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Commentary: Repeal the e-tax? Batman shrugged

This article first appeared in the St. Louis Beacon, Feb. 18, 2010 - In the movies and in the graphic novels that we used to call comic books, Batman defends the mythical city of Gotham from the sinister plots of a host of outlandish villains.

Though the specifics of the peril vary from episode to episode, the one commonality of all these fiendish schemes is the desire to bring Gotham to its knees so that its adversaries can take over and run things the way they want to. Standing alone against the wily enemies of lawful civic order is the caped crusader, who’s got a few tricks of his own up his sleeve.

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics. -Thomas Sowell

If Batman were to move to St. Louis, I suspect he would presently be doing battle with the Riddler — the mysterious and enigmatic foe whose clever gambits are never quite what they seem at first blush. One local who might be able to play that mercurial role is Rex Sinquefield.

Sinquefield is described by the Post-Dispatch as “a retired investment banker and big-money contributor to politicians and political causes.” He recently wrote a check for $500,000 to fund a petition drive to repeal the earnings tax in St. Louis and Kansas City. He reportedly feels that the e-tax puts these municipalities at a competitive disadvantage with the rest of the state.

I’ve never met Mr. Sinquefield, nor have I spoken with him about this issue, so I can’t assess the motivation for his generous contribution to the regional political dialog. I can, however, speak to the probable outcomes should this effort bear fruit.

The e-tax was originally instituted as a way to keep property taxes from spiraling out of control. People who live or work in the city pay 1 percent of their income to fund public safety; employers located within city limits pay one-half percent of their payroll for the same purpose.

Currently, about one-fourth of major American municipalities assess a similar levy, usually significantly above the 1 percent level. New York, Philadelphia, Chicago and San Francisco are among the cities that have managed to thrive despite earnings taxes assessed at rates substantially higher than those in St. Louis.

According to the aldermanic Ways and Means Committee, the e-tax generates 39.2 percent of city revenue while property taxes comprise an additional 11.5 percent. Should the e-tax be repealed and the full burden of public safety be returned to city property owners, property taxes would have to increase to provide 50.7 percent of the budget. Let’s see what that would mean to city residents:

A home owner who presently pays $2,400 a year in property tax would see his annual obligation rise to about $10,560 — more than quadruple the current rate. While $200 of his current monthly mortgage payment goes into an escrow account to pay the taxes on his home, that amount would have to increase by an additional $680 per month to offset the revenue loss.

Add about 4.4 times your current property tax to your monthly mortgage payment to see if you like the proposal. Nor are renters insulated from this calamity. If you live in a four-family flat and your landlord pays $2,400 a year in property tax, $50 of your rent payment goes to defray that cost. Your rent would thus increase $170 per month to free you from the burdens of the earnings tax.

By contrast, if our hypothetical home owner/renter makes $100,000 annually, he now pays $1,000 in e-tax — about $19.23 a week. To save that $1,000, our homeowner will pay $8,160, while it will cost our renter $2,040 to realize the savings.

Obviously, such catastrophic rate increases would devastate city property values. Many owners who had managed to hang on through the recession would be forced into default by the higher payments. The already troublesome foreclosure market would thus be flooded with new arrivals. And landlords would see vacancies skyrocket as renters seek better deals elsewhere. With supply high and demand low, guess what happens to sale price?

The general revenue would further contract because displaced persons tend not to pay taxes. This dollar shortfall would, in turn, necessitate further reductions in services, making the city an ever less inviting place to live, work or visit.

But what of the projected benefits of e-tax repeal? Won’t our new-found competitiveness spur economic growth? The short answer here is “No.”

Existing businesses would save the half percent payroll tax but that windfall would be more than off-set by higher taxes on the property they own or inflated rents on the property they lease. Businesses from outside the city would hardly be lured here by the prospect of higher rents just to save on a tax they don’t pay in the first place.

The only people who would reliably profit are suburban residents who work in the city and real estate developers and speculators who have been granted tax abatements on the city properties they own. They could pocket their bounty while the rest of us figure out how to pay for police, fire and ambulance services for them.

Of course, there are ways other than property taxes to raise revenue. Perhaps we could increase parking fines to $500 per violation. That ought to encourage tourism…

The simple fact is that the proposed “tax cut” is a crackpot pipe dream of supply-side economics that would do for local government what its broader application at the federal level has done for the national debt.

The earnings tax is a reasonably equitable way to share a collective burden. The people who place the greatest demand on municipal resources — those who live and/or work in the city — pay a modest stipend to provide for public safety. The lessons of politics and the lessons of economics can be reconciled if we consider the venerable adage that those who dance must be prepared to pay the fiddler.

The real mystery here is why a civic-minded investment banker would spend a half million dollars of his own money to promote a proposal that figures to bankrupt the city. That’s a riddle that might stump even Batman.

M.W. Guzy is a retired St. Louis cop who currently works for the city Sheriff's Department. His column appears weekly in the Beacon.