Rex SinquefieldTimothy B. Lee

Saint Louis faces a sad irony. It boasts cultural institutions that many larger cities envy — its symphony, opera theatre, botanical garden, art museums, and zoo are among the best in the nation. Its professional and collegiate sports teams have a history of success and draw from the across the Midwest. The entire world recognizes the arch. The city is home to prominent universities, one of the nation’s top-ranked medical schools and a thriving biotechnology corridor. It is filled with beautiful parks, neighborhoods and architecture. All of these advantages ought to draw residents and businesses into the city.

Sadly, however, the city has been on a downhill slide for over 30 years. After adjusting for inflation, total personal income within the city limits has been falling since the 1970s. While the Saint Louis suburbs have been growing steadily, city residents collectively take home less money, in inflation-adjusted dollars, than they did three decades ago. Businesses have been leaving too. In 1970, the majority of Saint Louis area workers had jobs in the city. Today, only 20 percent work within the city limits. Most of the region’s businesses are now in the suburbs.

How can a city that has so much going for it turn in such a depressing economic performance? We believe that the city earnings tax is a major culprit. Of course, many factors contribute to a city’s economic performance. But compare Saint Louis’s performance with that of Missouri’s largest city without an earnings tax — Springfield. Over the same 35-year period, as Saint Louis has been stagnating, total personal income in Springfield has tripled. And Springfield has managed to keep the overwhelming majority of its jobs in the city. Springfield’s share of employment in its metro area has fallen only slightly, from 92 percent to 88 percent.

The same pattern can be seen across the nation. A new Show-Me Institute Policy Study by Mizzou professor Joseph Haslag collects data on per-capita income in 101 of the nation’s largest cities, 23 of which have an earnings tax. He finds a consistent pattern: cities with earnings taxes are falling behind their suburbs in per capita income faster than the cities without earnings taxes.

As Haslag’s report explains, this is what economic theory predicts. Economics tells us that businesses and workers will both seek to locate where their after-tax returns are the highest. The earnings tax penalizes workers and businesses for doing business or residing within the city limits. It’s hardly a surprise, therefore, that the vast majority of Saint Louis–area job creation occurs in the suburbs.

Of course, few will dispute that the earnings tax harms the city. It is not a popular tax. But because it accounts for 16 percent of the city budget, some people consider eliminating it politically impossible. They ask “What services would you cut to get rid of this tax?”

This is the wrong question and the wrong way of thinking about this issue. The earnings tax is killing the city. If we continue as we have, driving residents and businesses into the suburbs, the bad economic news will continue as well. Thirty years of decline will become 40, then 50. The city’s budget woes will only become more severe, and cuts to city services will become inevitable.

On the other hand, if we replace the earnings tax with something more benign, the city will boom once again. That will mean new tax revenues, which will create plenty of room in the budget for improved city services.

Show-Me Institute scholars are actively exploring ways to fix the problem and will present these ideas in the coming months. But the one thing we know is that something has got to change. As long as the earnings tax is on the books, it will continue to hold back the city we all love. Some ask how we can afford to cut the earnings tax, but we ask: can we afford not to?

Rex Sinquefield is the president and Timothy B. Lee is the editor of the Show-Me Institute.

About the Author

Rex Sinquefield
Rex Sinquefield is co-founder and former co-chairman of Dimensional Fund Advisors, Inc. He also is co-founder of the Show-Me Institute.