Updating The Case for Reauthorizing St. Louis' Earnings Tax

Nearly a decade ago, I argued that the alternatives to the earnings tax were not fiscally sufficient, politically feasible, or economically desirable. That argument has only gotten stronger.

St. Louis voters: this Tuesday, there’s only one question on the ballot - the reauthorization of the City’s 1% earnings tax. I encourage you to vote yes, here are a few reasons why:

1. The earnings tax brings in over $200 million each year, more than a third of the City’s general revenue budget. It funds essential public services like fire, streets, parks, and trash pickup.

2. As I wrote on the eve of the 2016 vote, the alternatives to the earnings tax - cutting costs or services, raising taxes or fees, and bankruptcy or selling off public assets (i.e. the airport or water department) - are not fiscally sufficient, politically feasible, or economically desirable.

3. That was true then, and it’s even more true now. Last year’s devastating tornado destroyed thousands of homes and displaced thousands of families. From water to housing to streets, we have extraordinary capital needs. The state controlled Board of Police Commissioners is after our budget. This is not the time to defund the city.

4. Furthermore, as estimated in my analysis here, around half of the City’s earnings tax revenue is paid by people who work but don’t live in the city. If we eliminate it, that burden will shift largely onto residents through higher property taxes, higher sales taxes, or gutted services.

5. It’s also worth emphasizing that the economic case against the earnings tax - the supply side idea that tax cuts pay for themselves by unleashing economic growth - has repeatedly failed each time it’s been tested. In Kansas, dramatic income tax cuts created a fiscal crisis: revenue shortfalls, a credit downgrade, unconstitutionally underfunded schools, and depressed job growth. After five years, the legislature reversed course in a bipartisan override.

6. The deeper error in the anti-tax argument is that it treats every dollar of taxation as a drag on growth while ignoring what the money buys. Taxes fund public safety, infrastructure, schools and more, public goods which markets rely on. Ask yourself: are families and firms leaving the city due to the high tax burden, or due to underfunded schools, crumbling infrastructure and perceived high crime rates?

7. We can’t address these root causes of the City’s struggles without resources to support young people, repair streets and water lines, and interrupt the vicious cycle of poverty and trauma which drives violence. Research across 184 metro areas finds that the single largest factor curtailing job growth is initial inequality, followed by segregation and fragmentation. That’s us. STL’s problem isn’t that taxes are too high, it’s that inequality is too deep and local government has been fragmented by design.

8. We need revenue to make these investments, and income taxes are among the best tools available. Unlike sales taxes, which fall hardest on the poor, and property taxes, which can discourage development and inhibit growth, earnings taxes capture value broadly across the economy and have been found to exert positive effects on economic growth.

9. We should, however, acknowledge that the earnings tax isn’t perfect. For starters, it’s a flat tax on labor (not capital) income, which makes it functionally regressive. In an ideal world it would be reformed with a progressive rate structure designed to elicit an equal proportional sacrifice from families based on their ability to pay, and expanded to cover capital income. While such reform is currently barred by state law, as I’ve written about here, the Board of Freeholders has the power to supersede state law and could make that possible.

10. Long term, I believe that the path forward runs through Common Sense Charter Reform and Equitable Unification. St. Louis’ fragmented local governments don’t just fuel inefficiency and dysfunction, they also undermine democracy by obscuring where power lies, making it all but impossible for residents to hold local leaders accountable and undermining the public’s confidence that tax dollars will be spent effectively. As an initial step, charter amendments to make city budgeting, hiring and contracting processes more fair and functional would strengthen the case for public investment and ensure that every dollar collected delivers maximum value.

In short, I believe in reforming and strengthening the earnings tax, but we can’t reform a foundation that’s been demolished. Please vote yes on Tuesday in order to preserve the earnings tax, and keep working on Wednesday to improve it and local government.