One by one, they filed up to the microphone of a crowded hearing room in Missouri’s Capitol for nearly two hours.
Leaders of the Kansas City business community, local police and firefighters, civic leaders and elected officials arrived in the statehouse Thursday with one message to deliver to lawmakers: Repealing the earnings tax in Kansas City and St. Louis would have dire consequences.
“It’s a bleak future without the Kansas City earnings tax,” said Kansas City Mayor Sly James, later adding: “If the earnings tax ends, no Kansas Citian wins. And as Kansas City goes, so goes the region. If the region and St. Louis take a hit, so does Missouri.”
James testified before the Missouri Senate Ways and Means Committee, which on Thursday held a public hearing on legislation that would repeal the 1 percent earnings tax in both Kansas City and St. Louis by 2017.
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Leaders from both communities urged the committee to abandon the proposal, which they say would devastate city budgets and result in dramatic cuts in areas like public safety.
“I’m not here asking for a penny,” James told the committee Thursday. “I’m simply asking you to leave us alone.”
The issue has become easily the most critical of the 2016 legislative session for Kansas City, demonstrated by the outpouring of opposition from local leaders. James was joined in Jefferson City by Jackson County Prosecutor Jean Peters Baker, Kansas City Fire Chief Paul Berardi, Kansas City Southern Railway Vice President Warren Erdman and a host of others.
St. Louis Mayor Francis Slay and a contingent from eastern Missouri also testified in opposition to the legislation.
The bill is being sponsored by Senate Appropriations Chairman Kurt Schaefer, who originally floated the idea last summer in response to Kansas City and St. Louis both pushing local minimum-wage increases over the opposition of the legislature.
Schaefer cited a U.S. Supreme Court ruling last May that faulted Maryland’s policy of providing only a partial credit for income taxes paid to other states as unconstitutional. He likened the earnings tax to that situation and said he hoped his bill would act as an “attention getter” for the two cities before a judge strikes the tax down.
“Someone is going to file a federal lawsuit,” Schaefer said. “And they are going to win.”
Sean Marotta, a Washington, D.C., based attorney who argued the Supreme Court case, said Kansas City and St. Louis’ earnings taxes are unconstitutional because they don’t provide a credit for income taxes paid in other states.
The argument that ending the tax would hurt city budgets was made to the Supreme Court in the Maryland case, Marotta said, and “the court wasn’t moved.”
Kansas City’s attorneys say the contention that earnings taxes are unconstitutional isn’t valid. The city offers a credit for taxes paid to other cities, like St. Louis, and it applies the earnings tax equally to residents and nonresidents — both pay 1 percent.
Most importantly, said Assistant Kansas City Attorney Nikola Smith, Missouri already offers a credit to residents for any taxes paid in other states. If Kansas City offered a similar credit, Smith said, “it would be a double credit.”
Reliance on e-tax
Kansas City’s earnings tax, first enacted in the 1960s, has long been the city’s single biggest revenue source. The 1 percent earnings and corporate profits tax together generated nearly $234 million in the fiscal year that ended April 30. That revenue accounted for nearly 45 percent of the general fund, paying for police, fire, trash removal and other city services.
About 50 percent of the tax is paid by Kansas City residents, 20 percent by Kansas residents and 30 percent from those in the Missouri-side suburbs and elsewhere, according to the Finance Department.
The population of Kansas City is 33 percent bigger during the workday, James said. And those people rely on city services, driving on the streets and “helping create potholes” like everyone else.
Slay said that everyone who pays the earnings tax, both city residents and otherwise, “benefit from the services that we provide.”
Kansas Citians will vote in April on whether to renew the tax for another five years. Under current state law, if local voters reject it, the tax would phase out over 10 years. Schaefer is proposing to repeal the tax in Kansas City and St. Louis by the end of 2017.
The city’s Finance Department said if voters reject the tax in April and no new revenue source is identified, it could result in the loss of 800 uniformed police officers, 550 firefighters and hundreds of other city employees.
Back in 2011, Kansas City voters overwhelmingly approved the five-year renewal, 78 percent to 22 percent. Residents were generally convinced by city officials’ arguments that the budget and basic city services would be decimated by loss of the tax.
Sen. Bob Onder, a St. Charles County Republican, said the earnings tax may have enjoyed overwhelming support “but only city residents get to vote.” Those who pay the tax but don’t live in St. Louis could make the argument, he said, that they are victims of “taxation without representation.”
Rex in effect
Supporters of the earnings tax say much of the motivation behind ending it stems from one man: conservative megadonor Rex Sinquefield.
Sinquefield has doled out more than $22 million since 2011 to various candidates and campaigns in Missouri, far outpacing any other individual or group donor. He spent $11 million in 2010 to bankroll the successful ballot measure that forced St. Louis and Kansas City to hold votes on the earnings tax every five years.
Former Senate President Pro Tem Tom Dempsey, a St. Charles Republican, resigned from office in August, more than a year early, in order to work for a lobbying firm connected to Sinquefield. His successor, Republican Sen. Ron Richard of Joplin, last month received a $20,000 donation from another Sinquefield-backed group, Grow Missouri.
The bill was heard by the Senate Ways and Means Committee. The committee’s chairman, Republican Sen. Will Kraus of Lee’s Summit, is running for secretary of state and has received $100,000 from Sinquefield.
Schaefer’s campaign for attorney general has received $750,000 from Sinquefield.
Kraus called suggesting that the earnings tax repeal effort in the legislature is based on the wishes of Sinquefield “ridiculous.”
“Mr. Sinquefield supports me because I support lower taxes and sponsored the first income tax cut in Missouri in 90 years,” Kraus said.
He said he’s not sure yet how he would vote on the earnings tax bill, noting that there should be some replacement on the table to avoid deep cuts to city services.
“But I’ll say this, I don’t live in Kansas City because of the earnings tax,” he said.
Supporters of the tax say they expect Gov. Jay Nixon, a Democrat, would veto any repeal. He said last month that he didn’t think “it’s Jefferson City’s business to run into cities to tell them how they need to raise money for their local services.”
If the bill were to pass and be vetoed, mustering a two-thirds majority in both chambers to override the governor would be an uphill battle since it isn’t just Democrats but also Republicans like Sen. Ryan Silvey of Kansas City who have expressed opposition to the bill.
Even Schaefer seemed to concede that the bill was more of an attempt to jump-start a conversation on the earnings tax before any likely lawsuits put city budgets in the hands of a judge.
“It’s going to have to be addressed,” Schaefer said. “I hope this bill is the opening discussion to move forward to a resolution with the two affected cities.”
Senate Majority Leader Mike Kehoe, a Jefferson City Republican, agreed.
“It’s a healthy discussion to have,” he said, “so that everybody understands that there is some rough waters ahead and they need to prepare for that just in case.”
If lawmakers want to have a negotiation on the earnings tax, James said, they should start with a conversation. Instead, Kansas City is being brought to the table “with a gun to our head.”
“There’s been no conversation to this point,” James said. “The gun was raised, it’s been pointed, and that’s where it remains.”