By Jill Draper
As Kansas City residents go to the polls on April 6 to decide whether to renew the earnings tax, they might be surprised to learn the majority of large cities in the U.S. don’t have this type of tax.
Kansas City leaders and a long list of groups supporting the e-tax are quick to point out that the city’s budget relies heavily on this 1% tax which brings in an estimated $292 million (at least in non-pandemic years) to help fund street repairs, trash pickup, police and fire protection and other vital services. It’s the city’s single largest revenue source, producing more money than either property or sales taxes.
But according to the Show Me Institute, a conservative think tank, it actually harms economic and population growth in the long run by encouraging people and businesses to locate outside the city.
First, some facts. The e-tax applies to three groups: all city residents, regardless of where they work; nonresidents who work within the city limits; and businesses located in the city or doing business in the city.
KCMO residents who are retired or not working pay no e-taxes at all, because the tax does not apply to Social Security, dividends, interest, IRAs, worker’s comp, or disability and unemployment benefits.
Ever since the passage of a 2010 ballot initiative, the e-tax must be voted on every five years. It passed with 78% and 77% approval in the last two elections, and it’s likely to pass again next month. Otherwise, city residents would be rejecting a huge chunk of money from individuals who live in places like Overland Park, Olathe and Lee’s Summit but spend their workdays in KCMO, using city services as they earn their paychecks.
Mayor Quinton Lucas has called the earnings tax the city’s one true regional tax. “We’ve been hit with a lot in the last year,” he says. “Let’s not give up tools that have been important to us.”
If voters reject the e-tax, it would be phased out over 10 years. Options for replacing the money include hiking sales and property taxes and reducing city services.
Opponents of the tax say there are better options, and it’s time to have a conversation about them.
“Certainly some other taxes would have to be raised to replace the earnings tax,” says David Stokes of the Show Me Institute, “but the single, most dramatic and important way is to reduce tax abatements, subsidies and incentives the city is giving away.” KCMO lost at least $94 million in total tax abatements in 2018, he says.
He notes that many economists and organizations such as Strong Towns point to land taxes as one alternative, and offers the example of downtown Kansas City’s surface parking lots. “If you were paying more for the land and less for the improvement (buildings), it would be an incentive to develop the property.”
Stokes believes relying on the e-tax for future funds is not just bad governmental policy—it’s also risky. The city typically refunds $4 million in e-tax revenue each year, but for the upcoming fiscal year it has budgeted $17 million to pay back claims from nonresident taxpayers who spent most of 2020 working from home.
“We get normal requests for refunds every year. It’s not a new concept, just a more pronounced one this year because of the pandemic,” says Tammy Queen, KCMO finance director.
“That’s a danger,” says Stokes. “Telecommuting and working from home is becoming a fixture of American life. We don’t know what the return to normal is going to look like.”
In addition to a land tax (which Kansas City had until 2012), he says KCMO might consider more shared regional services, more privatization of city services, a shared sales tax pool with nearby municipalities and/or a local gas tax.
Whether it’s wise or not, Stokes expects the earnings tax will continue in the near future. “It’s the typical inertia of government,” he says. And he admits that changing the city’s funding process while the effects of the pandemic still linger is not the best timing. In 2026 there will be another election. “Perhaps in five years it will be much easier to talk,” he offers.