Policy Series: Taxes and Subsidies 

Paper number

37

2020

Howard Wall

The cities of St. Louis and Kansas City, Missouri, impose a 1 percent tax on residents’ earnings and non-residents’ earnings within the cities. This paper provides estimates of the effects of these taxes on the parts of Missouri outside the two metro areas. I estimate that over the decade from 2000 to 2010 the earnings taxes in Kansas City and St. Louis reduced household employment in the taxing cities by about 14,500, and by about 34,700 in the Missouri portions of their surrounding metro areas. When the link between the St. Louis metro area and outstate Missouri is considered, the statewide employment loss from the cities’ earnings taxes rises to 60,500, or about two-thirds of the state’s total employment loss over the decade. In all, about three quarters of the employment losses from the two cities’ earnings taxes were felt outside of the cities themselves, and nearly one fifth was felt in outstate Missouri.

Paper number

27

2017

R.W. Hafer and Howard J. Wall

If one believes popular rankings of “tax climate” across the states, Missouri fares pretty well. Using generic types of business tax rankings, however, can mask underlying issues that may belie their message. This study uses the Tax Foundation’s 2015 report “Location Matters: The State Tax Costs of Doing Business” to compare total tax rates paid by different types of businesses in Missouri to those paid by similar businesses in other states. Looking at the total taxes paid—not only corporate income taxes, but also property taxes, unemployment taxes, etc.—is crucial to understanding the total or effective burden of state taxes on businesses. It is this broader picture of tax burdens that allows us to, for example, better understand decisions by firms to locate, or not, in Missouri.

Paper number

24

2017

Howard J. Wall

This study provides estimates of the effect of earnings taxes in Saint Louis and Kansas City on population growth in the two cities and their surrounding metro areas. The results of this analysis are consistent with the proposition that the earnings taxes had negative effects on population growth in the City of Saint Louis and Kansas City, and positive effects on the rest of their metro areas. In net, the estimates indicate that the metro areas lost population because of their central cities’ earnings taxes. Given the significant negative relationship between earnings taxes and population growth in Saint Louis City and Kansas City, and the need to raise revenue to finance essential services, it is natural to ask what the cities should do instead. The answer to this question may lie in looking to the policies of other cities who have successfully raised raised revenue in less deleterious ways than the earnings tax employed by Saint Louis City and Kansas City.

Paper number

23

2017

Howard J. Wall

This paper summarizes the findings in the economics literature on the effectiveness of state tax credits in spurring economic development: (1) Tax credits generally have not been found to lead to increased employment even at firms that receive them. (2) In some sectors and some localities, it is possible for tax credits to lead to increased employment in non-recipient firms. (3) State tax credits do not tend to lead to higher levels of employment for local residents, nor, by extension, do they lead to higher levels of employment for state residents. These results suggest that for states like Missouri, which tend to have dual-purpose tax credit programs, it would be difficult to find strong evidence that development tax credits have generate significant increases in overall economic activity.

Paper number

20

2017

R.W. Hafer and Michael Rathbone

The answer to the question “Is Missouri a low-tax state?” depends on the approach used. This paper addresses the question by comparing income taxes. Specifically, for purposes of comparison we calculate, for each state, the income tax liability for a representative family of four earning the national median income. With this information we then compare the income tax liability across states, ranking them from highest to lowest. Using our approach, we find that Missouri ranks in the top half of states according to income tax liability. In other words, our ranking shows that Missouri is not a low-tax state.

Paper number

18

2017

Howard J. Wall

According to the Missouri Department of Economic Development (DED), the Missouri Quality Jobs Program (MQJP) will create 118 new jobs by 2020 for each $1 million dollars in tax credits awarded under the program. The claimed sources of these job gains are the direct increase in employment at the firms receiving the credits, and indirect increases at other firms due to spinoff and multiplier effects. Unfortunately, the DED’s estimates for these effects are based more on faith than on evidence. First, the DED rather naively assumes that all of the job gains at the firms receiving tax credits occur only because of the credits. Second, the DED’s projections of spinoff and multiplier effects are generated with a forecasting model that is incapable of an accurate accounting of negative substitution effects, such as the fact that many of the new jobs will be filled by people who are already employed. This paper summarizes new estimates of the employment effects of the MQJP using the actual, rather than the assumed, experience of local economies. What these estimates show is that after an initial net increase in employment following the authorization of tax credits, the net effect on employment becomes negative by the second year after authorization: Job gains in the county receiving the tax credits simply came at the expense of neighboring counties, which tend to lose more jobs than a recipient county gains. Finally, by the fourth year after authorization, the only statistically significant effects of the tax credits are job losses in neighboring counties.

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Lindenwood University

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