A judge ruled last year that ºüÀêÊÓƵ’ city government cannot collect its 1% earnings tax from out-of-town residents who work remotely for city-based employers. How the city’s pending appeal of that decision turns out will determine whether it will lose a huge chunk of its single biggest source of revenue going forward.
In essence, the future fiscal stability of the city’s police protection and other urgent municipal services is already hanging by a thread. Now Republican Missouri state legislators are trying to cut it.
Not content to wait and see where the legal system comes down on the issue, the House last week passed a measure to specify in state law what the plaintiffs are arguing in court: that a tax the city has collected for generations from anyone who receives a ºüÀêÊÓƵ-based salary cannot be collected from those who earn those salaries by working remotely from outside the city.
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There are reasons that argument isn’t outlandish — not least of which is that the city was willing to forego those taxes from remote workers until the pandemic exploded their ranks. But for legislators to purposefully blow a huge hole in the city’s budget with no discussion of how to fill it is irresponsible verging on malicious.
According to the , almost 4,000 municipalities nationally levy local income taxes. As in ºüÀêÊÓƵ, many of those cities impose their earnings taxes on residents and non-residents alike, with the determining factor being whether the income was earned through a city-based employer. The rationale is that even non-residents use city infrastructure when they commute into town for work.
It was a fairly straightforward proposition until remote technology, coupled with the 2020 COVID pandemic, fundamentally transformed the nature of the workplace. Remote work, common for less than a quarter of the U.S. workforce right before the pandemic, almost doubled that year.
Today, remote or “hybrid†employees (some days at home, some at the office) has settled at , according to most estimates. The days are gone when “going to work†almost always meant leaving home.
ºüÀêÊÓƵ’ earnings tax is generally deducted from the paychecks of employees at ºüÀêÊÓƵ-based businesses. Back when remote work was a rarity, the city routinely approved refunds to those employees who lived out of town and could show they weren’t physically coming into the city to do their jobs.
The pandemic, as they say, changed everything. With the spike in ºüÀêÊÓƵ-based employees working from their suburban homes in 2020, the city began refusing the refunds.
There are arguments to be made for that move. Remote workers’ earnings are tied directly to businesses that use the city’s infrastructure, after all. ºüÀêÊÓƵ is the top economic driver in the state; it’s myopic to suggest that those who live in the suburbs but dial into the city for work should have no stake in the city’s fiscal health.
But a circuit court judge wasn’t convinced, and ruled last year the city must refund the earnings taxes of six plaintiffs who worked remotely during the pandemic.
Though it’s a small amount of money immediately at issue, the city has appealed based on fears that a plaintiffs’ victory will open the floodgates and torpedo the budget. The Missouri Court of Appeals heard the case in February and hasn’t yet ruled.
The earnings tax brings in around $200 million annually, about a third of all the city’s general revenue. No one’s sure how much of that would disappear if every remote worker got a refund every year, but some estimates put it near $50 million. As a permanent annual loss, that would threaten the city’s fiscal foundation.
The city’s position in the litigation isn’t strong; it could well lose this and any future appeals. That legislative Republicans can’t even wait for the case to play out before piling on with potentially devastating legislation looks punitive and certainly isn’t helpful to the city, its residents or its business community.
As we have said before, ºüÀêÊÓƵ’ heavy reliance on this single revenue source isn’t ideal. But for now, it’s a fact that losing such a large portion of revenue will inevitably worsen all the problems the city’s critics point to, starting with police protection.
If lawmakers can’t work with the city to find a better way to fund those services, the least they can do is stay out of it.