Elected officials in St. Louis city say they want a “living wage” for everyone. If that is so, they should stop levying an income tax on the working poor.
Employers are required by law to withhold $1 out of every $100 they pay to their employees and remit the money to the city. Though not technically a regressive tax, the earnings tax is a cruel and unusual tax.
There is no exemption from the 1% earnings tax for working people at, below, or not far above, the poverty line. The tax hits the first and every dollar of income for the lowest-paid jobs. By contrast, the U.S. government exempts the first $12,000 of individual income and the first $18,000 of household income from the payment of the federal income tax.
Most cities — both big and small — have shunned the use of an earnings tax, seeing it as bad public policy. A tax on incomes encourages the out-migration of people and business entities. An easy tax to collect, a city earnings tax is also an easy tax to avoid — by relocating yourself or your business to any nearby suburb with no such tax. St. Louis and Kansas City are the only cities in Missouri with an earnings tax. Across the country, in cities with populations of more than 25,000, those with no earnings tax outnumber those with the tax more than 8 to 1.
The earnings tax provides close to $180 million, or a little more than a third of the city’s general-fund revenues, used to support fire and police protection, streets, parks, recreation and other day-to-day city services.
Policy analysts and scholars at the Show-Me Institute have suggested a number of practical ways that St. Louis and Kansas City could phase out the economically destructive earnings tax without drastic cuts in essential services or steep hikes in property and sales taxes. Here are some of the needed steps, aimed at recovering the lost revenue over a 10-year period:
• Despite the steady, continuing loss in population, the city’s budget continues to grow, if only slowly, from one year to the next, with few if any large reductions in its workforce. Surely, there is room for substantial belt-tightening in departmental budgets.
• The city can and should stop giving big tax breaks to developers and private business enterprises to encourage firms to invest in luxury apartments and high-end commercial properties. In 2018, the St. Louis Public School district lost out on nearly $19 million because of tax-increment financing, tax abatement and other special tax breaks.
• Nonprofit hospitals and universities are big employers and substantial consumers of public services but don’t pay property taxes. The city should actively solicit in-lieu contributions from nonprofits with sizable workforces. Elimination of the earnings tax would benefit their workers.
• Finally, the privatization of city services such as water, trash and the airport is another potential means of cutting costs and bringing in new revenue.
Although no current efforts are underway to phase out the earnings tax in toto, why are no steps being taken to alleviate the burden on the working poor?
With the passage of appropriate legislation, city leaders should instruct employers to stop collecting the earnings tax from the paychecks of any worker who makes $15 an hour or less. Effective immediately, these workers (making no more than about 80% of the median wage in the two cities) would all receive an additional 1% in take-home pay. To cite a few numbers:
• Someone at the current minimum wage in Missouri of $8.10 an hour would receive an additional $3.24 per week or $168 per year — assuming steady, full-time employment.
• Someone at a wage of $12 an hour would receive an additional $4.80 a week or $250 a year.
• Someone at a wage of $15 an hour would receive an additional $6 a week or $312 a year.
As tax breaks go, this is small potatoes. In addition to leaving a few hundred dollars in many people’s pockets, it would offer some encouragement to business entities to employ more inexperienced and relatively unskilled workers who are looking for good opportunities to begin their own ascent on the job ladder.
Surely the city is not so dependent upon the earnings of the working poor that it can’t provide this exemption.
Andrew Wilson is resident fellow and senior writer at the Show-Me Institute.