By Leslie Collins
Northeast News
March 23, 2011

There are two sides to every issue, and Kansas City’s earnings tax is no exception.

When voters go to the polls April 5, they will be asked to decide whether to keep the earnings tax or scrap it.

While some argue the earnings tax kills job growth, others refute that fact and say Kansas City needs the tax to stay afloat.

Kansas City adopted the earnings tax in 1963 when its population began to move to the suburbs. Although living in the suburbs, those citizens continued to work in Kansas City and use the city’s services.

City officials decided increasing property taxes wasn’t the answer and proposed adopting an earnings tax to fairly distribute the cost of providing city services. Voters approved the 1/2 percent tax in 1963 and in 1970, approved increasing the tax to 1 percent on salaries, wages and commissions earned in Kansas City.

Earnings tax doesn’t apply to social security income, pensions, trusts or investments.

Each year the earnings tax produces approximately $200 million in revenue and makes up 38 percent of the city’s General Fund.

“The earnings tax is known to make a city less competitive,” said Woody Cozad, spokesperson for Freedom PAC, an opponent of the earnings tax. “If you have an earnings tax you’re just less competitive for jobs, growth and population than cities that don’t have one.”

Cozad cited research from the Murrow Research Center that studied 176 U.S. cities, 23 of which had an earnings tax.

“On average, the one without an earnings tax will grow twice as fast in population and 50 percent faster in jobs than the one without an earnings tax,” Cozad said of the study. “Kansas City is one of the few cities with an earnings tax that is still growing.”

However, Kansas City is growing at half the population rate and two-thirds the job growth rate compared to cities without an earnings tax, Cozad said.

“It’s a job killer. That’s the shortest message,” he said.

Dan Cofran, spokesperson for the proponent, Keep KC Alive, refuted that fact.

“I disagree with Woody on that,” Cofran said. “I deal on facts, not fiction. The facts are very clear that with earnings tax, Kansas City grows, Kansas City has increased its jobs and it has increased its population over the last 10 years, particularly north of the river.

“Since 2003, it’s had over a 14 percent growth of jobs – that’s more than any city in Johnson County and it (Kansas City) has an earnings tax.”

Cofran argued the earnings tax creates an environment to attract and retain businesses by providing quality basic services like police and fire departments, road and bridge upkeep, among others.

Fair v. unfair

Cozad pointed out the tax is regressive and the brunt of the tax is carried by low to moderate income households.

“You start paying it on the first dollar of income you make,” he said. “So, if you’re a member of the working poor, of moderate income or even middle income, there’s no deduction for how many children you have, no deduction for your interest payments on your house, nothing.

“If I’m a wealthy person who is retired, sold his business and is collecting dividends, those aren’t taxed. People who own most of the wealth don’t pay it.”

In addition, Cozad said, larger businesses negotiate with city hall to avoid the tax.

“That leaves the small business people and the individual homeowners and citizens to pay this tax,” he said.

Cozad cited how Kansas City negotiated incentives to encourage the National Association of Insurance Commissioners to stay in Kansas City. The city remitted half of the company’s earnings tax, he said.

“It isn’t just NAIC,” Cozad said. “They’re rebating, remitting, TIFing, otherwise giving back $16 million of earnings tax… The only reason you give that back is because if you didn’t give that back, those people would leave.”

Cofran defended the earnings tax and said that a business looks at the total tax burden, not one tax only.

For example, he said, Kansas has a higher state income tax than Missouri, almost 1 percent higher.

Every tax has its advantages and disadvantages, he said.

The earnings tax is a “fair tax” because it only applies to the salaries, wages, commission and business profits and doesn’t apply to retirement income, he said.

While it is a regressive tax, it is a low tax, he said. State income tax and federal income tax allow deductions, but they also tax a higher percentage of a person’s wages, he said.

“Every day we have tens of thousands of people that come to Kansas City from Leawood, Lenexa, Lees Summit to work in Kansas City and use our services,” Cofran said. “It only makes sense they help pay for the services they are using. Otherwise, it’s like having a roommate who doesn’t pay his or her half of the rent.”

Kansas City isn’t alone in its earnings tax, he added.

“Over 4,000 cities, counties and school districts in the United States are using earnings taxes,” he said. “Most major cities have an earnings tax or income tax.”

Scenario if it doesn’t pass

If voters decide to eliminate the earnings tax, the tax will be phased out over 10 years. Twenty million dollars will be phased out the first year and an additional $20 million will be phased out every year after.

“I think you have to understand that of the 150 biggest cities in America, only about 25 of them have an earnings tax,” Cozad said. “That means 125 of them are providing police and fire protection and fixing their potholes and doing everything a city needs to do without an earnings tax.”

To balance the city’s budget if the tax doesn’t pass, it will require a variety of taxes and fees and careful spending, Cozad said.

“It can be done and it is done,” he said of balancing a budget without an earnings tax. “It (earnings tax) looked good in the 1960s when the world looked a lot different. Folks, it’s 2011 and it doesn’t look so good.”

Maintaining the city’s earnings tax is critical to Kansas City, Cofran said.

Although the city relies on several taxes: earnings tax, utility tax, property tax and sales tax, the earnings tax produces the largest amount of revenue for the General Fund. The burden of funding the city’s services would solely be placed on Kansas Citians, he said.

“There would be some very serious belt tightening (if it didn’t pass),” Cofran said. “The city’s had to cut the budget the last several years because of the recession. We really are down to the bone.”

If voters scrap the tax, the city can’t place it on a future ballot unless new legislation is brought to the state level.

“We only have one chance to vote on this,” Cofran said.

If voters eliminate the tax, budget and service cuts would be across the board, he said.

Property and sales taxes would likely increase, as well as fees for services like trash pickup and recycling.

At least 500 police officers would be cut and 20 to 30 fire stations would close. The number of dispatchers for 911 would also be decreased.

“Everything would face cuts,” he said. “No one would be spared the knife so to speak.”

To see more involving the e-tax debate, see our video on our YouTube channel, KCNortheastNews.