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Missouri House committee recommends phasing out St. Louis and KC earnings tax

Paul Payne, the budget director for the City of St. Louis, addresses an interim Missouri House committee hearing on St. Louis’ earnings taxes in Oct. 2023. The committee released its suggestions on Wednesday, which included phasing out the earnings tax
Brian Munoz
St. Louis Public Radio
Paul Payne, budget director for the City of St. Louis, addresses an interim Missouri House committee hearing on St. Louis’ earnings taxes in October. The committee released its suggestions on Wednesday, which included phasing out the earnings tax

A phaseout of St. Louis’ and Kansas City’s earnings tax is one of four recommendations by a Missouri House committee examining the tax.

The Republican-led committee, established by Speaker Dean Plocher in August, met several times in the fall to hear testimony from Kansas City and St. Louis officials and others about the 1% tax on income for those who work in the city.

The tax is subject to voter approval. During the last vote in 2021, the tax was reapproved by 79% of voters. The next retention vote will be in 2026. City officials have said the tax is essential for operations.

In addition to the phaseout, which would be tied to unspecified revenue increases, the committee recommended:

  • Advocating for reimbursements on the earnings tax for employees who work remotely.
  • Exempting the earnings tax from workers who have an income less than 150% of the federal poverty guideline.
  • Creating exemptions for new residents and establishing Earnings Tax Opportunity Zones to attract new businesses.

The recommendations may be considered by the legislature this session.

Rep. Jim Murphy, R-St. Louis County, who chaired the committee, said that of the suggestions, he believes addressing remote worker reimbursements will likely be addressed.

Currently, Kansas City employees who work remotely outside of the city are eligible for reimbursements. Earnings tax reimbursement for remote workers is the subject of a lawsuit against St. Louis.

“I think that everybody agrees that fairness is fairness. And that's just simply wasn't a fair way of looking at it,” Murphy said. “And Kansas City did the exact right thing. There was just no good excuse for St. Louis not to exempt people that worked outside the city.”

While Murphy believes that subject will turn into legislation this session, Rep. Steve Butz, D-St. Louis, who served on the committee, thinks the legislature needs to wait until the lawsuit over the issue is completed.

“I'll leave it that we're waiting on the courts for that one,” Butz said.

Rep. Peter Merideth, D-St. Louis, also said he’s inclined to see how the lawsuit plays out before exploring that issue legislatively.

“If we start going down that road of reimbursing for remote work, I think it becomes a more complicated gray area than simply, ‘Well you work for this entity. They are located here, this is the tax you pay,’” Merideth said. “And so I could kind of go either way on it. If we're going to have to deal with reimbursing it, then we do also have to figure out how to replace that revenue.”

One of the recommendations likely to get more bipartisan support would be a limitation or exemption on the earnings tax for low-income workers.

Murphy said he believes there could be some momentum for that policy.

For Democrats, Butz supported that recommendation and said it was worth studying and working on, including possibly changing the eligibility to a dollar amount instead of a percentage.

Merideth said that’s something he’s interested in.

“I would love to see our earnings taxes become more progressive. That said, I think if we're going to have that conversation, we should also be having a conversation about a higher bracket, where those that are bringing in tons and tons of money each year might have a higher rate to pay, as well,” Merideth said.

The biggest proposed change, phasing out the earnings tax over time, is a harder lift for the legislature, but it’s not a far-fetched idea, Murphy said.

“When you put a bill and say let's phase it out if we grow our income, well, you have to grow the income before that can be phased out,” Murphy said. “So it's not really one of these things where we're just trying to take away a tax, we're trying to find a way to grow the city.”

The main question is what that revenue would be replaced with if the earnings tax is phased out. Currently, the earnings tax makes up 37% of St. Louis’ general revenue fund and 45% of Kansas City’s.

During a committee hearing in St. Louis in October, St. Louis Budget Director Paul Payne said there wasn’t a backup revenue plan if voters ever rejected the tax.

Murphy said the lack of a plan from St. Louis was disturbing.

“Local government needs to operate and if they're not going to operate, then you can't complain when the state looks at solutions,” Murphy said.

Butz was also disappointed by Payne’s answer.

“You have to also plan for a worst-case scenario, and so I guess my only comment on that is it was disappointing to hear that officially that it had not been discussed,” Butz said.

However, Merideth said the city knows its voter base supports the tax overwhelmingly.

“I think unless that changes, they don't need a clearly defined plan. But the fact that they don't have a plan, actually says to me precisely what the problem here, is that there isn't a good way to replace the earnings tax revenue,” Merideth said.

On whether the committee came up with revenue replacement suggestions, Murphy said there is not a plan at this point on how that revenue would be made up.

“I think the whole purpose of this committee was to open the dialogue so that we can get everybody involved,” Murphy said.

Butz said the committee failing to come up with alternatives to the earnings tax means that such a solution does not exist.

“The central focus was to find alternatives to the city earnings tax. And I think it's safe to say there was none,” Butz said.

On whether earnings tax legislation would have support in the Senate, President Pro Tem Caleb Rowden, R-Columbia, said he thinks work can be done on the earnings tax, including with remote work reimbursements.

“We have more taxing districts in any state in the country per capita. There's a lot of work that can be done there,” Rowden said.

However, Senate Minority Leader John Rizzo, D-Independence, said if people don’t like the earnings tax, then they can act when it’s up for renewal.

“Go spend some money, win an election. That's how it works,” Rizzo said.

Sarah Kellogg is a Missouri Statehouse and Politics Reporter for St. Louis Public Radio and other public radio stations across the state.