Is Kansas City’s earnings tax at risk? MO lawmakers, angry with St. Louis, want changes

Missouri Republican lawmakers want to cut or eventually eliminate the 1% earnings state in St. Louis, a move that risks ensnaring Kansas City’s own earnings tax and a crucial revenue source for the city.

A GOP-led Missouri House committee this month released a slew of recommendations, including a gradual phase-out of the earnings tax in Kansas City and St. Louis tied to certain revenue increases. But interviews with lawmakers make clear their anger lies with St. Louis and how the city handled taxing workers during the pandemic.

The panel also recommended exempting new residents and low-income workers from paying the tax, as well as the creation of “opportunity zones” where residents and workers would also be exempt.

“An earnings tax, especially when we’re dealing with two cities that border on other states – it doesn’t necessarily attract business and attract people to the metropolitan area,” said state Rep. Jim Murphy, a St. Louis area Republican who chaired the committee that studied the tax.

Still, Murphy said, “Kansas City was not the main issue.”

Supporters of limiting or ending the earnings taxes have not provided clear answers about how the cities would replace the revenue generated from the tax, which makes up nearly 47% of Kansas City’s general fund revenue and pays for basic city operations. The House committee recommended that the tax in both Kansas City and St. Louis be reduced by 10% reductions based on revenue increases, eventually triggering a complete elimination of the tax.

Kansas City voters have overwhelmingly supported the earnings tax, which Democrats point to in opposing changes. More than 77% of Kansas City voters approved it the last time it was on the ballot in 2021. Some have painted attempts to cut it as more evidence of Republicans in Jefferson City attempting to strong-arm residents in Missouri’s two most Democratic and diverse cities.

“Contrary to what Republicans in Jefferson City believe, the people who live in Missouri’s two largest cities are more than capable of governing themselves,” state Rep. Maggie Nurrenbern, a Kansas City Democrat who was one of three Democrats on the committee that studied that tax, said in a statement.

Senate Minority Leader John Rizzo, an Independence Democrat, echoed this sentiment while speaking to reporters last week, contending that whenever Republicans “don’t like something that primarily Democratic local elected officials do, they try to fight it.”

Much of the discussion in Jefferson City surrounding the earnings tax centers on St. Louis, which has been sued over denying earnings tax refunds to remote workers. Kansas City allows remote workers to get refunds on taxes they paid while working outside of the city limits.

Murphy said the way St. Louis handled remote work reimbursements during the pandemic caused lawmakers to examine changes to the tax in both cities.

“Unfortunately, Kansas City got caught up in the mix of the exploration,” he said.

Kansas City Mayor Quinton Lucas said in a statement that the earnings tax was crucial to funding public safety in the city as well as basic city services. He also pointed to the fact that city voters have historically supported the tax.

“I encourage the legislature and the Committee to focus their efforts on making the Earnings Tax permanent to preserve this vital funding rather than eliminating the City’s ability to make decisions on a local level related to taxation and funding of vital City services,” he said.

Murphy has filed legislation that would require St. Louis to issue refunds to remote workers and bars the city from imposing an earnings tax without submitting a quarterly report showing how much money it’s received from the tax. At least one bill, filed by state Sen. Ben Brown, a Washington Republican, would phase out the tax in St. Louis.

Another bill would create “earnings tax opportunity zones,” areas within “distressed communities” where residents and workers would be exempt from paying the tax.

No bills have been filed so far to phase out the tax in Kansas City, but Murphy said that if “we find solutions for St. Louis that work and would work in Kansas City, certainly we would try to apply it both ways.”

Kansas City has collected an earnings tax, also called the e-tax, since 1963 from businesses, residents and workers. The tax helps pay for basic city operations, including police, firefighters, trash pickup and road repairs.

“The earnings tax comprises the single largest portion of revenue in each of Missouri’s two largest cities and economic drivers,” state Rep. Steve Butz from St. Louis, the ranking Democrat on the committee that studied the earnings tax, said in a statement.

“Failing to propose a plan to cover that lost revenue is fiscally reckless and irresponsible.”

Butz on Wednesday issued a scathing rebuttal to the House committee’s recommendation to phase out the tax, arguing that eliminating it would result in cuts to important government services such as police and fire, education, health care and tourism.

But Missouri Republicans argue that it’s an issue of fairness and the tax in both cities does not encourage people to want to live and work there.

“It’s not good public policy as it relates to, you know, taxing folks in that way,” Senate President Pro Tem Caleb Rowden, a Columbia Republican, told reporters.

House Speaker Dean Plocher, a St. Louis-area Republican who appointed the committee to study the earnings tax in Kansas City and St. Louis, told reporters that he thinks that the tax hurts St. Louis, calling the issue a “peculiar thing.”

“I don’t think that earnings tax is actually the right way to help the city thrive,” he said. “But I’m open to debate.”

Murphy acknowledged that state lawmakers don’t have exact answers to how the cities would be able to make up for lost revenue if the tax is eliminated. But he said that if city residents decided to vote against the tax, the cities would be stuck “with a big hole in their budget.”

‘Common ground’

For Murphy, eliminating or phasing out the tax is a “pie-in-the-sky” proposal. He said lawmakers are more likely to look to pass legislation related to refunds for remote workers in St. Louis and a bill that exempts low-income workers from having to pay the tax — legislation he thinks will have support from both parties.

While Butz pushed back on phasing out the tax, he said Democrats agreed with the proposals to exempt low-income workers and the creation of opportunity zones.

“I believe we can find some common ground with our Republican colleagues on a few of the less inflammatory and dramatic recommendations, and we should work to make this system more equitable and progressive,” state Rep. Marlon Anderson, a St. Louis Democrat who was also on the committee, said in the release.

2nd District Kansas City Councilman Wes Rogers, a former Democratic lawmaker, in an interview pointed to the broad support the tax has received among Kansas City voters.

“Voters have spoken pretty overwhelmingly in support of this tax and we need to be respectful to the voters as to how they choose to finance their government,” he said.

Rogers, however, said he has a good relationship with Murphy and it’s “always worthwhile to take a look at how we’re taxing people and making sure that it’s fair to the taxpayers.”

While Republicans seek to phase out the earnings tax or limit who has to pay, state Sen. Greg Razer, a Kansas City Democrat, has filed a bill that would extend the number of years the tax is in place in Kansas City. Currently, the tax is required to be on the ballot every five years and Razer’s bill would expand that to ten years.

Rizzo, the top Democrat in the Missouri Senate, said that if people don’t like the tax, they can vote against it. He said Republicans should “spend some money” and campaign on the issue when it comes back on the ballot if they want to get rid of the tax.

“Win the election,” he said. “There will be a renewal in a few years. Win an election.”