Prop A Puts Earnings Tax Where It Belongs: Right in Front of Us

The passage of Proposition A means that, starting in the Spring 2011 election cycle, a vote will exist on whether or not the City will retain the 1% Earnings Tax on citizens and employees of City-based businesses. If not passed, the issue will return to the ballot on a five-year basis, coming back as an electable issue in the 2016 election cycle, then 2021, and so forth.

While the passage of Prop A was a state-wide event, the upcoming elections on the specific cities with earnings taxes will take place only within the voting constituencies of Kansas City and Saint Louis, the only cities in Missouri with earnings taxes. Or: No worries of out-state voting on the earnings tax in 2011 or thereafter.

Right now, it is not anticipated that the tax will be eliminated in the near future, namely Spring 2011. Most every City politician will be against it, and that makes sense. Today, the City of Saint Louis is not fiscally ready for the Earnings Tax to go away in the ten years following Spring 2011.

What is absolutely fascinating is that the mere existence of this initiative on ballots, with its returning as an electable issue every five years, will strongly encourage the City to more seriously consider how it garners revenues, and how those revenues are spent. It will remind us voters that our elected officials are culpable for how our tax monies are allocated, furthering smart spending. The shadow that Prop A now casts will force City politicians to continually improve the city’s revenues & their budgeting, so much so that, one day, the need for the Earnings Tax may go away.

So, while Spring 2011 will odds-on not see the repeal of the Earnings Tax, who is to say that the objective ever was Spring 2011? It very well could be 2026, for implementation in 2036, when perhaps the City budget can then do without an Earnings Tax.

In these upcoming years, it can be hoped & anticipated that our elected leaders will come together to see how the City can increase the efficacies of its budgeting and revenue gathering so that the Earnings Tax would no longer be necessary. That’s the possible beauty of this – it can force all sides to work together to fix the revenue and spending needs of the City, and at that time allow the Earnings Tax to disappear for no longer being needed.

Among such cost-savings measures exists immediate opportunities for increased cooperation and sharing of services between the City of Saint Louis and Saint Louis County. By combining services, both the City and the County can identify potential redundancies, and through cooperation eliminate them, providing cost savings to both City and County. Through this, we could see the City much closer to re-entering the County in the reasonable future.

Whether or not this leads to a full “merger” between the City and County of Saint Louis remains to develop in time, but very much, almost explicitly, Proposition A is an issue with a significant objective to further unify the City of Saint Louis and Saint Louis County. It must be noted that an increased City business environment, and the resulting revenues, would greatly appeal to County voters should “merger” ever become an electable issue.

Today the City of Saint Louis is a relatively poor city, but it’s not that the City has done a poor job in managing its existing revenues. On the contrary, fiscal discipline within the City is to be strongly commended. The retention of the City’s investment-grade bond ratings, in this market environment, speaks volumes to how well many are doing their jobs. However, the root of the problem isn’t just allocating the monies that are coming in, but finding newer sources of revenue from which to grow. Therefore, by taxing 1% of business revenues, the City is able to amass an estimated 31% of its own revenues, and right now every dollar counts.

It is equally acknowledged that the Earnings Tax is a significant hindrance to sourcing many companies, and their resulting new jobs, to the City. After all, the loss of 1% of revenues is naturally prohibitive to many companies’ intentions to locate in the City. This includes both out-of-state companies considering Saint Louis for new facilities sites (or even full corporate relocation), and local companies seeking the savings of relocating their business to the County. There are very few Boards of Directors who would want to explain to their shareholders why 1% of revenues are lost simply by locating their companies in the City, or to their employees explaining how they’re about to lose 1% of their salaries.

In contrast, no municipality in Saint Louis County has an earnings tax. As the Clayton skyline grows, vacancies exist in multiple modern Downtown high-rises, even those with wondrous views of the Gateway Arch that CEOs worldwide would otherwise fight to claim. And as established City companies leave for the County, those revenues which had been expected from the Earnings Tax are lost, and City coffers are lower than they were beforehand.

Much of the reason Saint Louis is a relatively poor city is simply the costs of being an established & historical city, an “older” city, with the resulting needs for significant capital going into infrastructure, social services, education, policing, and so on. When we hear of cities that are known for job growth, many of them are “newer” cities, such as Atlanta, Phoenix, and San Diego, cities that do not have Earnings Taxes, and also have not amassed the historical infrastructure, legacies, or resulting historical charm of Saint Louis. If we are to compete with these cities for future job, industry, and population growth, we must acknowledge that, right now, we are currently burdened with an Earnings Tax where they are not.

Other cities that currently have Earnings Taxes include New York, Chicago, and Philadelphia, “older” cities which didn’t feel the effects of population & job flight in the second half of the 20th Century to the degree Saint Louis did. Manhattan can charge a premium to offices along their Broadway in ways Saint Louis can’t along ours.

Congruently, none of these cities, old or new, have ever had to worry of the risk to losing their best companies to the immediate outlying community in the regionally cannibalizing way Saint Louis has had to endure corporate location, and relocation, vis-à-vis Saint Louis County. Of the nine Fortune 500 companies in the Saint Louis area, only two (Ameren and Peabody Energy) are located in the City, with the remaining seven in the County. The Earnings Tax has been at issue for many of these past decisions and definitely is an issue for corporate locating today and going forward.

If businesses were in an environment without the Earnings Tax burden, more companies could feel at ease locating to the City, especially to Downtown, and increase the standards of living & work opportunities for us all. Prop A may exist simply to remind us of this: that if the Earnings Tax were ever to be repealed, then the City of Saint Louis would again emerge as a much more friendly place for businesses to locate, grow, and thrive. The effects of such growth would greatly increase the quality of life for the entire region, with increases in population and the resulting consumer demand leading to stronger & more stable regional housing prices, increased retail shopping & dining choices, and even to an increase in the number of sustained flights at Lambert Airport.

Therefore, with Prop A’s passage, the City can now work over a definable period of years to develop a long-term budgeting and finance program, focused both on prudent spending and developing new revenue sources, that can perhaps eliminate the need of the Earnings Tax, and only then turning to the voters and saying such. When surpluses are one day flowing into City coffers, the Earnings Tax will probably be voted away.

What’s exciting is how, after the Spring 2011 elections, we can expect the word will go out on increased fiscal responsibilities:

OK, so we’re good for the next five years, but how about afterwards? Can we fix our budgets any further? How else can we increase revenues? Are we spending appropriately? How can we find better cost savings? Because this’ll be up again in 5 years, and we have to be ready to report back to the people by then. Otherwise, it’s our jobs.

Philosophically, I’m for the elimination of the Earnings Tax, to lure more businesses to the City, and through them jobs, revenues, and increased quality of life opportunities. But pragmatically, I know we can’t do that today, and I personally do not plan on voting for it in the spring. Then again, I see the passage of Prop A’s putting the issue on the ballots every 5 years as a truly multi-generational issue that may lead, one day, to the elimination of the Earnings Tax, doing so if and only if it is no longer essential and necessary. And, it will do so only once the City is in an economic environment where the elimination of the Earnings Tax is reasonable, is not an undue burden, and is majority supported by both its elected officials & constituents.

Let’s see how we are by 2026….