The City Earnings Tax

1
The City Earnings Tax

• Missouri legislature enacted tax in 1947
• 1 maximum if population is 70,000 or
• over
• St. Louis and Kansas City adopted a 1
• rate

2

• Does the city earnings tax matter?
• Economics says tax the goods whose
• demand is most inelastic
• An earnings tax affects after-tax returns
• to labor and capital
• But, the rate is low and activity in
• the central business district is not
• mobile

3
Purpose of this study is to examine the evidence
Main result (and why we are here today) the
city earnings tax does matter

• Data taken from 1990 and 2000 censuses

• Relative to their MSA, in cities with earnings
• taxes, income is smaller than in cities
• without earnings taxes

• For every one percentage point increase in the
• tax rate, city-to-MSA income ratio falls 5
• percentage points

4
Pretty easy to tell where the growth is
occurring city has shrunk
5
Here, city is at least growingsuburban growth
much faster
6
Here, city has tripled since 1969
7
City employment loss is just as dramatic
8
City is still employment center on MO side
9
Look at the scalealmost no movement in the
ratio during this period
10
Effect of earnings tax rates
Higher rates lead to lower city-MSA per capita
income ratios across U.S. cities
11
Summary

• Big changes in Missouris largest citiesboth
  income and employment migrated to suburbs
• What is more compellingthe St. Louis and Kansas
  City experiences are part of a nationwide
  phenomenon
• A 1 percentage point increase in the earnings
  tax rate is related to a 5 percentage point
  reduction in the fraction of income in the city
  relative to the MSA

12

• The earnings tax does hurt the city
• In Missouri, the border metro areas likely
  affect
• the states coffers
• The next question Is there an alternative that
• is better?

13
How you remove the earnings tax and keep city
revenues constant?

• The economics of taxation
• tax things that are in fixed supply
• this way there is no way to avoid
• taxes by choosing lower quantity

One possible solution therefore is to tax
landa vertical supply curve
14

• History of land taxes
• Henry George promoted land taxes in the 1870s
• Used in several Asian countries
• Hong Kong, Singapore, and Taiwan
• Used extensively in Pennsylvania cities and
  towns
• 2-tier tax structure in which
• structures are taxed at a different rate
• than land

15
Illustration Kansas City