The Buzz

Earnings tax dispute spreading to other cities

Kansas City Mayor Sly James
Kansas City Mayor Sly James

Other cities that impose taxes on their residents’ income are now wrestling with the same problem facing Kansas City: Are residents owed an earnings tax credit for tax payments they make to other states?

Kansas City officials say the answer is no — a judgment they repeated at a meeting Wednesday involving the City Council and more than a dozen state lawmakers.

But lawyers in other cities collecting a wage-based tax may be reaching the opposite conclusion. Monday, WHYY in Philadelphia published a story on the problem. Its lead paragraph:

“Thanks to a ruling this year from the Supreme Court of the United States, Philadelphians who earn out-of-state income may qualify for a break on their city wage taxes — a break that could cost the city untold millions in tax revenue.”

The case involves a Supreme Court decision known as Comptroller v. Wynne. In a 5-4 vote, the Court said states can’t tax income twice across state borders.

Kansas City argues the earnings tax here meets constitutional muster because the city offers a credit for earnings taxes paid to other cities, like St. Louis. But it offers no credit for taxes paid to another state — a Kansas Citian working in Kansas, for example, is taxed twice on that income.

Kansas City says state taxes are different from local taxes. Legal experts in the WHYY story have reached the opposite conclusion:

“ ‘The Philadelphia tax works identically to the tax invalidated in Wynne,’ said Ruth Mason, the Hunton & Williams Professor of Law at the University of Virginia. Mason, who focuses on tax law, co-authored amicus brief in Wynne with Penn Law professor Michael Knoll.

“As far as the Constitution is concerned, local laws and state laws are essentially the same, so a city tax can violate the dormant Commerce Clause the same as a state tax.”

Or see this, from the Financial Planning Association, regarding the implications of the case:

“Example 1: John is a resident of a city that imposes an earnings tax. He earned $200,000 in 2014; $150,000 from his resident state and city and $50,000 from work in a nonresident state to which he paid income tax of $2,500 (5 percent tax rate on $50,000). John’s total income tax in his resident state was $9,500 (6 percent of $200,000 minus the $2,500 credit for taxes paid to the nonresident state).

“John also paid his resident city’s earnings tax of $2,000 (1 percent tax rate on $200,000). John is allowed to claim a credit against the city tax for the taxes paid to the nonresident state. The amount of the credit is $500 (the lesser of the $500 owed to the city on the portion earned out of state, or the full $2,500 paid to the nonresident state). These are effectively the facts of the Wynne case.”

The squabble continues as city officials prepare to launch a major campaign to keep the earnings tax.

At Wednesday’s lunch with state lawmakers, Kansas City Mayor Sly James urged rejection of at least three separate pre-filed bills that would end the E-tax at the end of 2017.

“They need to be defeated,” he told the legislators. “They’re dangerous and they’re anti-city. … We need your help.”

Missouri Sen. Jason Holsman said he anticipates an argument next year that the E-tax, as it is now configured, violates the Constitution by illegally taxing income twice. City Attorney Bill Geary said he did not think that was a problem (see above). But he also said the city’s position may be tested in court, either here or in other states.

James’ plea extended beyond potential legislative roadblocks for the tax, which generates almost $230 million annually. He — and others at the lunch — suggested the bills were introduced for political reasons, with little chance of actually passing.

Instead, the city’s leadership is focused on the state-required renewal vote, now set for April 2016.

James said the campaign’s message will target retired residents, whose taxes would likely go up if the E-tax is ended. Half of the city’s E-tax revenue, he said, comes from people who live outside the city.

Kansas residents who work in Kansas City, Mo. can now claim a credit against their Kansas taxes for their earnings tax payments.

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