Moody’s: Missouri Tax Vote Could Strain Kansas City, St. Louis

CHICAGO — Missouri’s passage of a ballot measure that threatens Kansas City and St. Louis’ long-term collection of a 1% earnings tax could stress both cities’ credits, Moody’s Investors Service warned in its weekly credit outlook released Monday.

More than 69% of Missouri voters approved Proposition A, requiring St. Louis and Kansas City to ask voters next spring to approve the continued collection of the earnings tax. The two cities are the only ones in the state to impose the tax.

A majority of St. Louis voters rejected it, but Kansas City voters and those statewide supported it. The referendum also bans the tax from being imposed on additional cities.

If local voters call for the repeal of the tax in 2011, 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.

Representatives of both cities have warned that the demise of the tax — which is the single largest revenue source collected by both — could have a dire impact on their budgets and ratings. The tax generates $200 million annually for Kansas City, supporting 40% of its operations, and $140 million for St. Louis, representing 30% of general fund revenues.

Moody’s rates Kansas City’s general obligation bonds Aa2 with a stable outlook. It rates St. Louis Aa3 with a stable outlook. Moody’s analysts said no immediate credit risks are posed by passage of the proposition. Instead, the credit challenges lie in the required local vote and the need to renew the tax every five years.

“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,” Moody’s warned.

Both cities have begun lobbying ­voters to vote against a repeal on the April ballot, warning massive cuts would be required.

Kansas City officials have warned of a steep reduction in the number of police officers.

St. Louis Mayor Francis Slay helped form a campaign committee called “Citizens for a Stronger St. Louis” to help fight a repeal.

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.

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