As noted here a couple of days ago, a new study has found that St. Louis’ earnings tax has been partly responsible for the flight of residents and jobs to the suburbs. Now David Nicklaus notes that St. Louis has placed itself in a vicious cycle in which it may not be able to eliminate the tax:
The property tax is the biggest money-raiser for many other cities, and some theorists consider it the ideal funding source for local government.
“Property taxes in general are considered to be less distortionary than other taxes,†said Patrick Fleenor, chief economist at the Tax Foundation in Washington. “It’s harder for people to avoid.â€
But St. Louis has set up a big barrier to increasing its property-tax take: For decades, nearly every project built in the city has received either tax abatement or tax-increment financing.
That’s partly because the city has been desperate for any investment in an era when residents and businesses were fleeing. The flight is due in part to the earnings tax. But tax abatement makes the earnings tax more important in the city’s revenue picture.
That’s the inherent problem with high taxes - St. Louis put itself in a bad position by taxing earnings of workers and the businesses that employ them. Then, when the residents and businesses fled to the low-tax suburbs, the city used tax gimmickry to attract development. Now the city is hamstrung by the tax gimmickry in its attempt to get rid of the tax that caused the problem in the first place. Far better to (a) spend less and (b) avoid TIFs and tax abatement that distort financial incentives and the revenue base of the city. Unfortunately, is it too late already?
