Gib Kerr, a small business owner and commercial real estate broker, writes about how the earnings tax drives small businesses out of Kansas City in the KC Star.
Earnings tax repeal deserves full consideration
By Gib Kerr, Special to The Kansas City Star
Mayor Mark Funkhouser stirred up a new round of controversy recently by floating the idea of eliminating the Kansas City earnings tax, which brings in about $200 million to the city coffers every year.
Before a meaningful debate could even begin, however, the City Council voted 10-1 to cut off the discussion immediately, reasoning that the earnings tax is too sacrosanct to touch.
The mayor has earned an unfortunate reputation for consistently failing to build a consensus on important issues. This is nothing new. But Funkhouser is on the right track here.
The 1 percent earnings tax that Kansas City levies against residents and wage-earners in its jurisdiction is killing our town. The tax penalizes employment and gives people a strong incentive to live and work outside the city.
According to an article in The Star last fall, Johnson County is on the verge of surpassing Jackson County as the employment center of the Kansas City metro area. “Employment in Johnson County exploded 70.7 percent from 1990 to 2008” while Jackson County grew by an anemic 2.3 percent.
The common explanation for why people and employers have been gravitating toward the suburbs is that the schools are better. We hear this from residential real estate agents all the time. But what we commercial real estate brokers hear more often — when working with companies that are moving their businesses — is they want to avoid the Kansas City earnings tax.
Yes, we do have incentive programs such as tax increment financing, enterprise zones and tax abatement. But those tools are rarely pursued by the small businesses that generate about 80 percent of all new jobs. When large corporations in Kansas City obtain incentives, it is always big news.
But when a mom-and-pop small business – with five or 10 employees — opts to avoid the 1 percent earnings tax, the public rarely hears about it.
Small businesses — many, if not most, of which are Subchapter S or limited liability corporations whose earnings are taxed at the individual level — are quietly choosing to locate in places like North Kansas City, Overland Park or Lee’s Summit instead of Kansas City, principally to save 1 percent.
Generally speaking, large corporations pass the tax on to their employees, but small businesses feel the pain more acutely.
With its complete dependence on the earnings tax, City Hall is like a heroin addict. Its short-term desire for the next fix overwhelms any thoughts of long-term health. Meanwhile, the earnings-tax drug is slowly poisoning the body.
It is time for an “intervention” at City Hall. Weaning our city from the addiction to the earnings tax will not be easy. There is no quick fix. Recovery will start only when we acknowledge that we have a problem.
Let’s admit that we have a problem. Reasonable solutions, gradually enacted over time, do exist and should be debated. Let’s start by looking at the tax structures in place in surrounding municipalities. May the discussion begin.
