CALCULATIONS BY MISSOURI BUDGET OFFICIALS are at odds with figures from advocacy group Better Together which show its plan to merge governments in St. Louis city and county could boost state tax revenues by up to $40 million over a decade.
The latest analysis prepared by the state’s Division of Budget and Planning, dated Feb. 22, projects that Better Together’s proposal to phase out the City of St. Louis’s earnings tax on individuals and businesses would generate a maximum of $14.6 million for the state over 10 years from 2023 to 2032.
This is far less than the $23.7 million figure Better Together projects in its own analysis related to the earnings tax. The $23.7 million is the biggest individual component of the $40 million in additional state tax revenue that Better Together says its plan would generate.
The differing calculations – and the varying methodologies they reflect – are a sign of the disagreements over math that are emerging as Better Together moves forward with its plans to collect signatures for an initiative petition to amend the Missouri state constitution. If voters approve the initiative in November 2020, Better Together’s proposal for a St. Louis Metro City government would be fully in place by 2023.
“These two documents highlight that Better Together developed the proposed constitutional amendment largely in isolation, not in consultation with affected stakeholders in St. Louis city and county,” said Mark Tranel, director emeritus at the University of Missouri-St. Louis.
Tranel’s past research for UM-St. Louis’s Public Policy Research Center has challenged Better Together’s own research that says consolidated governments are more efficient at providing public services. Tranel’s work has been cited by organizations including the Municipal League of Metro St. Louis, an advocacy group representing St. Louis County municipalities that are strongly opposed to Better Together’s proposal.
Better Together officials did not respond to specific questions from McPherson about the state’s latest calculations.
The lure of the earnings tax
St. Louis City’s earnings tax is the linchpin of the city’s annual budget; in 2018 the $174 million it brought in accounted for about one-third of the main operating fund. Retired investment manager and philanthropist Rex Sinquefield, a driving force behind Better Together, has openly campaigned in the past for the abolition of the earnings tax on the grounds that it hinders economic growth.
The 1% earnings tax applies to individuals and businesses; under Better Together’s proposal, the tax would be phased out over 10 years starting in 2022. A separate 0.5% payroll tax that applies only to companies would be phased out over the same period.
Better Together’s plan also proposes cuts in property taxes that fund county-level government services. As the earnings, payroll and property taxes decrease, the taxable incomes of individuals and businesses increase. This in turn provides increased tax revenue for the state.
Better Together and state budget officials agree on this point, but they differ when it comes to quantifying the increase.
Better Together says its proposal would add to state revenues by a bigger and bigger amount each year. By 2032, the group says, additional state revenue linked to the abolition of the earnings tax would total $23.7 million over the previous decade, while revenue linked to the abolition of the payroll tax would total $11.3 million. Factoring in additional positives from the property tax changes would yield a total of up to $40 million.
The state’s Budget and Planning division has not taken a position on the overall merits of Better Together’s plan, but it projects a smaller impact. Its most generous calculations, which take note of a scheduled decrease in the state’s top rate of income tax, show additional state revenue of just $14.6 million over 10 years from phasing out the earnings tax. That’s more than $9 million below Better Together’s calculations, and that’s just for the earnings tax.
State officials did not specify the impact on revenues from reduced property taxes or the phasing out of the city’s payroll tax. Officials in the budget division did not respond to follow-up questions about their calculations.
One reason for the difference in the calculations is methodology. Better Together used the size of St. Louis city’s tax base in 2018 to make its projections, but the state used an average of actual tax collection figures from 2013 to 2017.
State officials have already corrected their figures once, after Better Together pointed out that the state wrongly used a 20-year phasing out period for the earnings and payroll taxes in its original figures.
Better Together also argued last week that state officials “understated the positive impact to state revenue by failing to account for the distinction between individual and business taxpayers.” Since businesses treat the earnings and payroll taxes as expenses, rather than as itemized tax deductions, the elimination of the taxes will boost net incomes for businesses, Better Together argues. This would raise their state tax liability accordingly, the organization said.
The office of Missouri State Auditor Nicole Galloway is in the process of compiling the analyses by Better Together, the budget division and other state and local entities that would be affected by Better Together’s proposal. Galloway’s office is responsible for creating a fiscal note that would address the financial impact of the initiative petition.
A spokeswoman for Galloway said the auditor’s office has until March 5 to send the note to Attorney General Eric Schmitt. Schmitt’s office then has 10 days to approve the legal content and form of the fiscal note summary before the final version goes to the office of Secretary of State Jay Ashcroft.
