Saturday, November 13, 2010

MARK HAIM ASKS: Why are earnings taxes bad?

Mid-Missouri Peaceworks director Mark Haim (left) sent the following memo about my endorsement of Proposition A, which passed and allows St. Louis and Kansas City residents to vote on their city's "earnings taxes," while greatly reducing the prospect of more earnings taxes for other Missouri cities.   
The gist of my (admittedly incomplete) response is that geographically-restricted earnings taxes create tax disparities that increase, rather than ameliorate, such insidious processes as "white flight" and economic segregation.   
Mark  Haim writes:  I respect your right to support Proposition A, but I must note, your rationale is somewhat lacking.
You point to corruption and failure in our inner cities.  I think you'd find broad agreement that this is the case. You have not, however, shown any causality between the earnings tax and the problems of the inner cities.  You also have not pointed to how removing the ability to tax would help the inner cities.

You state, "Killing the earnings tax would be one way to bring new life to Missouri's urban gems." but you provide absolutely no reasons why this would be the case.  Perhaps you thought it was obvious, but, as I read it, you've not made the case, or even tried to do so.  You've simply stated the cities are a mess, and that eliminating the tax will help.

Sorry, but there needs to be some cause and effect link on both sides. You need to show how the tax has contributed to the problems we all know are there, and/or how removing the tax would improve things.

A couple of final points. There are many cities around the country that have similar problems to StL and KC. Some have earnings taxes, some don't. It would help your case if you could show that cities w/o the tax, but otherwise similar, were doing better than StL and KC.

Also, it is worthy of note that earnings taxes are a way to get everyone who makes regular use of a city's infrastructure to pay some portion of its costs. When there has been white/middle class flight from our older cities, and the remaining population is disproportionately low income, it is very hard for the remaining residents to cover these costs.  It seems to me unfair for suburbanites who work in, and make use of the amenities of, a city, to not pay some portion of the costs of operation of the city.

Thanks, as always, for sharing the info you do.
I respond:   I think the point you make speaks for itself -- that the earnings taxes in KC and St. Louis were at least partly designed to make up for the errors and consequences of racial segregation, like "white flight."  
That motivation makes such taxes suspect because they do not address the root problem.   Racial segregation started these Missouri cities on a downward path; the taxes were, in part, a quick fix to that much thornier issue. 
That said, there's a significant body of economics literature on the effect so-called "tax troughs" have on geographic areas.   So long as St. Louis and KC are surrounded by communities with low or no earnings taxes -- i.e. tax troughs -- businesses and residents will relocate to those areas.  It's not the earnings tax per se that drives prosperity out -- it's the lack of earnings taxes in surrounding communities, and the economic osmosis this disparity creates.  
As for the tax contribution to corruption, it's hard to imagine hollowed-out cities with anything but, especially when they collect enormous revenue pools from absentee types such as business commuters using city services with little vested interest in how the taxes they pay are spent or apportioned. 
Finally, if these taxes have really worked all these years -- to the tune of a combined $300 million annually -- why aren't St. Louis and KC shining cities with thriving schools, low crime, and safe neighborhoods?   I suggest that it's problems these taxes have helped allow to fester, by easing their fiscal impact -- a symptom -- but never addressing the underlying ills. 

1 comment:

  1. So then you would like for the cities to raise their revenue primarily by taxing anyone unfortunate enough to own property within their borders?