Will KC issue earnings tax refunds? Mayor Lucas says the answer may have changed

The argument over who pays Kansas City’s 1% earnings tax — and who doesn’t — may soon detonate in the region, with short- and long-term implications for almost everyone.

The COVID-19 pandemic forced thousands of private employees to work from home this year. For months, Kansas City officials have said workers who live outside the city, and are now working outside the city, would be eligible for an E-tax refund in 2021.

E-tax refunds for out-of-city work have been City Hall policy for decades.

Because the pandemic has lasted so long, though, once minuscule refunds now amount to hundreds of dollars for each of the thousands of Kansas City-based employees who work from home in places such as Lee’s Summit or Olathe.

Refunds could also mean millions in lost revenue for the city.

Now, though, city leaders are considering a surprising reversal. City Mayor Quinton Lucas said he believes the city can legally keep earnings taxes from suburban workers who earned wages outside the city limits in 2020.

“I’m clearly in the camp that I don’t think Kansas City should … refund it,” he told The Star Editorial Board. Lucas said he’s working to round up support for an ordinance or resolution that would empower the city to keep the money.

“I’m of the view that it is a lawful approach for us,” Lucas said. “Do I have the City Council votes to do such a thing? I don’t know.”

City spokesman Chris Hernandez, who said explicitly in June that E-taxes would be refunded to workers who qualify and file returns, now says keeping the money is under active consideration.

“Staff has been discussing this idea,” he said in an email. “And right now, our teams in Finance and Law are running the numbers, and reviewing our ordinances and codes, to see what we would need to do, administratively, to implement this idea.”

COVID-19 has wrecked city and state budgets. The mayor’s idea deserves serious consideration — and some patience and understanding from suburban workers, who depend on a healthy Kansas City even if they’re working from home this year.

Given the extraordinary circumstances that have already blown a hole in the city’s budget, keeping the E-tax money is likely justifiable.

At the same time, Kansas City officials must be clear-eyed about what would happen if they refused to pay refunds. Lawsuits are almost a certainty. It would leave the city’s budget structure unclear for months while the legal process unfolds.

Missouri lawmakers might take an interest as well.

Millions are at stake. Kansas City gets about $270 million a year from the earnings tax, which pays for police and fire protection and other city services.

Estimates are hard to come by, but City Hall has said roughly half of the money comes from suburban commuters who work inside the city. In fact, taxing commuters is a main selling point for the tax.

For the sake of argument, assume just 25% of the revenue comes from workers outside the city. If one-third of those taxpayers seek refunds for nine months of in-home work, it would cost City Hall more than $15 million in refunds.

The city already faces a $60 million shortfall, which could prompt across-the-board, double-digit spending cuts. And City Hall can’t wait for help from Washington — or more money from surrounding counties, which have been stingy with CARES Act funds.

That’s one reason St. Louis, which also collects a 1% earnings tax, has said it won’t issue refunds. “Employees who work remotely from home should be treated as working at their original principal place of work,” its guidance says.

Lucas said he agrees with that city’s conclusion about Kansas City’s ability to collect the tax.

“If St. Louis has laid out a path that very simply says, ‘We don’t think the laws of Missouri require us to refund it,’ then I see no reason why Kansas City is going to say, ‘Hey, what the heck, let’s just refund it,’ “ he said.

Time is of the essence here. Hundreds of thousands of workers must make budget and tax plans in early 2021, and they need some certainty about these refunds. And, oh, by the way — Kansas City voters will decide whether to re-authorize the earnings tax at the polls in April.

Refunds are likely to be a key issue.

After that’s done, Kansas City will need to have a broad discussion about how the tax is structured for the years ahead. Thousands of commuters may begin working from home permanently, potentially putting a dent in E-tax revenue (and sales and property taxes, for that matter) for years to come.

That could mean less money for police, parks, firefighters, trash removal and a host of other services.

City Hall must come to grips with recurring legal battles over whether it can tax the income of people who don’t live or work in the city, or even in Missouri. Mayor Lucas has opened that discussion, and careful consideration must now begin.