In case you haven’t noticed, ºüÀêÊÓƵ is in a slump.
I’m talking about the economy, not the baseball team, and this slump goes far beyond a single disappointing season. The metro area’s population is now shrinking, and the city’s population has fallen by half since 1970.
From 2010 to 2019, the years between the Great Recession and the coronavirus pandemic, the metro area lagged national job growth by more than 40%. If a sports team fell so far behind its peers for so long, fans would be howling for a major shakeup.
Fixes aren’t easy for a regional economy that suffers from many ills, including political fragmentation, industrial decline and racial segregation. One has to start somewhere, though, and the Show-Me Institute would have us start by getting rid of ºüÀêÊÓƵ’ earnings tax.
The libertarian think tank, founded by billionaire Rex Sinquefield, released its first study on the earnings tax in 2006 and has sponsored half a dozen followups since then. A , by Lindenwood University economist Howard Wall, adds persuasive evidence that the tax harms both the city and the region.
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Wall compared cities with earnings taxes to those without them, controlling for long-term trends such as the decline of manufacturing and the population boom in the South and West. For cities that are otherwise similar, he finds that places that tax workers’ wages grow more slowly.
The city of ºüÀêÊÓƵ lost 18,600 residents between 2010 and 2019. Wall’s model shows that the decline would have been less than half as large in the absence of an earnings tax. He also estimates that the tax reduced job growth in the city by 29%.
Simply put, both people and employers avoid the tax by avoiding the city.
What’s worse, the tax appears to drag down the whole region. Wall estimates that job growth in the metro area was 19% less because of the city’s earnings tax.
We know that firms move to the suburbs to avoid the tax, but what’s harder to see are the employers that avoid the region because it doesn’t have a strong central city. “What is really happening is that this reallocation of people and businesses throughout the area is inefficient,†Wall told me. “It’s not how people and businesses are supposed to be distributed within a metro area, and it’s because the earnings tax distorts things.â€
City leaders have greeted Show-Me’s previous studies with a shrug, agreeing that the earnings tax does some harm but saying they need its nearly $200 million in annual revenue. Soon, however, much of that money may go away.
In January, a judge ruled that the city must refund the 1% tax to nonresidents who worked from home during the pandemic. City officials estimate that between $25 million and $50 million a year is at risk, and remote work appears to be a permanent phenomenon at many companies.
Unfortunately, the main alternatives to the earnings tax carry political difficulties. Property taxes are unpopular with homeowners while sales taxes have a disproportionate effect on the poor.
Sinquefield funded a 2011 report that suggested ways to replace the earnings tax revenue. The city used some of the suggestions to plug other budget holes, but the earnings tax remains.
Sinquefield owes city leaders a new list of realistic ways to raise $200 million a year. Those leaders owe their citizens a real effort to replace the earnings tax rather than defending a policy that impoverishes their city and the whole region.
David Nicklaus is a retired Post-Dispatch columnist who continues to follow the ºüÀêÊÓƵ business scene. Reach him at dnickstl@gmail.com