Show-Me Institute on Local Income Taxes

July 18, 2008

The Show-Me Institute in Missouri noticed our recent release of Tax Foundation Fiscal Fact No. 133: “County and City Income Taxes Clusters in States with Poor Tax Climates,” and wanted to point out a few of their studies on local income taxes in that state:

How an Earnings Tax Harms Cities Like Saint Louis and Kansas City
“By adopting an earnings tax, a city gives businesses and residents an incentive to locate production outside the city. People go where they will obtain the highest after-tax return on their labor or investments. In order to raise the return, people locate more productive capacity outside the city limits in order to avoid the tax burden. This incentive effect can account for why the city share of per capita income is smaller in cities with earnings taxes than without.”

Saint Louis Can’t Afford an Earnings Tax
“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.”

How to Replace the Earnings Tax in Saint Louis
“[A]t the end of the phase-out period, the revenue-neutral land-value tax rate would be 10.04 percent. The model predicts that in the long run, the number of people working in Saint Louis would double. “

How to Replace the Earnings Tax in Kansas City
“[A]t the end of the phase-out period, the revenue-neutral land-value tax rate would be 6.7 percent. The model predicts that Kansas City could eliminate the earnings tax in a revenue-neutral fashion over 10 years, replacing it with a 6.7 percent tax on the assessed value of land. The number of people working in Kansas City would increase by 50 percent in the long run.”

More on Missouri here.

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