By: Michael Guzy
Things that seem too good to be true usually are. Nobody likes to give their money to the government. Appealing to that sentiment, Proposition A will be featured on the ballot this November, seeking to outlaw earnings taxes across Missouri. Presently, only St. Louis and Kansas City levy such a tax.
At first blush, the measure appears to be a reasonable effort to limit the reach of the tax man. Further analysis, however, reveals that this seemingly innocuous initiative would have dire consequences for all Missouri residents. To understand why, consider the case of St. Louis.
The earnings tax was instituted there in the 1954 to prevent property tax rates from spiraling out of control. Under the current arrangement, people who live or work in the city pay 1 percent of their income and employers pay a half percent of their payroll to fund public safety operations. The tax generates 39.2 percent of the city’s revenue.
If these revenues were lost, St. Louis would have to drastically curtail police, fire and ambulance services or make up the budgetary shortfall elsewhere. Either alternative would have devastating impacts on city residents and the surrounding metropolitan area.
If property taxes were raised to compensate for the deficit, they would increase to about 4.4 times the current rate. A homeowner who now pays $1,200 annually in property taxes would see his or her bill inflate to $5,280 -- raising their mortgage payment by an additional $340 per month.
If that homeowner earns $50,000 per year, he or she pays $500 annually in earnings tax -- or $9.62 per week. It would thus cost that homeowner $4,080 per year in property tax to save $500 in income tax. Rents would be correspondingly inflated as landlords passed this additional burden onto their tenants.
To compensate for the lost revenue through sales taxes, the tax on retail sales would rise to roughly 18.5 percent. This would destroy city merchants. Who would shop in St. Louis when they could get the same goods and services elsewhere for almost 10 percent less?
The earnings tax is an equitable way to fund the vital services upon which residents and visitors to the city rely. San Francisco, Chicago, Philadelphia and New York are among the major cities in other states who levy similar taxes, usually at a significantly higher rate.
If St. Louis and Kansas City were to be crippled by the loss of this critical revenue, they would have to turn to our already financially-strapped state for relief. Suburban and rural residents would thus be called upon to fund operations that are presently self-sustaining.
Further, the measure would take taxing decisions for all municipalities from local authorities and place them under state control. Communities would be barred by law from determining how best to fund their own operations.
Supporters of Proposition A claim that a repeal of the earning tax would spur economic growth in the inner cities. This is simply not true.
Existing businesses would save the half percent payroll tax they currently pay, but that windfall would be more than offset by higher taxes on the property they own or inflated rents on the property they lease. Businesses from outside the cities would hardly be lured to them by the prospect of higher rents just to save on a tax they don’t pay in the first place.
The only people who would reliably profit from the repeal are real estate developers and speculators who have been granted tax abatements on their urban holdings and corporate CEO’s and professional athletes who could pocket an additional 1 percent of their salaries and bonuses. These fortunate few could bank their bounties while the rest of us figure out how to pay for police, fire and ambulance services for them.
The simple fact is that the proposed “tax cut” is a crackpot pipe dream of supply-side economics that would do for local government what its broader application at the federal level has done for the national debt.
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Guzy is a retired St. Louis cop who currently works for the St. Louis City Sheriff's Department.
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Copyright (C) 2010 by Missouri Forum. 10/10
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