Looking at the Earnings Tax

I’ve been paying a lot of attention to the Kansas City Budget lately, and trying to see how we can pay for basic services, attract and retain good jobs, and become a better, safer city. I suspect that the budget for the coming year will focus mostly on the first goal I listed, but there simply isn’t going to be a way to make significant strides on the other two without additional investment. In future years, we need to consider the revenue side of the equation.

What about graduating the Earnings Tax, coupled with a tax credit to negate the tax on our urban core and low-income workers? I’ve been told that 55% of the earnings tax is paid by nonresidents, that compliance is fairly high, and most is paid in through corporate withholding. (There are tweaks that need to be made to compliance and withholding which could have a good impact on revenue, but let’s set that aside for the current discussion.)

Just to toss out some numbers, while acknowledging that I do not have the data to fine tune the proposal and come up with real numbers, let’s say that we say that we will tax income under $40,000/year at the current 1% rate, and income over $40,000 at 1.5%. At the same time, we will establish a refundable tax credit of $400 for Kansas City residents. That would mean that if you earn $40,000, your tax bill would be $400, and your refund would be $400, so you would not pay any earnings tax. If you live outside Kansas City, you would continue to pay your $400, just like you do today.

If you earn $50,000, you would pay tax of $550 (1% on $40,000 and 1.5% on the amount over $40,000), so, if you live in Kansas City, you’d be getting a reduction of $350 when you count the tax credit, and if you live outside of Kansas City, you would only face a $50 tax increase.

Of course, all these numbers would need to be fine-tuned by someone who has access to the data on how much is paid by income levels. My gut feel is that these numbers would work out okay, but I really don’t know that for certain. Perhaps the break-off point would need to be $30,000, with a $300 tax credit.

But tell me what you think of the concept. The advantages, as I see them, are that it would give employed workers a reason to choose Kansas City instead of suburbs. It would give the urban core a little more spending money, which could help generate some trickle up economics where it’s needed most. On the other hand, it could cause some mobile businesses to relocate to the suburbs, to dodge the tax (to the extent that such businesses have not already left). It would also be somewhat harder to administer than it is currently, though I doubt that would be a huge hurdle.

3 Responses to “Looking at the Earnings Tax”

  1. Anonymous says:

    I moved to KC from out-of-state a couple of years ago and knew nothing of the earnings tax. (Hell, it would never have occurred to me it was called an earnings tax…) Because my employer is not in KC they are not required to collect the tax. I only learned about it by happenstance. Now, I'm potentially faced with several years of back taxes, interest, and penalties.

    Frankly, if I'd known there was such thing as the earnings tax prior to purchasing a home, I would have purchased elsewhere. Two blocks away from here I would have been home free…

  2. RW says:

    What I think we all have realized here is that in Kansas City, the earnings tax accounts for 42% of the city's general revenue. In St. Louis, that number is 39%. The State Auditor has put out a report saying that state the obvious. That if cities like St. Louis and Kansas City lose these respective percentages of revenue, deep cuts would have to be made.

    The Auditor also states that, in order for the cities to aquire these funds from other revenue streams, property taxes would have to go up 500%, utility taxes would triple, and court fees would have to be increased by 1,100%.

    I think we can agree that the cities should seek alternative revenue streams, but until these are found, we should keep the $199 million of St. Louis's money on the streets in the form of police and firemen. By the way, The earnings tax nets the city of St. Louis about $141 million annually —roughly equivalent to the entire budget of the police department.

    I personally would like to see more police on the streets as opposed to none at all. I would also like to have a District Attorney to prosecute murders, and courts in which to prosecute them.

    I think you have a good idea, but I also think we all agree that this is a bad idea. Don't sign the petition, and we can save ourselves a lot of trouble.

  3. [...] Make no mistake, I understand the impulse. The earnings tax is a great thing. 55% of the earnings tax is paid by nonresidents, compliance is high, and most is paid in through corporate withholding. I even supported making the tax higher for the wealthy, back in the day. [...]

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