CHICAGO — Voters in Kansas City and St. Louis will cast votes Tuesday on whether their cities can continue collecting one of their main sources of revenues — a 1% tax on wages and salaries — in a decision that stands to impact their credit ratings.
Officials from both cities have warned of the dire impact that could result in other tax increases or deep spending cuts to compensate for the loss of revenue if voters repeal the tax.
It currently generates $200 million annually for Kansas City, supporting 40% of its operations, and $140 million for St. Louis, representing 30% of general fund revenues.
The April ballot measure follows Missouri’s statewide passage of a referendum last November on the earnings tax.
More than 69% of voters in Missouri approved Proposition A, which requires St. Louis and Kansas City to ask voters this April to approve the tax’s continued collection. The referendum also banned the tax from being imposed on additional cities.
If local voters call for the repeal of the tax, it would be phased out over 10 years beginning in 2012, and it could not be reinstated.
If they approve it, the cities can continue collecting the tax, but it must be renewed every five years.
Though officials from both cities are fretting over the vote, Kansas City has more reason for concern. That’s because the majority of St. Louis residents rejected the November referendum while a narrow majority of Kansas City residents approved it.
The tax “anchors the city’s revenue structure by providing slightly more than 40% of the city’s $500 million general fund,” said Kansas City finance director Randall Landes.
“Absent such approval, the city will undertake a 10-year phase-out process, which will require a combination of cuts to essential services and-or tax increases, which will fall entirely on city residents and businesses,” he said.
The City Council has adopted a budget that includes earnings tax revenues, but has a backup plan if voters repeal it. The city would take advantage of existing but unused authority to increase its debt service property tax levy and impose a fee on solid waste. Many other taxing options would require voter approval.
Proponents of continuing the tax are hoping city residents vote to keep it because about half of the funds collected come from those who work in Kansas City but live in the suburbs, while it is city residents who would bear the burden of paying for new taxes and suffer the effects of service cuts.
Fitch Ratings earlier this year downgraded the city’s general obligation rating one notch to AA and placed the GO and special obligation ratings on negative watch due to the challenges posed by the looming referendum.
Moody’s Investors Service rates Kansas City’s GO bonds Aa2 and Standard & Poor’s rates them AA, both with stable outlooks.
The negative watch “reflects the risks associated with the first such voter referendum, which could have a materially adverse impact on the city’s already thinly balanced finances absent draconian expenditure reductions over the long term,” the report said.
Supporters of the proposition believe the warnings from city officials about credit damage are exaggerated.
Let Voters Decide, a committee that led efforts pushing for passage of Proposition A, argues that voters ought to have the final say in levying a tax that the group believes is unfair to residents and businesses that already pay state and federal income taxes.
The tax revenue represents about 30% of St. Louis’ $451 million budget with about 70% being paid by non-city residents.
Mayor Francis Slay helped form a campaign committee called “Citizens for a Stronger St. Louis” to help fight a repeal and city Comptroller Darlene Green has warned of the devastating fiscal impact and potential credit damage. “St. Louis is fighting hard to keep its 1% earnings tax in place and we are confident the people will vote to retain the tax next month,” she said.
St. Louis has a AA-minus from Fitch, a Aa3 and a stable outlook from Moody’s, and an A-plus from Standard & Poor’s.
Moody’s warned in a report late last year that “the long-term credit quality of Kansas City and St. Louis will hinge on management’s ability to cope with potential ongoing elections on the earnings tax renewal and contingency planning for the potential loss of their largest operating revenue stream.”
Even if the tax survives in the vote this week, both cities will face similar uncertainty in five years. A bill pending in the state Legislature would give the cities more breathing room by extending to 20 years from five years the renewal vote.
“This would give us the revenue stability we need to safeguard our credit ratings and follow the will of the city’s voters,” Green said.