Ending earnings tax would hurt KC, administrators say

Mar 3, 2010 — The Kansas City Star

Lynn Horsley

Mar. 3, 2010 (McClatchy-Tribune Regional News delivered by Newstex) -- Repealing Kansas City's earnings tax could seriously jeopardize basic services, the city's credit rating and long-term financing for projects, city administrators warned today.

"You would just have to fundamentally rethink Kansas City government" without the earnings tax, Finance Director Randy Landes told the City Council's Finance and Audit Committee.

Landes and others were reacting to a statewide petition drive that could eventually lead to the repeal of Kansas City's 1 percent earnings tax. The tax generates about $202 million annually, or 42 percent of general fund spending.

"The earnings tax is pretty darn vital to us in terms of providing basic city services," said Assistant City Manager Rich Noll. He said the tax is equivalent to covering the entire fire department and half the police department.

The petition campaign seeks a change in Missouri's earnings tax law. If the proposal were to pass statewide later this year, voters in Kansas City and St. Louis would then hold referendums on the earnings tax every five years. If those local voters supported repealing the earnings tax, it would phase out over 10 years.

Marc Ellinger, spokesman for the petition campaign, emphasized that the initiative does not repeal the earnings tax -- it simply lets voters have a say on the earnings tax.

"You're giving voters an opportunity to decide on how they're being taxed," Ellinger said.

One positive impact of the petition effort, Ellinger said, is that it is compelling the city to examine its tax structure, and to seek the best tax structure possible.

But Landes warned that the precarious future for the tax means the city would not have a reliable revenue source to pay debt service on long-term financing. So the city's credit rating could suffer and costs of borrowing likely would increase dramatically.

"Uncertainty equates to risk, and the markets don't like risk," Landes said.

Landes also noted that there are numerous tax increment financing projects in Kansas City whose debt is already backed by the earnings tax. If the tax went away, payments on those projects could be jeopardized.

Noll said there simply aren't a lot of other reliable revenue sources to replace the earnings tax. He said it could require doubling the total property tax or tripling the local sales tax.

Some supporters of the earnings tax repeal have suggested that a land tax might replace it. But Noll said it would require a land tax in the "double digits," which could affect senior citizens who own land but don't currently pay the earnings tax if they are on a fixed income and don't have earned income.

Noll said that even with the earnings tax, Kansas City's tax burden is lower than that in Omaha, Neb., and Des Moines, Iowa. He said he is still researching how Kansas City's tax burden compares with that in area suburbs. But he also noted that non-residents pay 35 percent to 50 percent of the current earnings tax. If that went away, residents might have to absorb that additional burden.

Finance Committee Chairman Deb Hermann worried about how the earnings tax repeal and resulting budget turmoil could affect Kansas City's standing with other cities, in terms of attracting businesses, jobs, tourists and residents.

"This would put us out of competition ... with all our benchmark cities," she said.

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To reach Lynn Horsley, call 816-234-4317 or send e-mail to lhorsley@kcstar.com.

Newstex ID: KRTB-0102-42526012