assert that “some rich executives and lawyers are exempted’’ from paying the earnings tax. 

Slay and his staff deny that’s case.

Their debate centers on some tax breaks, including a portion of the earnings tax, that the city has granted eight companies if they follow through on proposed expansion projects. One of those eight, Ralcorp, already has been terminated because the project has been scuttled.

Although the tax-incentive packages differ, all involve a rebate of the portion of the earnings tax that the corporations pay for the new jobs, if they follow through with adding additional jobs.

Slay and his staff emphasize that the rebate would be on the additional earnings tax that the corporation would pay because of the expansion. If no jobs are added, there would be no rebate. In any event, the corporation would pay its existing earnings tax. And all of the corporation’s employees would continue to pay their full earnings tax, whether or not they are part of the expanded workforce.

The earnings-tax rebates covered by the incentives cost the city close to $330,000 a year.

Slay and his budget chief note that’s a fraction of the $164 million that the city collects annually through its earnings tax.

Jo Mannies is a freelance journalist and former political reporter at St. Louis Public Radio.