Municipal earnings taxes: Yay or nay?

Great Debates
1

An earnings tax, in this case, refers to a tax on personal earnings in a municipality, even if one’s residence is elsewhere; as in St Louis (1%), Cincinnati (2%), NYC (3.5%),* et alia*. (Note that these percentages are pretty low, compared to federal income taxes or typical sales tax rates. Not a large part of the typical tax bite.)

Here, Una Persson comes out against Kansas City, Missouri’s earnings tax because its absence sounds like a better deal for residents of the Kansas side of the metroplex. But is it a better deal for the city?

At the moment, I think cities with earnings taxes have good conservative reasons to keep them. If it ain’t broke, as the saying goes. It’s a pretty good way to raise revenue. Of course there are those who object to being taxed in the place they earn their money when they’ve gone to the trouble of establishing residence elsewhere to dodge urban taxes. Those people are directed to note the obscure 14th SDMB smiley, “the world’s smallest violin,” after this sentence.

Given the general character of this board, I expect many voices to chime in that cutting any tax must be good, & if it’s bad for the city, then the city was rotten & needed to die anyway. Consider that argument well & truly anticipated. (Pages 2-7 of this thread will be this argument repeated in varying degrees of agitation, I know. Yes, I know the libertarian/propertarian/defund-the-government wing will be along in the very next post, but you’re not saying anything new.)

I of course take a more pragmatic view; cutting one tax will, for practically all intents & purposes, require raising others. Will those taxes actually be more desirable to the city as a living environment, a working environment, & a commercial center?

I think there is a serious question whether a sales tax can effectively replace an earnings tax in a city’s budget. Since some amount of money not spent locally, a sales tax would be at a higher percentage; it would also be much more difficult to build in exemptions for low incomes. Much shopping would move to just outside the district. A sales tax hike might be worse for citizens & city businesses than keeping the earnings tax.

As for property taxes, well, those are going to land on residents & businesses in the city–I’m not sure how that’s better. If taxable property were defined narrowly as land, that would land (excuse the pun) harder than is desirable on residents; if it were expanded broadly to include net worth, one could expect to see a certain flight to neighboring districts; even if one were to weight it somewhat to a mix real & personal property, it might feed migration out of the city more than an earnings tax could.

[Note that I am against Missouri’s Proposition A because I see this as an open question, whereas Prop. A would close it with an undue air of finality. Also, its ads are a bloody fraud. Even were I persuaded that K.C., Mo., needs a better arrangement, I am still convinced Prop. A is a bad answer.]

2

I am wholly in support of such taxes, think every town should have them, and they should be much higher (with proportional reductions in other taxes).

Seriously.

Most people spend a substantial part of their lives in their working neighborhoods. Why in the world wouldn’t you want to support and develop that environment as a safe, functional, and pleasant place?

ETA: The Una link doesn’t work.

3

I suppose it might be a bad idea in whichever country it was that was founded by people who were always going on about “no taxation without representation”…

4

So, you must be against sales taxes, unless they are not charged for visitors to the taxing jurisdiction.

5

I think they’re bullshit. I am not a tax dodger because I chose to live in an area where no earnings tax is levied. While proximity to my abode has some bearing on where I work, I sure as hell don’t pick up and move every time I change jobs.

I’m not even 40 yet and I have worked in Ann Arbor, Southfield, Troy, and Southfield again. Look them up on a map of Michigan and you’ll see that you can conceivably work in all those places in the metro Detroit area without changing residences.

And what of the person who lives inside one of these municipal earnings tax zones, but works outside of it. For example, if I live in Detroit, but work in Livonia? Now I get the benefit of your tax dollars without contributing…that doesn’t seem right, does it?

6

No, under the present system such a person would be paying as much income tax to Detroit as if they worked in Detroit (and twice as much as a non-resident)–they’d be paying full-time taxes to a jurisdiction they spent a lot of time out of.

The fairest system would probably be for everybody everywhere to pay an income tax based on residence and an income tax based on workplace–sometimes these would be the same jurisdiction, sometimes not.

7

Every jurisdiction in the WORLD has taxing authority over income earned within its borders. We tax Canadian hockey players for the in the United States even though they live in Canada, we tax all sorts of income earned by non-residents.

We charge an income tax (usually in the form of withholding tax) on foreigners that have never set foot in the United States if they earn investment income in the United States (much of this income is exempted through exemptions but in theory we impose taxes on ALL that income).

Tax theory simjply doesn’t support your position.

“No taxation without representation” rhetoric is not appropriate in this cases…

8

It doesn’t make you a tax dodger but a commuter tax isn’t implying that you are a tax dodger (and even if you moved in order to avoid a tax doesn’t make you a tax dodger, if you actually lived in Detroit but set up a fake address in Livonia to avoid Detroit taxes, THEN you would be a tax dodger), it is merely taxing you for income you earn in their jurisdiction. You are welcome to complain about taxes, its a God given American right, as is working where you want and living where you want.

BTW, if you lived in Detroit, you would pay Detroit income taxes. I do not think there is a single jurisdiction in the country that imposes a higher commuter tax than income tax.

9

I refered to myself (in jest, of course) as a tax dodger because of the OP’s sentence characterizing the behavior as “dodging” the tax.

And you are correct, residents pay 2.5%, and non-residents pay 1.25% I wonder if you’re aware of the income disparity between residents of Detroit and residents of the suburbs. Even a lower tax rate likely involves them contributing more income than the residents, who likely use a larger portion of the city’s services.

I still don’t like it and vote against it whenever possible. Especially in a city like Detroit, which would benefit from increased investment in the area, but people know if they work there they will get hit with a tax penalty that they won’t have if they work in one of the more affluent and better served suburbs. Companies know there is a disincentive to working there, so very few are willing to locate significant resources there.

10

I don’t think there is a universal answer to this.

I think that for some cities it makes no sense at all. For others, it probably makes good sense. I think if you can fund your city’s expenses with moderately low property taxes on residents, that’s generally a fine way to do it. I’ve lived in/been familiar with several small to medium size towns (15,000-50,000) and most of those have been okay with running things off of their existing property tax base.

If things are going fine, why create a new tax for spending that doesn’t exist? Or that the citizens don’t want?

On the other hand, I’m also familiar with a lot of cities where you have a genuine “city” (meaning > 100,000 population) that has a lot of jobs in the city but a lot of people who live outside of it. Maybe at some point in the past, most of the people who worked in the city also lived there, and those people also paid property taxes there and et cetera. Well, when the city lost 50,000 population from the year 1960-2010, but kept almost the same number of workers it essentially lost a third of its tax base but kept all the problems of having to maintain roads and services for those 50,000 people who commute into the city every day. In those situations some form of municipal taxation on city workers is the only way for the city to cover the budget shortfall that will exist because of a large portion of users of city services not living in the city and thus being exempt from the city’s property taxes.

There’s also a few different routes of municipal fund raising in these situations. There are direct taxes on income levied at the municipal level, there are also flat rate user fees that I’ve seen enacted by some cities. Deciding on which way to go seems to mostly by decided based on what State constitutions allow.

Another interesting note is that some State constitutions have provisions drawn up during the Great Depression that have hard limits on local property tax levels, passed in an era in which some people were losing their homes due to inability to pay back taxes. So for some municipalities they may not have the ability to increase their income any way other than taxing earnings.

11

I think you are probably right about them losing investment. But then, might a better solution be to incorporate the surrounding metroplex into a revenue-sharing zone? Maybe not a Detroit earnings tax, but a regional tax? And will that win support?

12

Thanks, Martin Hyde. I think you’ve helped explain why many cities resort to this tax. The city has to bear the cost of infrastructure to support all these people, so it makes them pay. Sounds reasonable to me.

13

I think it’s in the public’s best interest to allow the elected officials of the municipality make decisions on how its services should be funded rather than a state-wide referendum (even if that referendum only mandates binding, non-reversible 5-year votes).

Some local articles have indicated that the city of St. Louis was investigating ways to reduce or phase out the earning tax anyways in order to encourage growth, but that they hadn’t found a way yet to keep service levels adequate without the tax (it contributes about a third of the city revenue). Some suggestions included charging higher rates for water and trash service (apparently trash service and rat infestations were the initial impetus for the tax in STL). Obviously property taxes could be increased, but that also has implications for growth.

Another interesting factor is that the MO prop would increase state revenues by a not-insignificant amount (since municipal taxes are deducted from state taxes). Yet another reason for the residents of cities other than KC or STL to support it purely for their own financial well-being.

14

So what if my company is headquartered in that city, but I telecommute 95% of the time? Do I get an exemption from the tax?

15

Why would you? Public services is more than just roads (some of which are often funded by states and the feds anyway). Some of the bigger costs would include public-sector salaries (police, fire fighters, etc).

I mean, you only have so many options to raise revenue as a municipality. Property taxes, sales taxes (including the every-popular tourist taxes), earnings taxes, and fees I would think cover most of them. What mix is appropriate is something that will vary wildly from city to city, but I can’t see why an earnings tax is somehow less just than the other options.

16

I can’t say for sure but based on this statement, I am going to guess that without the commuter tax, Detroit wouldn’t be able to provide the services it currently provides.

Detroit lets you vote on their taxes?

Are you saying that a lot of businesses are opening up shop right outside Detroit city limits to avoid the commuter tax? My guess is that Detroit has the same problem that a lot fo the rust belt cities have. A large city infrastructure without the population or economy to support it.

Detroit needs to downsize the size of their city, not cut taxes or trytto entice businesses with tax cuts, they will only succeed in reducing their tax revenue.

17

Taxes are not a toll charge. Youdon’t pay taxes based on how much service you use.

18

Another complication that I’ve heard voiced, but don’t understand too well is the issue of municipal bond ratings… They’re saying if the tax is subject to a vote every 5 years, borrowing money will be more difficult since the city’s bond rating will take a hit. Can anyone explain that a bit better? Or is it a non-starter?

19

If the housing market was fair. Look at NYC, rent control totally has thrown the free market out of whack. NYC has the jobs and no place to house the workers. Other places like Palm Beach and the Florida Keys have the same problem. No affordable housing.

A person shouldn’t have to pay more to work in a city, when the city through rent control, zoning laws and other such issues, is artifically driving up the free market rents.

It’s also counterproductive as businesses will simply move elsewhere.

Why not tax the business? Is it fair to give Walmart a local tax free zone, in order to get the business in the city, then tax the workers at the Walmart, because they can’t afford to live in the town.

If you want to do this it should be fair. Fine, pay extra tax, if your town has affordable housing, the business that you work at must be not getting any tax breaks from the local government and the town must prove that their own employees are only earning the fair market rate for their employees. No more file clerks making $40,000/year.

Of course given those conditions no town would agree.

20

But still, the rent is…