Kansas City fires back at Missouri legislation to repeal earnings tax

Kansas City Mayor Sly James and top business leaders fired off a strong rebuttal Wednesday to state legislation that seeks to eliminate the city’s earnings tax.

They said Missouri Sen. Kurt Schaefer’s bill to repeal the 1 percent earnings tax is wrong in its legal reasoning and detrimental in its financial impact and would callously interfere with local control.

“Civic and business leaders agree that the earnings tax is a sound and fundamental way for Kansas City to finance city services,” James said in a news release issued jointly with the Greater Kansas City Chamber of Commerce and the Civic Council.

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.

Kansas City residents already are slated to vote next 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.

But Schaefer, a Columbia Republican who is chairman of the Senate appropriations committee and a candidate for attorney general, proposes to repeal the 1 percent earnings tax in both Kansas City and St. Louis by the end of 2017. If his bill becomes law in the 2016 legislative session, each city would have a little more than a year to sort its budget out.

Many local political leaders don’t expect the bill to get much traction in the upcoming session. But Schaefer is chairman of a powerful Senate committee, giving him clout in the legislature’s upper chamber.

As he pre-filed the legislation Tuesday, Schaefer argued the earnings tax “is outdated, dysfunctional and certain provisions are clearly unconstitutional.”

Schaefer cited a U.S. Supreme Court ruling in 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 allowing Kansas City residents to keep more of their earnings would be the better path to economic growth.

But James and the city attorney’s office in Kansas City said Schaefer misunderstood the ruling. They said the local earnings tax is constitutional and not affected by the Maryland ruling.

They argued Kansas City’s earnings tax, imposed on anyone who lives or works in the city, is not similar to the tax structure that was struck down in the Maryland case.

James said the city will mobilize to fight Schaefer’s proposal when the legislative session begins in January.

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 city basic services would be decimated by loss of the tax.

A finance department chart this week showed that 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.

“The earnings tax is a critical component of a balanced set of revenues that funds basic city services relied upon by the business community as well as individual citizens,” John Sherman, Civic Council chairman, said in the news release.

Chamber of Commerce President Jim Heeter was more blunt.

“Sen. Schaefer’s action is wrongheaded and mean-spirited,” he said.

The idea, however, has a champion in GOP megadonor Rex Sinquefield, who in 2010 bankrolled a statewide ballot measure that mandated that the earnings tax be reapproved by voters in Kansas City and St. Louis every five years.

Schaefer’s campaign for attorney general has received $750,000 in donations from Sinquefield. Overall, Sinquefield has donated more than $22 million to various Missouri candidates and causes over the last five years.

Repealing a tax is sure to win support of many lawmakers in a tax-averse Missouri General Assembly. House Speaker Todd Richardson, a Poplar Bluff Republican, appeared open to the idea during an interview this summer on St. Louis Public Radio.

But even among Republicans, the earnings tax repeal will be met with significant resistance from Kansas City-area lawmakers.

“The voters in Kansas City should be able to decide this issue,” said state Sen. Ryan Silvey, a Kansas City Republican and vice chairman of the Senate appropriations committee. “For the legislature to step in and take away our right to vote, which was given to us by the entire state back in 2010, that’s not appropriate.”

Silvey acknowledged he’s personally “not a huge fan of the earnings tax,” but said it’s irresponsible to simply cut off such a significant chunk of the city’s budget without offering a plan to replace the lost revenue.

The earnings tax is also a major component of St. Louis’ budget, accounting for about a third of the city’s general fund.

In St. Louis, Mayor Francis Slay has not yet issued a public statement on the proposed tax repeal, but his chief of staff, Mary Ellen Ponder, said in an email, “We are confident that a majority of the senator’s colleagues will still support local control.”

Democratic legislators have also vowed to fight Schaefer’s proposal.

House Minority Leader Jake Hummel, a St. Louis Democrat, and Assistant Minority Leader Gail McCann Beatty, a Kansas City Democrat, accused Schaefer of “vendetta-based governance.”

“Kansas City and St. Louis residents will not be intimated by Senator Schaefer’s threats and political posturing,” the Democratic leaders said in a prepared statement. “But if the senator wants a real fight, he’s about to get one.”

Schaefer could not be reached for comment Wednesday.

Not everyone in Kansas City agrees that city government makes good use of the earnings tax.

“It is absolutely important that people in Kansas City vote on the earnings tax periodically,” said Patrick Tuohey, a city resident and western Missouri field manager with the Show-Me Institute, which Sinquefield co-founded.

“It should keep the city honest and keep them having to demonstrate whether or not it is needed.”

Tuohey said people in his Waldo neighborhood and many others remain frustrated with the city’s delivery of basic services and don’t trust the city to spend the earnings tax wisely.

This story was originally published December 2, 2015 at 6:17 PM with the headline "Kansas City fires back at Missouri legislation to repeal earnings tax."