Suburban Lou
01-31-2007, 06:35 PM
Think tank proposes city trade its earnings tax for land tax
By Tim Woodcock
Posted Wednesday, January 31, 2007
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The Show-Me Institute, a conservative think tank, has released a study making the case for the city of St. Louis replacing its earnings tax with a land tax.
Currently people who work or live in the city must pay 1 percent of their earnings to the city, and, in addition, companies based in the city pay a half a percent of their payroll to the city. The situation is similar in Kansas City, Mo.
The city of St. Louis’ 2006 income from taxes totaled $435.5 million. Of that, $170.9 million, or 39.2 percent, came from the earnings and payroll tax. Previous years’ financial reports show a similar reliance on the earnings tax.
Taxing people according to the value of the land they own, not their personal income, would spur growth in St. Louis’ lackluster economy, said Joseph Haslag, a professor of economics at the University of Missouri-Columbia and author of the report. Over time this growth would offset any of the problems associated with the tax, which could be phased in over 10 years and allow the city to continue with its current level of services, Haslag said.
Simply changing the city’s tax structure would not be enough for the city to reverse its 50-year slide, said Rex Sinquefield, president of the Clayton-based Show-Me Institute. Improving the public schools and cutting the level of crime are of a similar level of importance, he said.
The earnings tax is “a tax that says you’re not welcome, especially if you are high income,” Sinquefield said. Creating a business-friendly culture by eliminating the earnings tax would allow the city to capitalize on its assets — the network of highways that serve it, the cultural institutions and the sports franchises that distinguish it from the suburbs — and introducing a land tax in its place would create a virtuous circle, because a property owner’s tax burden would go up only to the degree that the local economy is prospering, Sinquefield argued.
In its mission statement the Show-Me Institute states it is “rooted in the American tradition of free markets and individual liberty” and says “the institute’s scholars seek to move beyond the 20th-century mindset that every problem has a government solution.”
Pure economics
The advantage of a tax on land is that it is less distortionary than other kinds of taxes, Haslag said.
“Because the land is not movable, there is no decision that the land owner can undertake to reduce the tax burden,” he writes in the report. If a landowner were really unhappy with the new tax, he could sell his property holdings in the city, but there would be a new owner who would still be liable to pay the tax. By contrast earnings taxes and sales taxes give people the option of taking their business elsewhere — in economists’ terms they distort the market.
“This is the best economic plan you can bring to the city,” Haslag said. “Among economists this is not a controversial thing.”
A traditional property tax can be seen as a combination of a land tax and a tax on improvements, and if the rates are too high they have the effect of discouraging improvements; furthermore there tends to be differing rates for commercial and residential property and again that distorts the working of the market, Haslag argues.
Under Haslag’s proposal commercial and residential buildings would be assessed at the same rate.
The Show-Me Institute proposal draws on the experience of several small towns in Pennsylvania that have “two-tier” property tax systems. Here the two tiers refer not to residential and commercial rates, but a land tax rate, based on acreage, and building tax rate, based on the structures and equipment on a piece of land.
As with any tax change, there would be winners and losers.
The winners would be people with large incomes who own little property. The losers would be, in the words of the report, “people with low incomes and large property holdings” — most likely seniors. The disproportionate impact on seniors — who are also the group most likely to vote — means that it is hard to imagine these proposals coming into being without some sort of concession being made to pensioners. However, Haslag said, this would be an undesirable distortion of the market.
The implications of a land tax can seem “callous,” Sinquefield said. But if the market dictates that the optimal use for a piece of city land is not for it to be owned by a low-income senior, then that is what the market dictates, he said. The alternative scenario is worse, he said: a city with too many poor retirees would put the usefulness of the city’s earnings tax in jeopardy over the long run anyway.
Haslag’s proposed tax structure would act as a stick to encourage owners of under-utilized property to get it back into use — and a use that offers a good return on investment.
The working assumption of the study is that 75 percent of the city’s 61.9 square miles of land would be taxable. This figure excludes sidewalks, streets and parks. As to whether not-for-profits would pay the tax, “that’s a political issue,” Haslag said.
Mixed reactions
The response from top city officials has been lukewarm.
Comptroller Darlene Green, who oversees all the city’s financial functions, said, “The city earnings tax represents one-third of the general fund budget. Replacing that large a revenue source is a difficult proposition, but I’m certainly open to any discussion on the issue.”
Aldermanic president Jim Shrewsbury was more dismissive of the think tank’s ideas. “I only see abolishing the earning taxes as a practical idea under one condition and that is St. Louis City re-entering St. Louis County — and I don’t think that is going to happen,” he said. He described the proposals as “voodoo economics” and “pie in the sky.”
When people make radical suggestions like this, it is normally because it benefits them and their supporters — in this case business leaders, not average citizens, he said. Working within the existing framework the city is making progress, he said.
Mayor Francis Slay has said in the past that he thinks the city needs to find a way to replace the earnings tax but he has not endorsed this plan.
“The mayor’s office has a lot of concern about the proposal’s effect on homeowners,” said Ed Rhode, a spokesman for Slay. “But, we were appreciative of the Show-Me Institute for doing this study. We believe that the earnings tax creates a challenge for the city, and the study could be part of a framework for change.”
The mayor’s office has also contracted with a consulting firm to study the city’s spending and revenue patterns, and it is expected to make some recommendations on “streamlining city operations without cutting services” in the near future, Rhode said. The firm will then move on to looking at tax issues, he said.
http://www.westendword.com/index.shtml
By Tim Woodcock
Posted Wednesday, January 31, 2007
E-mail this page Printer-friendly page
The Show-Me Institute, a conservative think tank, has released a study making the case for the city of St. Louis replacing its earnings tax with a land tax.
Currently people who work or live in the city must pay 1 percent of their earnings to the city, and, in addition, companies based in the city pay a half a percent of their payroll to the city. The situation is similar in Kansas City, Mo.
The city of St. Louis’ 2006 income from taxes totaled $435.5 million. Of that, $170.9 million, or 39.2 percent, came from the earnings and payroll tax. Previous years’ financial reports show a similar reliance on the earnings tax.
Taxing people according to the value of the land they own, not their personal income, would spur growth in St. Louis’ lackluster economy, said Joseph Haslag, a professor of economics at the University of Missouri-Columbia and author of the report. Over time this growth would offset any of the problems associated with the tax, which could be phased in over 10 years and allow the city to continue with its current level of services, Haslag said.
Simply changing the city’s tax structure would not be enough for the city to reverse its 50-year slide, said Rex Sinquefield, president of the Clayton-based Show-Me Institute. Improving the public schools and cutting the level of crime are of a similar level of importance, he said.
The earnings tax is “a tax that says you’re not welcome, especially if you are high income,” Sinquefield said. Creating a business-friendly culture by eliminating the earnings tax would allow the city to capitalize on its assets — the network of highways that serve it, the cultural institutions and the sports franchises that distinguish it from the suburbs — and introducing a land tax in its place would create a virtuous circle, because a property owner’s tax burden would go up only to the degree that the local economy is prospering, Sinquefield argued.
In its mission statement the Show-Me Institute states it is “rooted in the American tradition of free markets and individual liberty” and says “the institute’s scholars seek to move beyond the 20th-century mindset that every problem has a government solution.”
Pure economics
The advantage of a tax on land is that it is less distortionary than other kinds of taxes, Haslag said.
“Because the land is not movable, there is no decision that the land owner can undertake to reduce the tax burden,” he writes in the report. If a landowner were really unhappy with the new tax, he could sell his property holdings in the city, but there would be a new owner who would still be liable to pay the tax. By contrast earnings taxes and sales taxes give people the option of taking their business elsewhere — in economists’ terms they distort the market.
“This is the best economic plan you can bring to the city,” Haslag said. “Among economists this is not a controversial thing.”
A traditional property tax can be seen as a combination of a land tax and a tax on improvements, and if the rates are too high they have the effect of discouraging improvements; furthermore there tends to be differing rates for commercial and residential property and again that distorts the working of the market, Haslag argues.
Under Haslag’s proposal commercial and residential buildings would be assessed at the same rate.
The Show-Me Institute proposal draws on the experience of several small towns in Pennsylvania that have “two-tier” property tax systems. Here the two tiers refer not to residential and commercial rates, but a land tax rate, based on acreage, and building tax rate, based on the structures and equipment on a piece of land.
As with any tax change, there would be winners and losers.
The winners would be people with large incomes who own little property. The losers would be, in the words of the report, “people with low incomes and large property holdings” — most likely seniors. The disproportionate impact on seniors — who are also the group most likely to vote — means that it is hard to imagine these proposals coming into being without some sort of concession being made to pensioners. However, Haslag said, this would be an undesirable distortion of the market.
The implications of a land tax can seem “callous,” Sinquefield said. But if the market dictates that the optimal use for a piece of city land is not for it to be owned by a low-income senior, then that is what the market dictates, he said. The alternative scenario is worse, he said: a city with too many poor retirees would put the usefulness of the city’s earnings tax in jeopardy over the long run anyway.
Haslag’s proposed tax structure would act as a stick to encourage owners of under-utilized property to get it back into use — and a use that offers a good return on investment.
The working assumption of the study is that 75 percent of the city’s 61.9 square miles of land would be taxable. This figure excludes sidewalks, streets and parks. As to whether not-for-profits would pay the tax, “that’s a political issue,” Haslag said.
Mixed reactions
The response from top city officials has been lukewarm.
Comptroller Darlene Green, who oversees all the city’s financial functions, said, “The city earnings tax represents one-third of the general fund budget. Replacing that large a revenue source is a difficult proposition, but I’m certainly open to any discussion on the issue.”
Aldermanic president Jim Shrewsbury was more dismissive of the think tank’s ideas. “I only see abolishing the earning taxes as a practical idea under one condition and that is St. Louis City re-entering St. Louis County — and I don’t think that is going to happen,” he said. He described the proposals as “voodoo economics” and “pie in the sky.”
When people make radical suggestions like this, it is normally because it benefits them and their supporters — in this case business leaders, not average citizens, he said. Working within the existing framework the city is making progress, he said.
Mayor Francis Slay has said in the past that he thinks the city needs to find a way to replace the earnings tax but he has not endorsed this plan.
“The mayor’s office has a lot of concern about the proposal’s effect on homeowners,” said Ed Rhode, a spokesman for Slay. “But, we were appreciative of the Show-Me Institute for doing this study. We believe that the earnings tax creates a challenge for the city, and the study could be part of a framework for change.”
The mayor’s office has also contracted with a consulting firm to study the city’s spending and revenue patterns, and it is expected to make some recommendations on “streamlining city operations without cutting services” in the near future, Rhode said. The firm will then move on to looking at tax issues, he said.
http://www.westendword.com/index.shtml
