ST. LOUIS • One focus of the debate over the city’s earnings tax lies behind the glimmering glass windows of the Polsinelli law firm.
The office, inside downtown’s Deloitte Building, has wide open spaces and amazing views of the Gateway Arch and Busch Stadium. It has tall ceilings, flat-screen televisions and coffee bars. And much of it was paid for with the city’s earnings and payroll taxes.
The firm moved 80 employees into the office. In return, in 2010, the city diverted half the earnings and payroll taxes paid by Polsinelli and its employees to fund up to $3.6 million of the office improvements. Meaning the 1 percent tax levied on the salaries of Polsineli employees and on the firm’s net profits paid for the renovation, but not for police officers and fire trucks.
Now, the deal is in the spotlight as the city argues that every cent of the $160.7 million in annual revenue that the earnings tax delivers is vital to its survival. On April 5, by state mandate, city voters will decide if the 1940s-era tax should remain.
City Hall leaders say the earnings tax is the fairest and most equitable tax they have to provide services with a regional reach. The government has become more and more reliant on it even as local wage taxes have come under attack in cities across the nation, with many pledging to lower them.
Still, if the earnings tax is re-approved in St. Louis, some argue more companies will seek special breaks from the tax, potentially eroding the earnings tax base that makes up 33 percent of the city’s general revenue. The payroll tax, a one-half percent tax paid by businesses on their total payroll, makes up an additional 8 percent of city revenue, or $38 million a year.
That tax is also under assault. Clayton lawyer W. Bevis Schock, who successfully sued to shut down the city’s red-light ticket program, has filed a lawsuit arguing the Missouri Legislature never authorized the payroll tax, and the city has no authority to impose it. The city first instituted a payroll tax in 1988.
Schock’s suit, on behalf of General Marine Services, also targets the Polsinelli deal.
“They thought up this plan where everybody will pay the earnings tax and the city will refund it back to the firm,” Schock said. “The problem is it violates the constitutional requirement of uniformity of taxation.”
Randy Gerber, Polsinelli’s St. Louis managing partner, said the deal was good for downtown.
“At a time when other firms were leaving the city, we were pleased to move many highly skilled jobs to the heart of downtown St. Louis,” Gerber said. “We appreciate the city’s support, and value the significant presence we continue to maintain here.”
The St. Louis Comptroller’s office said that in 2015, four companies had similar active deals with the city.
In 2008, the Board of Aldermen approved a $1.75 million deal to divert earnings and payroll taxes for the development of downtown’s Culinaria grocery, operated by Schnucks. In 2009, Anthem, then known as Wellpoint, moved 300 jobs into the city in exchange for diversion of up to $4.5 million of earnings and payroll taxes. The city then struck a $1.67 million earnings tax diversion deal in 2012 with Wells Fargo Advisors. All of the deals have expiration dates.
While these special agreements are rare, Schock predicted more companies will seek them, just as they have with tax-increment financing abatements on real estate taxes.
“Once you give it to a few, then you have to give it to everybody,” Schock said. “It’s a major reason why the city is broke.”
Alderman Scott Ogilvie says the tax diversions are “pretty limited” and a necessary tool for the city to fill office space with workers. He said it’s no different than a neighboring municipality offering property tax diversions to build a Walmart. And he warned it’s a better way of funding government than nearby municipalities that have resorted to traffic stops and excessive fines and fees.
“It’s for businesses that are increasing their number of workers,” Ogilvie said. “There’s no property tax to use as an incentive. The incentive to use is the earnings tax.”
St. Louis has lost two-thirds of its population over the past 65 years, but it still services an infrastructure built for a city of its former size.
The Missouri Legislature authorized St. Louis to begin collecting a one-half percent earnings tax in 1948 to help with its chronic financial problems. But that authorization was temporary. In 1953, the city’s big chief executives formed Civic Progress Inc., and returned to the Legislature asking to make the tax authorization permanent. City voters ratified the permanent tax in 1954.
Civic Progress declared in support: “The city of St. Louis is the hub of the metropolitan area, and the balance of the area is dependent upon its being maintained.”
Mayor Raymond Tucker said the money could be used for progress and improvements, including the city’s share of expressway construction — the big highways that helped the Civic Progress businessmen, and so many others, leave the city for the suburbs.
In 1959, voters raised the rate to 1 percent, where it has remained.
Even with the tax, the city has struggled to maintain its infrastructure. The city’s capital committee has identified $114 million in critical capital-improvement needs that the budget can’t cover. On April 5, voters also will be asked to approve a $25 million no-tax increase bond issue to fund some of those improvements.
The earnings tax has remained controversial.
Missouri mega-political donor Rex Sinquefield pushed through a legislative measure requiring St. Louis and Kansas City voters to reauthorize the tax every five years. St. Louis voters reauthorized the tax in 2011 with 88 percent of the vote. If voters ever fail to pass the tax by a simple majority, it would be phased out over 10 years.
Ogilvie says failure to reapprove the tax would be catastrophic.
“Police will be laid off. Retirees won’t get their pensions. Ambulances will be called and they won’t show up,” Ogilvie said.
Ogilvie says the tax is one of the best ways for the city to raise revenue, and it forces more of the region to pay for services the city provides for the metro area.
“What city would be better off with 30 or 40 percent less revenue?” Ogilvie asked.
But Schock, the lawyer suing the city, says people are leaving the city because they are frustrated with how it spends money.
“The political class has become so powerful that they control enough votes to keep this tax,” Schock said. “People get tired of bad government. They get tired of the little problems you deal with around here. And the city cries poor yet they just voted $150 million to Stan Kroenke.”
Many cities have earnings or local income taxes that have come up for debate.
Detroit has a 2.4 percent income tax rate for residents, and 1.2 percent for nonresidents who work there. Income tax made up 27 percent of Detroit’s general revenue for 2016.
In 2013, Detroit filed bankruptcy. In a proposal to creditors, the city appeared to admit that its income tax was a source of trouble. The city wrote that lowering its income tax level to rates that are “at least competitive with surrounding jurisdictions is critical to reversing the City’s crippling population and job losses.”
Missouri has only two cities with local income taxes — St. Louis and Kansas City. By contrast, Philadelphia, which became the first city to adopt an earnings tax in 1939, operates in a state where nearly 3,000 municipalities have an earnings tax.
Mayor Francis Slay acknowledged in 2001 that the tax “does put the city at a disadvantage, but you can’t just wipe it out because the city needs the money.”
Since then, Slay has pledged to make the city less reliant on the tax, but that has been a struggle. The earnings tax made up 31 percent of the city’s general fund in 2001. In 2016, it makes up 33.4 percent.
To make the tax more palatable, Slay spearheaded a bill in 2000 at the Board of Aldermen where the city exempted stock options and dividends from the earnings tax.
But Alderman Sharon Tyus filed a bill this month to strip those exemptions.
“At a time when the city is financially strapped and we make the people who earn $8 an hour pay earnings tax, then everyone should pay,” Tyus said. “If we are telling the citizens how important the earnings tax is to our city’s revenue, and we need them to vote to retain it, then the citizens ought to know that the wealthy are bring exempted from paying these very taxes.”