This article first appeared in the St. Louis Beacon, April 6, 2011 - Now that the city has five years' breathing room on the earnings tax, officials in St. Louis are studying a new report on the best ways to substitute the $140 million a year it provides.
They're also looking hard at a companion report that provides a road map to do more of what they already are doing -- talking with St. Louis County about collaborating on certain services to save money, make government services more efficient and maybe bring the long-held dream of true regionalism a little closer to reality.
The studies were funded with $300,000 from wealthy businessman Rex Sinquefield and conducted by PFM (Public Financial Management) of Philadelphia. They were released at midnight Tuesday, after the results of Tuesday's earnings tax election in the city were announced; the Beacon got copies of the studies in advance.
Mayor Francis Slay says the talks are further along than they have been at any time since he took office in 2001, in three specific areas: economic development, health services and construction code management.
And though no one expects the baby steps to lead to a full-blown city-county merger any time soon, Slay's chief of staff Jeff Rainford says time and experience might eventually lead in that direction -- if officials make progress.
"There has to be some reason to do this," Rainford said in an interview. "Either services are going to get better, and/or they are going to cost less. As we work up from small things to medium-size things, there has to be some tangible benefit. It can't just be some theoretical thing.
"You need to make sure the logistics work. When you're the first one at something, you want to make sure it works so you're not the last one at something. Some people in St. Louis County think everything we do turns to junk. So we want to make sure this works really, really well."
Slay puts it this way:
"We need to take this thing in steps. If we show some results, some cost savings and efficiencies as well as providing quality services, it can lead to other effective ways to work together as city and county."
But efficiency and logistics are quite different from the visceral feelings that sometimes emerge in discussions about the long-divorced St. Louis and St. Louis County. Since their separation in 1876, efforts to get the pair back together again have failed time and again. This time around, instead of taking the big plunge, both sides hope that incremental movement will lead to greater results that help everyone involved.
"In a lot of ways," says Garry Earls, chief operating officer for St. Louis County, "I kind of feel like women are from Venus and men are from Mars. What we do are the same things that the city does, but we go about them differently. It's like visiting another culture. When we stand out here and try to manage the day-to-day activities of county government, there is relatively little opportunity for me to wonder how they do this in the city. These talks take a lot of mystery out of it."
The $140 Million Question
The study of the earnings tax and possible replacements by PFM is a follow-up to one done in 2009. This time around, the report gets much more specific, talking about changes the city could make to replace the $140 million that the 1 percent levy on city residents and workers in the city brings in each year.
The study compared St. Louis to a number of cities in Missouri, including Kansas City, Columbia, Springfield and St. Charles, as well as to cities elsewhere that it considered comparable: Baltimore, Knoxville, Tenn., Louisville, Minneapolis, Norfolk, Va., Omaha and Pittsburgh.
It also examined five cities or metropolitan areas that have made changes to their tax structures -- Pittsburgh, Philadelphia, Minneapolis-St. Paul, New York City and Washington, D.C. -- to try to identify the issues and possible roadblocks that St. Louis may have to face.
The result, says study author Randy Bauer, is a blueprint that the city can use as a guide for whatever changes it may want to propose.
"The things that we recommend are significant changes. They're not things you could call no-brainers," Bauer said in an interview at the Central West End office of the group Missouri Council for a Better Economy, which is funded by Sinquefield.
It was Sinquefield's $11 million-plus campaign last year that led to the passage of Proposition A, prompting this week's vote in St. Louis on whether to retain the earnings tax. The proposition requires that the city hold such retention votes every five years. Sinquefield would not comment on the studies, a spokesman said.
Noting revenue problems that have plagued St. Louis in recent years, Bauer added, "The city is going to continue to have budget shortfalls whether or not the earnings tax is retained. We suggest that some of the recommendations in our study, dealing with city-county collaboration, may be tools that could deal with that."
The PFM report points out that in St. Louis, four sources of revenue each bring in more than 10 percent of the total pie, with the earnings tax, at more than 30 percent, being the largest by far. It is followed by departmental revenue, about 12.7 percent; franchise and utility taxes, at 11.9 percent; and property taxes, at 11.5 percent. A far greater proportion of property taxes paid by city residents goes to the school system than to operations at City Hall, the report noted.
Sales tax, at about 10 percent of total revenue, is one possibility to examine if the earnings tax goes away. If the sales tax were raised, and if it were to apply to more goods and services, it would bring in more money, the study noted. Much of that revenue would be from people who do not live in the city but come there to work and shop.
But, as Bauer noted, sales taxes aren't necessarily the best answer, and if they are increased, some changes would be appropriate to ease the burden on some city residents.
"There aren't major retail centers in the city," he said. "Most of them are outside the city already. What the city is collecting is a tax from people coming into the city during the day to buy things or people who are traveling. A fair amount of that is exporting the tax burden to nonresidents, which is good.
"If I were in Missouri and constructing a sales tax system, I wouldn't exempt food, and I would provide some form of credit for low-income individuals to make up for some of the burden put on them. I'd raise it for the people buying foie gras and not raise it for the people who are buying their babies' milk."
There are few "new" taxes that the city can use, the report said, adding that "in general a reliance on known own-source revenue is preferable in practice. Innovative revenue sources, such as a land value tax or a split value tax, are appealing but have not been in widespread use in cities in the United States."
One such novel approach that the study mentioned is "municipal marketing," where a city agrees to highlight or advertise a particular product in exchange for payment. The official soft drink sponsor of Dallas, for example, is Dr Pepper, while corporate sponsors decorate bridge houses in Chicago for the holidays.
Bauer said St. Louis may be able to take advantage of this approach in limited ways. "You are an iconic city," he said. "That's not necessarily the case for Pittsburgh."
For the most part, though, more traditional ways of raising revenue are likely to be the key for St. Louis. One of those that the city may explore is so-called PILOTs -- payments in lieu of taxes from some of the city's biggest nonprofit employers, like Washington University and BJC, which are exempt from many taxes now.
Bauer said that in such cases, "what you hope for are voluntary agreements with the nonprofit community. A number of cities have been able to arrange that, such as Boston and Cambridge with their higher education community.
"Some cities have used a carrot-and-stick approach. If you can't get a voluntary agreement, you can use other kinds of assessments, then offer credits against those assessments. But in most places, they prefer voluntary programs. Clearly, BJC, Washington University and Saint Louis University are important institutions to the community, and you wouldn't want an adversarial relationship with them."
Whatever form the final strategy takes, Bauer -- who formerly was budget director for the state of Iowa and is familiar with political realities -- said they will need approval by the voters and most likely from the Missouri legislature as well. He said they should be put into one big package for voters to vote up or down, to help ease the process, even though that route may give everyone something to hate.
"There are no perfect taxes," he said. "There are going to be liabilities associated with any of the choices you make; there are always people whose ox is being gored. There's an old saying, I think it's French: The art of taxation is plucking the greatest amount of feathers from the goose with the least amount of hissing."
Working Together, One Step at a Time
Hissing at taxes is just one of the St. Louis area's popular sports, of course. Dissing the city from the county -- and vice versa -- comes in a close second, if not tied for first.
But if the city needs to make up revenue lost from a vanished earnings tax, increasing income is just one component. Savings from a more efficient government also plays a role, as a companion PFM report shows. It suggests that with certain combinations between city and county, as much as $40 million might be saved each year, though Bauer is quick to say that estimate is very rough and anyone who cites it should "caveat that like crazy."
The report's overall recommendation reflects recent reality: Rather than raise the knee-jerk responses that come when anyone is talking about the city re-entering the county as a separate municipality, or having the city and county merge into a single political entity, both jurisdictions should revive the spirit of such collaborations as the Zoo-Museum District, Metro and the Metropolitan Sewer District and find new ways to deliver services more effectively.
The report cites areas such as administration, health, economic development, parks and human services as ways St. Louis and St. Louis County can eliminate duplication and provide better operations at a lower cost. For now at least, it leaves out courts and police, which are state functions in one or both of the jurisdictions.
At 196 pages, the report goes into detail in many relevant areas, citing how such cooperation discussions have worked elsewhere and providing a roadmap similar to the efforts that have already been under way for many months. Earls, in St. Louis County, said the study is a valuable tool as the talks go forward.
"I really like the fact that they have done research on all of the other places that have done some consolidation," he said. "That gives me some assurance that there is an answer to the potentially infinite number of ways you can put this together.
"In many ways, it looks like one of those jigsaw puzzle with 10,000 pieces. A lot of people think this is simple -- just put all of those government guys in a room and they'll figure it out. But just about everything you do has a different strategy."
As an example, Earls pointed to the different ways the city and county handle the question of jails: two of them in the city -- one called a workhouse -- compared with one in the county, and different ways to determine who should be locked up where. But they share one big common problem.
"There is really no room in any of the jails unless you can reduce the population," Earls said, "so there is relatively little efficiency to be gained. There are still too many people to put into too little space."
In other areas, he sees much more common ground, though the sources of funding may be different. "They have roads, we have roads," he said. "They have parks, we have parks."
According to Earls and Rainford, the three areas where talks have been held -- economic development, health services and construction code enforcement -- were picked because they promise to be ways where the bottom line is likely to be realized: services just as good or better, at lower cost.
"We're going to approach it from a very rational point of view," Earls said. "If you can make the service better or make it more efficient, those are very high likelihood targets for us to study further. In those elements of our government that don't provide better outcomes or do things much more efficiently, why would we bother to do that?
"This is not an emotional issue. This is an effort to do things better."
Not to say that such talks don't raise the emotions of residents on both sides of the city-county line. But, Rainford says, everyone needs to realize recent hard economic times have hit governments as hard as they have hit families and individuals.
"The economy has really put a crimp on local government budgets," he said, "and there is no appetite for tax increases. Put those two together, and as long as everyone in the region was fat and happy, they could have their own recreation department, their own police crime lab, our own this and our own that.
"Now, something is going to have to give. Either vital services are going to be cut, or we are going to have to be smarter in how we go about it."
Rainford said that the whole collaboration gene seems to have skipped a generation, noting that after MSD, Metro and the Zoo-Museum District, the impulse to work together waned. He doesn't think the inertia will continue with younger residents whose understanding of how government works may just be starting to dawn.
"The future of the city is tied to the county," he said, "and the future of the county is tied to the city. Recognizing that the city and the county merging is not a political possibility right now, it still might be in a couple of generations. We can still start doing business with each other, and when people see it's not as bad as they think it is, then we can go to the next thing and the next thing and the next thing.
"If we stay in a 1950s-60s model, the world is going to pass us by. We can't be just an amalgamation of fiefdoms. There are still people on their cul-de-sacs who want to leave things alone, but there is a growing recognition that we are all in this together."
He acknowledges that the earnings tax "clearly has a negative effect. The question is: how much and compared to what? That's where these studies are valuable."
He's not sure about the strategy of putting all earnings tax replacements together in one big package, but he likes the incremental approach of the city and county working together on a few smaller things at a time.
"It's hard for me to imagine nine tax increases are all doable," Rainford said. "The stars would have to line up to get them done. But that doesn't mean none of them are doable, and that doesn't mean none of them is a good idea. I don't want it to have to be all or nothing. If it is all or nothing, I'm pretty sure it's going to be nothing.
"I love deadlines, and deadlines are a good thing. But when you say all or nothing, I think that getting rid of all of it would be a gargantuan task. That doesn't mean you don't look at how it can be done, or start chipping away and make smart moves so that the city tax base is less subject to boom and bust cycles. As someone who has been through a 10-year bust, I can tell you, it ain't any fun."
Will the city be able to change its revenue structure to replace the earnings tax? What will the state of the city-county cooperation look like one year from today or five years down the line? No one can be sure, of course. But Earls in the county and Rainford in the city agree on one thing -- the status quo has to change.
"I'm no Pollyanna," Earls said, "but I think it does work, and it will work. We will have to make it work. We don't have any choice."
STL Earnings Tax Draft Report 3-1
STL Intergovt Final Report 2-16-11 v2