Proposition A – Let Voters Decide: Good Economics!

The falsehoods rage on as municipal leaders seek to keep their tax options open and public sector unions, with their hands in OUR pockets, continue their assault on Let Voters Decide – Proposition A.  The opponents of Proposition A seem to believe that if you say false things often enough, they will miraculously become true.  They know that’s not true but they also know that if you say false things often enough you can mislead people into believing they are true, which is their goal.

The problem with the falsehoods the opponents are spreading is, well, they are lies.  The “end of the world as we know it” economic lies are the most blatant.  Talk of tax increases if Proposition A passes are blatantly and knowingly false.  Proposition A makes no changes to any existing tax what-so-ever.  No policeman, no fireman, NOBODY loses a job if Proposition A passes, except hopefully those who made up the falsehoods!

Today, we have a guest blog on the real economic impacts of earnings taxes.  It is by Abhi Sivasailam, student of economics at the University of Missouri.  Abhi does an excellent job of capturing the impacts and his blog is well worth reading and sharing.  Enjoy!

Economic Realities of the Earnings Tax

by Abhi Sivasailam

One of the fascinating features of proposition A is the discussion it has produced over the bounds and proper scope of democracy. Much of the opposition to Proposition A focuses not on the economics of the earnings tax, but rather the fairness of allowing earnings tax policy to be determined by Missouri residents that do not live in cities that currently or will ever levy an earnings tax. The premise of these arguments is that, for myriad reasons, local control of local policy is valuable. Certainly, there are sound reasons to advocate for local control, but there are also meaningful reasons to allow citizens across Missouri to influence some forms of local policy. To see this, it is useful to begin with an exploration of the economics of the earning tax.

The economic case against the earnings tax is compelling. In theory, the earnings tax operates like any other income-based tax: on the margin, an earnings tax reduces incentives to work, reduces incentives to invest, and strengthens incentives to relocate outside and away from the municipalities levying the tax. The theory is well-supported by the evidence. Empirical evidence suggests that cities that levy earnings taxes enjoy lower levels of growth than cities that do not. Research shows that cities that impose earnings taxes have slower rates of real income growth for its citizens and experience slower rates of population growth relative to surrounding suburbs. Of course, if earnings taxes are eliminated in these cities, the resulting lost revenue may need to be replaced. The key disadvantage of the earnings tax is that it is an inefficient mode of collecting taxes. With the earnings tax eliminated, more efficient modes of taxation can be introduced to collect tax revenue at lower cost and with fewer harmful distortions. In sum, theory and empirics imply that the earnings tax negatively affects the growth of cities such as St. Louis and Kansas City.

If these cities existed in relative isolation from the rest of the state, then the costs of the earnings tax would be borne almost entirely by the residents of the cities. This, however, is not the case. The reality is such that Kansas City and St. Louis are powerful centers of economic activity and important drivers of economic growth within the state. Moreover, these cities are border cities. This means that when these cities enact burdensome policies that stifle growth, it is likely that jobs and investment capital and potential state tax revenue will not just be chased to neighboring cities, but to neighboring states.

If earnings taxes stifle growth, and if the cities that have earnings taxes are economically powerful border cities, then earnings tax policies implicate not just the cities that enact them, but the state as a whole. This implies that the earnings taxes levied in the state currently impose costs on individuals who are unable to vote or exercise alternate means of influence to eliminate them. Proposition A is an implicit admission that the economy of the state is, in some ways, a common-pool resource for the state’s residents.

Surely, opponents of the initiative are correct that local control of local policy really is valuable. However, given that the effects of the earnings tax spill over past local boundaries, it may also be valuable to allow other affected citizens to vote. This includes citizens who work in St. Louis and Kansas City and consequently pay earnings taxes but do not live in either and thus currently have little power to shape policy. It is not immediately clear which value ought to take precedence.

It is clear though that there is a case to be made that Proposition A is right to involve citizens across the state: ‘Let voters decide’ isn’t just a catchphrase; it is recognition that all of Missouri’s residents are stakeholders in the state’s economic vitality. (emphasis added)

Carl Bearden
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