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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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2 Comments leave one →
  1. January 25, 2010 4:45 pm

    Great blog post! By far the best one I’ve seen. Finally, someone put out some economic development stats. That’s the central argument against the e-tax is that it encourage jobs and people to locate elsewhere. Of course, not a single jobs or population stat from the Star. 50 years of 0 population growth in KCMO despite excellent schools in the Northland and Lee’s Summit schools hitting the SE part of KCMO. The best line in your blog was about recognizing we have a problem. The biggest problem right now is so many in KCMO are in absolute denial about the damage from the earnings tax. Again, great post; I hope you’ll post more.

  2. Gib Kerr permalink
    February 1, 2010 3:33 pm

    All of the economic development effort seems to be on attracting the “big fish” Fortune 500 companies, who always get huge economic incentives. When we land one of these big companies, it’s always a big story in the media, but our focus really needs to be on the small businesses who account for 80-85% of all new jobs created in the US.
    Unfortunately, when most of these small firms choose not to be in KCMO, it goes completely unnoticed by the media. But over time, it has become a significant exodus from the urban core.
    The City needs to be more “user friendly” for small businesses.

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