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The Earnings Tax is Bad for Kansas City

January 19, 2010

Mayor Funkhouser stirred up his latest round of controversy last week by floating the idea of eliminating the KCMO earnings tax, which brings in roughly $200 million to the City coffers every year. Before a meaningful debate could even begin, however, the City Council voted 10-1 to cut off the discussion immediately, reasoning that the earnings tax is too sacrosanct to touch.

The Mayor has earned an unfortunate reputation for consistently failing to build consensus on important issues, so this is nothing new. But like him or not, he is on the right track here.

The 1% earnings tax is a major impediment to economic growth in Kansas City. It’s like a foot on the throat of both businesses and individual wage-earners. The tax penalizes employment and acts as a strong incentive for people to live and work outside of the City limits. People have plenty of good options on where to live, and companies have lots of choices on where to locate. And since the earnings tax was enacted in the 1960s, a large number of people and companies have elected to leave KCMO.

According to an article in The Star by Diane Stafford on September 30, 2009, Johnson County is on the verge of surpassing Jackson County as the employment center of the KC metro area. “Employment in Johnson County exploded 70.7% from 1990 to 2008” while Jackson County grew by an anemic 2.3% during this same period.

The common explanation for why people and employers have been gravitating toward the suburbs is that the schools are better outside of the urban core. We hear this from residential real estate agents all the time. But what we commercial real estate brokers hear more often – when working with companies who are relocating their businesses – is that they want to avoid the KCMO earnings tax.

When businesses avoid the City, residents do, too. Yet City Hall continues to grow, placing an increasing tax burden on the lesser able folks who are left behind. Meanwhile, property values decline, further eroding the City’s tax base. Rather than incentivize people to be here, City Hall only thinks of new ways to tax them. It’s a Detroit death spiral.

Yes, we do have incentive programs such as TIF, enterprise zones, and tax abatement, but those tools are rarely pursued by the small businesses that generate the lion’s share of new jobs.

With its complete dependence on the earnings tax, City Hall is like a heroin addict. Its short-term desire for the next fix overwhelms any thoughts of long-term health. Meanwhile, the drug is slowly poisoning the body.

It is time for an “intervention” at City Hall. Weaning our City from the addiction of the earnings tax will not be easy. There is no quick fix. Recovery will start only when we acknowledge that we have a problem.

Let’s admit that we have a problem. Reasonable solutions, gradually enacted over time, do exist and should be debated. Let’s start by looking at the tax structures in place in surrounding municipalities. May the discussion begin.

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Should the City Support a New Convention Center Hotel?

December 14, 2009

A task force at City Hall is currently studying the possibility of a new 1,000-room convention center hotel near Bartle Hall. Setting aside for the moment the debate over which of several competing sites is best for such a new hotel, let’s first look at the bigger picture. Should the City even be involved in the hotel business?

In today’s horrendous economic climate, private developers cannot obtain financing for a hotel of this size. Most estimates for a 1,000-room hotel run around $250-300 million. With hotel occupancy rates hovering between 50-60%, the numbers simply don’t pencil out without significant public incentives. All of the recently constructed or renovated hotels downtown took advantage of various economic incentives, primarily TIF and historic tax credits. And at least two of these – the Marriott and the Hotel Phillips – have not performed according to their original projections, leaving the City on the hook for annual payments.

Given this bleak picture, at first glance a reasonable person would conclude that further subsidies to build another – even bigger – hotel would be insane, (i.e. doing the same thing over and over while expecting different results). Experts on the convention industry, however, will tell you that the reason the existing hotels are underperforming is because we don’t have ENOUGH hotel rooms near the convention center to attract or retain the big conventions. They will reel off a list of major conventions that we have lost as a result of too few hotel rooms in close proximity to Bartle Hall.

Any good free-market, capitalist type would argue that the municipal government should just let the “invisible hand” of the market solve this problem. Ideally, that would work. But the reality is that the convention industry pits cities against one another, and nearly every new convention-oriented hotel that has been built in recent history has been heavily subsidized (or even publicly owned). These big hotels have become part of cities’ public infrastructure, like the convention centers, airports, transportation systems, etc.

For the past 30 years or so, our “convention district” has been a total embarrassment. Until the Power & Light District was completed last year, the area around Bartle Hall was a disaster zone of haunted houses, smut stores and blighted buildings. Now we finally have a district that we can be proud of – after spending about a billion dollars on the entertainment district and major expansions to Bartle Hall. But our work is incomplete as long as we lack the critical number of hotel rooms required to attract the major conventions.

The question we as a City must ask ourselves is, “Do we want to be competitive in the convention industry or not?” After spending over a billion dollars on our convention center and district, the answer is obvious. We have come too far to turn back now. We need to do it right and finish the job. Let’s build a new 1,000-room hotel that will put Kansas City back on the map. It has been twenty-five years since we built the Marriott. It is time for us to think big for a change. Let’s quit “playing not to lose” and instead adopt a winning attitude as a City. The City Hall task force needs to figure out how to make this happen in 2010.