Slow Death by Sales Tax: How Overreliance Threatens St. Louis Municipalities

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Many of the municipalities in the region are failing or stagnating. The failing ones are easy to spot. They can’t feed their prisoners. The mayor is caught embezzling. They use speeding tickets to fill budgets. Their population is dropping. Wealth is fleeing. Empty housing, retail, offices, and factories dominate. These are the apparent signs.

What is less obvious are the ones stagnating. Their populations aren’t growing, their land is built-out, their housing stock and population are aging. A mall dying, a big box leaving, or a declining school district could send them into a downward spiral. Popular perception may be a healthy one, but let’s look closer.

I’m using numbers from Ellisville, not to pick on them, they are heroes in my book for fighting the temptation of a TIF, but because they share useful data. A pitfall of transparency, I suppose.

Ellisville has 9,143 residents (up 39 from 2,000, 22nd largest in St. Louis County, smaller than a city ward, which average 11,000) spread over 4.39 square miles. The median age (That is half above, half below) in 2010 was 44.7 years (39 in 2000). Median household income is $66,832 ($65,016 in 2000). It has a high home ownership rate of 84.7%. The picture of stability and the envy of many.

But wait, the median income number is in nominal dollars. Let’s take into account inflation. $65,016 in 2000 is $82,329 in 2010 dollars. Household size in 2000 was 2.84 and in 2010 was 2.52, which may account for some of the decline. It is still higher than the median income in St. Louis County at $58,485.

Let’s see how the municipality’s revenues have fared recently. See the document below for a full rundown. I’ve displayed the Real Estate Tax (3.65% of total revenue), the 1% Sales Tax (22.66% of total revenue), and the 1/2% Stormwater Sales Tax (13.8% of total revenue). I’ve normalized them to their 2004 amounts so we can see how they’ve changed relative to each other. Ellisville is a Point-Of-Sale city.

Ellisville Revs 2004-2012

Property taxes have been volatile, but have beaten inflation. Sales tax collections have fallen precipitously. In addition to the two sales taxes displayed, Ellisville now has a 1/2% Capital Improvements Sales Tax (added in 2011) and a 1/4% Parks Sales Tax (added in 2007). These four together raise 53.8% of Ellisville’s revenue. Had they kept up with inflation, they would have raised 20% more in 2012. No wonder they’ve added two new taxes recently. The prices of things have kept up by definition, but the total amount sold in Ellisville has not.

This reveals how the reliance on sales taxes has left Ellisville vulnerable, and why a new Walmart was attractive to many, no matter the subsidy offered. Vulnerable to Internet sales, vulnerable to shifting consumer habits, vulnerable to the TIF wars, vulnerable to the transportation and housing subsidized hyper-horizontal development pattern. I suspect a similar story could be written for many of our cities (Sales taxes are 44% of Crestwood’s revenues down from 56% in 2006, down 33% in real terms or $2.9M). They are in a much weaker position to deal with municipal challenges, let alone meet the usual delivery of basic city services. For example how can a city bond out a project backed by general revenues if there is risk that a big box closing puts a huge hole in receipts?

Ellisville’s per capita income in 2012 was $40,263, or $368M for the entire city. In 2000 it was $27,379, $36,504 in 2012 dollars, or $332M for the entire city. If Ellisville had the dreaded and now banned Earnings Tax, revenues would have grown 10.8% over inflation 2000-2012, and they might be lowering other taxes instead of raising them. I’m leaving out the fact that had Ellisville had an Earnings Tax it would clearly be a horrible place to live, and everyone would have left by now, so any revenue projections are suspect (as many Earnings Tax opponents would have us believe). *Numbers are from census data which have big error bars. The IRS says per capita AGI for ZIP code 63011 is $38,959 and for 63021 is $37,657. These ZIPs cover Ellisville and more, 92,600 residents in all.

What to do? The Super Mega Merger may not be the answer, but neither is the status quo. I encourage municipalities like Ellisville to examine their revenues similarly and promote local, regional, and state development and taxing policies that would render them more resilient, instead of hanging on the whim of a national retailer, or slowly sliding into financial crisis.

A Strong Towns post The Problem with Sales Tax

Ellisville, MO Revenue 2013 by nextSTL.com

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  • http://donspoliticalblog.blogspot.com Don

    I appreciate the thorough analysis. Sales tax is the new panacea especially in Republican circles. Got an earful on this from a client on Monday who lives in PA. Earnings taxes are the norm in both PA and Ohio. My client tells me in Pittsburgh — where he works — it’s 4% but he doesn’t pay it because he lives in a wealthy suburb which has an earnings tax of 1%. Since he works, but does not live, in Pittsburgh he still must pay Pittsburgh some nominal fee somewhere between $100 and $200, in lieu of the earnings tax.

    My cousin lives in suburban Canton OH where earnings taxes are also the norm and I’m thinking it was something like 3%.

    There has to be a better way to fund our governments.

    • dempster holland

      This generation of wealthy people do not beleive in paying higher taxes
      for the public good

      • Alex Ihnen

        Higher than what? Taxes, especially income taxes are at historic lows for this generation.

        • dempster holland

          You are right. The highest marginal federal rate in the
          1950s was 70 per cent, and now is about 40 per cent,
          The highest state rate of 6 per cent over $9000 has not
          changed for decades. This has been an enormous
          financial boon for the wealthy, but has resulted in
          a starving of resources at the federal level and a massive
          increase in federal debt. Yet this generation of rich
          people are constantly complaining. The loss in federal
          income is one reason that local sales taxes have gone
          up.

          • moe

            It’s all about marketing to the lowest denominator which the republican party has mastered. They have convinced their voters that they can have the same government with no taxes and any tax increase is evil. Never mind the science of inflation, demand, supply, population shifts, etc. Then after they gut any program they feel they don’t benefit from, they lower taxes for the super rich and then they weasel in local taxes and pass the blame on to small town reps. who have no choice but to erect TIFFS and the like to make ends meet.

            Taxes Are NOT evil. Let me repeat that: Taxes are NOT evil.

            Now to end; there have been a rash of recent articles like this:

            http://bettercities.net/article/why-are-young-adults-returning-city-20345

          • moe

            That should be reading Why are young adults returning to the cities?

          • flyover

            Actually, in 1963, the rate was 91% on everything over $3 mil. We hear these rates thrown around and in the same breath we hear how little we pay today. The problem is nobody ever paid those rates. The tax code was loaded with loopholes. Remember things like “income averaging?” You used to be able to deduct your credit card interest. The interest on your car loan. There were hundreds of tax shelters. All of that went away under Reagan when the rates were lowered. That was his deal with Tip O’Neal. When comparing 39.5% and 91% you are comparing apples and oranges.

        • http://donspoliticalblog.blogspot.com Don

          When talking about income taxes, It’s important to note that Republicans have been very successful at redefining “income” for income tax purposes to only wages. So, while it’s true as Dempster notes, that the top marginal income tax rate is 39.6% on income above $450k, that only applies to wages.

          Mitt Romney (not to pick on him, but some of his tax info became public unlike non-politicians) in 2011 had a tax liability of just less than 10% on more than $13M in reported income, or at least what most Americans would consider “income”. Embarrassed by his largess from a tax code rigged for the very rich, and running for President, Romney voluntarily reduced his charitable deductions to boost his tax to 13.7%. He has 3 years to amend and get the extra money back. See Forbes: http://www.forbes.com/sites/leesheppard/2012/09/25/east-of-eden-mitt-romneys-2011-returns/

          In 2011 I paid 30% of my considerably less “income” to the Federal Government.

          • rgbose

            Keep in mind that Social Security taxes (6.2%, more if you’re self employed and you pay the other half hidden from our paychecks) end at about $110k in income. Are you including that in your 30%? That sounds huge. My “effective rate” to the Feds excluding FICA was 10% this year. Then add in 6.2% Social Security, 1.45% Medicare, almost 6% for MO, 1% for Stl City.

            I found this funny about the new Mayor of New York’s taxes
            http://www.businessinsider.com/de-blasio-lower-tax-rate-than-mitt-romney-2014-4

          • http://donspoliticalblog.blogspot.com Don

            I’m a self-employed professional and pay the self-employment
            tax. Remember half this tax (the portion your employer pays for you)
            is tax deductible for me. The 30% included my self employment tax as
            did Mitt Romney’s 13.7%.

          • flyover

            Actually, Mitt Romney paid the same rates as everyone else. As a retired person, he no longer has wages, which are defined as “ordinary earned income.” You pay the same rates as Romney when you have a capital gain or receive a dividend. If you start taxing capital gains as earned income, you will reduce the willingness of Americans to take risks. When that happens you can forget about economic growth. Our tax code already greatly penalizes success. The top earners pay a higher rate and see deductions phase out as they reach certain thresholds. I’m sure you don’t like that they pay no taxes on interest income from muni-bonds. However, when they agree to accept a lower interest rates than they could get from taxable corporate bonds, the tradeoff is your schools and local governments get to borrow at reduced interest rates. If our country is ever suicidal enough to try to tax muni bonds, you will see a collapse of many marginal municipalities and other governmental agencies. Also, remember that when you talk about taxing capital gains, dividends and interest income as ordinary income (wages) you will be taking food off the table of retirees who depend on their savings and investments to live, especially as a new generation tries to retire without pensions. Retirees planned for retirement expecting to get this tax treatment. Changing the rules at the end of their game would be grossly unfair.

          • Alex Ihnen

            Just chiming in – conversations naturally drift this way and that, but let’s keep this on municipal tax strategies and sales tax if possible. Thanks for the conversation!

          • flyover

            Just checking. I was answering Don who commented on Mitt Romney’s taxes. Was this message for him or both of us?

          • Alex Ihnen

            Any, all, the Internet, whomever. It’s always a back and forth so no big deal. What keeps conversations here worth participating in is that they generally keep on topic and don’t slide into other issues.

          • flyover

            I agree, but about half the comments deal with other forms of taxation. My point is while cities, school boards, fire districts, etc. all view taxes separately, real people just look at the total bill. Any attempt to raise any tax needs to be sensitive to that. I hate earnings taxes and believe they run companies out of town. However, if you look at cities like Clayton and Creve Coeur that don’t have a lot of commercial property, but a lot of offices, I can see how some type of personnel tax might be appropriate in some situations. Instead of an earnings tax, perhaps a per-head impact tax of $50 or $100 a year might work. Companies could pay it monthly so it wouldn’t be a big one-time hit. Personally, I think too many cities try to do too much. You get a group together and it really isn’t too hard to hijack a municipal budget. Cities (I exclude the city of STL as it is also its own county) should worry about police protection, roads, zoning, garbage disposal, snow removal, animal control, parks and recreation and basic services. I think a good case could be made to consolidate building inspections with the county as many cities already do. However, I see too many towns wasting money on extraneous things that may sound nice, but really don’t accomplish anything. When I see some towns budgeting for feel-good environmental projects not related to the operation of the city, I am reminded of an incident that happened during the Vietnam War. In the late sixties, a group of students at my high school, frustrated with the laborious peace talks that were not seeing any progress, did what all high school students do. We picketed the principal’s office demanding the war end. Our poor principal came out and told us, “kids, if I could end it, I would, but I am just a principal at a small town school.” A lot of things make people feel good, but aren’t really effective or needed. Cities should remember that and stick to the basics.

          • moe

            Flyover…with regard to your comment “real people just look at the total bill”….yes they do…they think that The Federal Gov is the big evil Satan and the State Gov is it’s evil brother. They completely gloss over (or conveniently ignore) ALL the other taxes and fees that counties and cites and a plethora of other financial districts add on that make that bottom line so big.

          • flyover

            I don’t believe they ignore them. I think they are purposely packaged by the County into a single bill that people just call “property taxes.” If we got a separate bill for schools, the library, the fire department, I think people would pay more attention.

          • moe

            Possible Flyover…however, the thought behind the package is that combining all taxes is a convenient way to bill and then collect the taxes. However, most if not all of these districts have to have the taxes approved by the voters and or boards that they elect. Add to that the politician led by (or is that paid by) the special interest know just when to place the issue on the ballot to get little turn out/favorable return.
            I think we are on the same page. But let me stress for the others again…that it is not the Federal and State tax dollars that are killing us, it’s the local taxes and fees. The politicians campaign on cutting taxes and win…then they go to Jeff City or Washington where they implement even stupider and more destructive laws on our society than money issues while their ‘friends’ back in Home Town raise the local taxes and fees to cover the amount that was cut. Then that circles back to voter apathy.
            A prime example are the fire districts….paid board members elected at low voter turnout elections who then raise rates to pay their salaries and not a voter shows up to protest, lest they be seen as either anti-union or anti-public safety post 9-11.

          • flyover

            I agree which is how you end up with firemen making over $150k and a secretary making $90k in the Creve Coeur Dept. They were out there again a few weeks ago begging for more money and getting it three to one. They already have more Chevy SUV’s than Johnny Londoff. Or, the Ladue School district which scheduled a tax hike election while the private schools were on spring break. Yeah, they know exactly when to do it.

          • dempster holland

            Discussing other types of taxation is completely relevant
            in discussing the sales tax. Conservatives much prefer
            sales tax over a graduated income tax because that means
            the rich can keep more of their money as the middle class
            and poor must pay more. Now we are seeing the result of
            continually increasing sales taxes so that in some areas
            they total 10 per cent.

    • Jason Stokes

      Cleveland city is 2%. Where I live in the burbs is 1.5%. That’s the standard around here. Makes 1% seem light by comparison – and when my wife worked at SLCH they paid it for her.

      • Alex Ihnen

        2.1% in the City of Cincinnati

    • Steve Sheridan

      You can have large governments by catering to special interests, or you can have responsible small ones that serve the people. It equates to, you can limit spending power of your citizens or customers, OR you can have an attractive prosperous local economy.

      • http://donspoliticalblog.blogspot.com Don

        We can’t have large governments that cater to the people?

        • Steve Sheridan

          No one has figured out how to do that yet. To have a large government, you have to get a lot of money from somewhere. And taking too much directly from the people leaves them with reduced purchasing power to live in your community.

        • DanieljSTL

          What happens when you have a city of 10,000 people. They all live in and work in the city. They spend their money only in that city, and pay taxes in the city. 1 resident spends $1 on a muffin at the diner. That diner pays tax on the muffin. They then have $.95 to spend at the market for more ingredients. The market now has $.92 to spend (after taxes). They take the delivery truck to the local gas station, where they turn the $.92 into $.89… you get the point.

          Unless people from outside the city are bringing money in, the dollar eventually turns to $0. It’s a somewhat simplistic way of looking at it, I know. It’s not too realistic, either. But by increasing taxes, over and over again, regardless if it’s income, sales, etc…How much government do we really need? How much can we live without?

          • dempster holland

            But if the local government receives the tax, it then spends
            it and at least some of the money stays in the city. There
            is no inherent difference between a private business re=
            spending its revenue and a government re-spending its
            revenue. In either case, some will be re-spent in the city
            and some will be re-spent outside the city

          • DanieljSTL

            I agree, to a certain extent. As I said earlier it was a simple way of looking at it. The problem, as you can observe in most governmental agencies of any level, is that public entities have a tendency to bite off more than they can chew. When you or I do it, we have to cut from another area of the budget. When governments do it, they look for more ways to raise revenue.

            While I’m probably more conservative than most people on this board, when it comes to finance, I understand and appreciate the need for taxes. My concern, however, is that we as citizens allow Democrats and Republicans to muddy the waters with constant arguing over taxes and entitlements. There are plenty of ways to tighten the belt without sacrificing too much.

  • Steve Sheridan

    I have a different approach in mind. While I enjoy the analysis, it seems something has been overlooked. All the focus is on revenue, and none on spending. Why not just skip all the special interests required for a large government, and go with an economical one instead.

    • rgbose

      Looks like Ellisville is taking in about $1100 per resident. Is that a lot or a little? I guess it depends on what they get for it. The point here is that it’s a bad idea to rely so much on sales taxes. They amount raised has been declining which jeopardizes the level of service Ellisville citizens receive. If a low level of service becomes a detriment, people will start moving out and the town will be in real trouble. Lately they’ve been responding by raising sales taxes in 2007 and 2011, which given recent performance was the wrong tax to raise. A different tax structure might have been more stable so citizens could count on a level of service with low risk of being hit up for higher taxes. Maybe a different gov’t structure is worth considering, let’s discuss.

      • John R

        Right, generally these communities are providing the services their residents expect/demand and in many cases vote for directly. Citizens want the good roads, community centers, parks and trails, etc.

      • http://yastlblog.blogspot.com/ Kevin Barbeau

        Agreed. As more purchases move online, cities/municipalities will either have to take the plunge and enact an online sales tax (which brings its own ethical/technical questions and limitations), find replacement funds through other resources, or move toward sustainable practices that (in time) reduce budget line item totals.

        It’s an interesting time for public service! The ones who will make the tough choice over the easy one — and still have enough support to get elected! — are needed right now.

    • http://donspoliticalblog.blogspot.com Don

      I think you overestimate the amount of “special interest” spending by the city of Ellisville. There’s fat in every budget, but this isn’t the Federal or even the state budget.

      • DanieljSTL

        Agree that “special interest” may not be the appropriate term, but the City likely has a bit of a spending problem, too… They have plenty of cops driving around with nothing better to do than write speeding tickets on Manchester Rd. I think Steve has a point that there are two sides to the problem. Unfortunately, our current 2 party system forces us to ignore problems with both revenue and spending. Instead, we blindly side with which ever party we feel to be less evil (see comments below on Romney).

        A bigger problem for Ellisville, to me at least, is the fact that millenials are leaving the burbs. Ellisville is about as far from the highways as any municipality can be in StlCo. There are very few, if any, attractions to visit, and look at the median age over the last 10 years… 10% increase.

        What happens as the housing stock of Ellisville (1960’s to 1990’s) becomes run down? Are the aging residents going to rebuild or renovate? Will they be able to afford to? Are young families going to move in and rehab? I’m too young to know this for fact, but I’ve been told that Jennings and Walnut park were very desirable places to live in the 50s and 60s.

        • Eric3497

          Yeah, the average age in Ellisville grew 4.7 years in just 10 years. Pretty soon it’s going to be a big retirement community.

          • DanieljSTL

            The sarcasm is heard, loud and clear.

            If the 10% trend continues, the City will have problems in the future.

  • rgbose

    37% of Hazelwood’s revenue is from sales taxes. Down $1.25M in real terms or 10% since 2008,

    In 2004 sales taxes were 12% of general revenues in St. Louis City. In 2012 they were 10.3%, down 23% in real terms. All general revenues were down 10% over the same period. So for the city sales taxes aren’t getting it done either, but they are less vulnerable than many. Keep in mind though that its population decreased unlike Ellisville, Crestwood, and Hazelwood.

  • http://yastlblog.blogspot.com/ Kevin Barbeau

    Question about STL City…

    Is there a sheet available that lists ALL taxes imposed by the City of St. Louis (and, I suppose, those state taxes which STL falls under) and the budgets they’re supposed to go to? Have a sudden urge to do an exercise in City budget/tax chopping…