The Saint Louis and Kansas City earnings taxes, 1-percent income taxes imposed on those living or working within city limits, have consequences. People have ways of avoiding these taxes, and the single easiest way is through their mobility. Put another way, people choose where to work and what businesses to operate based on a variety of factors, including the taxes in competing political subdivisions. This location decision is particularly pertinent to both Kansas City and Saint Louis, because each one’s metropolitan area straddles a state line. In contrast to metro areas that lie in the center of the state, any tax avoidance in Missouri’s largest cities will have repercussions for the state coffers as well for Kansas’ and Illinois’ benefit. Thus, in addition to the losses in economic efficiency and total productivity that it brings, earnings taxes leave the state and municipal governments with a shrinking tax base and a commensurate decrease in tax revenue, affecting all Missourians.
It is undeniable that the Kansas side of the Kansas City metropolitan statistical area (MSA) and the Illinois side of the Saint Louis MSA are gaining on their Missouri counterparts. The former has made such substantial gains in the last several decades that Kansas City is approaching an even split between the two states in terms of population, retail sales, and total employment. During the last decade, Missouri’s share of total employment within the Kansas City MSA slipped down to 0.57 in 2006, from 0.59 in 1998. Put another way, Missouri would have had another 19,000 people working in our state if the employment ratio had stayed the same. While Missouri is still by far the dominant state in the Saint Louis MSA, Illinois also has gained relative to the Missouri side. The ratio of Missouri employment to total employment in the Saint Louis MSA has fallen during the last decade from 0.85 in 1998 to 0.84 in 2006, reducing Missouri’s employment by 9,500 workers. In both cities, evidence indicates that employment is seeping across state lines, taking with it opportunities for tax collection and revenue accumulation for the state of Missouri.
How much of this phenomenon can actually be attributed to the city earnings tax? Saint Louis and Kansas City are hardly the only earnings-tax-enforcing cities that are losing economic power from their base state. Cities such as Philadelphia, Pennsylvania, and Cincinnati have also seen losses in employment to neighboring states. In fact, from 1998 to 2006, every MSA that includes counties from two or more states, in which one enforces a city income tax, has seen a decline in the ratio of employment within the area subject to an earnings tax relative to total MSA employment, even while similar multistate MSAs without earning taxes have experienced, on average, a modest increase in that ratio during the same period.
An elimination of the earnings tax could have a real, quantifiable impact on the level of total employment retained by Missouri in its two largest metropolitan areas. According to our calculations, eliminating the earnings tax in Kansas City would increase the ratio of Missouri employment to total employment in that metropolitan area by over one-half of a percent, an increase of approximately 4,700 Missouri jobs. Such an injection of employment into the state of Missouri would represent an annual gain of nearly $134.5 million in total state earnings. This increase in earnings would impact the municipal and state tax coffers as well, infusing over $4 million in additional tax revenue into Missouri state and municipal governments.
Missouri would stand to gain even more from elimination of the Saint Louis earnings tax. Our calculations indicate such a change in tax policy would precipitate an increase of more than 6,500 Missouri jobs in the short run, along with nearly $157 million in additional earnings within the state of Missouri. Local governments within the Missouri side of the Saint Louis MSA stand to gain nearly $5 million dollars in supplemental tax revenue from these additional Missouri jobs alone.
Perhaps an even more salient point is that all of these figures forecast benefits for the state of Missouri and its citizens in the immediate future. If the long-term gains are nearly as substantial as the immediate gains appear to be, eliminating the earnings tax could be a paradigm-shifting change for the Kansas City and Saint Louis MSAs, and for Missouri in general. It could help stem the trend of economic activity shifting outside city limits, fleeing toward suburban and out-of-state destinations, and help preserve Missouri’s fading dominance in those areas.
The earnings tax is, even without the concerns raised here, an economic force that adversely affects the cities that levy it, their metropolitan areas, and the state. It discourages investment and cultivation in the urban core, often the part of a city with the most infrastructure and economic potential, thereby weakening the entire economic structure of a metropolitan area and a state as a whole. When these potential pitfalls are combined with increasingly appealing out-of-state commercial options, the earnings tax becomes a formidable enemy to the economic stability of a state like Missouri. It is time to consider whether the costs of the earnings tax are worthwhile. Would the citizens of Missouri be better served by a balanced playing field that allows Saint Louis and Kansas City to compete with surrounding suburban and out-of-state areas unencumbered by the economic distortions produced by the earnings tax? The economic vitality and fiscal solvency of their state may depend on it.
Joseph Haslag is executive vice president of the Show-Me Institute, a Missouri-based think tank, and a professor in economics at the University of Missouri–Columbia. Alex Schulte is an intern at the Show-Me Institute.