The cost of a tax agenda: the passage of Proposition A and its effects on Kansas City and St. Louis City.

• Author: McCoy, Missy

1. Introduction

   Eight dollars and sixty-seven cents per vote is what one Missouri resident recently spent to promote a successful ballot initiative that threatens to destabilize municipal budgets in the state's two largest cities. Rex Sinquefield provided funding in the form of approximately $11. (2) million toward the passage of Proposition A. (1) On November 2, 2010, nearly 1.3 million Missouri residents voted in favor of the proposition, (2) which limits the ability of Missouri cities to tax their residents and generate revenue. (3) Yet, just five months later, the residents of Kansas City and St. Louis City (4) put their earnings tax to a vote, as required by Proposition A, and 78 and 87% of voters, respectively, stated their desire to retain the tax. (5) Sinquefield's use of the legislature to input his tax policies was ineffective, so he found a way to bypass it. The irony, however, is that the April 2011 local votes prove that Proposition A was a response to a nonexistent crisis. Now, residents of Kansas City and St. Louis City are left with a bizarre form of forced ballot-box democracy.

   Proposition A prohibits any city from enacting an earnings tax if it does not have one in place on December 31, 2011. (6) It also requires Kansas City and St. Louis City, the only cities with an earnings tax presently in place, (7) to put their earnings taxes to a citywide vote once every five years beginning in 2011. (8) If city voters ever decline to continue the earnings tax, Proposition A requires elimination of the tax over a ten-year period through gradual reductions of the tax amount in an attempt to give the affected cities time to locate other funding sources. (9)

   This Law Summary begins with a discussion of the history of the earnings tax in Kansas City and St. Louis City starting with both cities' designations as home rule cities. (10) Being home rule cities allowed them independence in governing their populace and the eventual implementation of an earnings tax through city charters and state enabling statutes. (11) Next, this Law Summary discusses Proposition A's repeal of the previous enabling statutes, the institution of new statutes, (12) and the prohibition of any other city from passing an earnings tax. (13)

   This Law Summary takes the position that Proposition A, funded largely by St. Louis-area businessman and fundraiser Rex Sinquefield, (14) unfairly put the earnings tax issue to a vote of the entire state even though it primarily affected only St. Louis City and Kansas City. (15) The earnings tax may have survived its first brush with death as residents voted overwhelmingly to retain it in April 2011, but the worry is far from over. (16) Elimination of the earnings tax as a revenue source for St. Louis City and Kansas City would create a gaping hole in those cities' budgets and leave city officials scrambling to replace the revenue. (17)

   Locating sources of revenue to replace the earnings tax in the event it is eliminated is of foremost importance to Kansas City and St. Louis City residents. (18) However there is no denying that accountability of spending at the municipal government level can be seen as a benefit of Proposition A. (19) Unfortunately, that accountability seems to be outweighed by Proposition A's creation of a tax policy for which the residents of Kansas City and St. Louis City clearly have no use. (20) This bizarre result leaves residents in the awkward and expensive situation of funding a vote every five years to retain an earnings tax that they want in place, as demonstrated by the results of the November 2010 and April 2011 votes. Through the use of a ballot initiative, Sinquefield has managed to bypass the legislature, forcing residents of Kansas City and St. Louis City to take action through the courts or legislature to rectify the unjust situation of putting a local issue to a statewide vote. (21)

2. Legal Background

   More than fifty years have passed since St. Louis City implemented its current earnings tax, (22) and the tax has existed for nearly that long in Kansas City. (23) over the course of that half-century there were relatively few challenges to those taxes. (24) Prior to the passage of Proposition A, the majority of challenges involving the tax related to the meaning of "income" and what types of payments would be subject to the tax. (25)

   Although Proposition A was the first measure to substantially challenge the earnings tax, Missouri is no stranger to eliminating taxes, or to a government entity's ability to impose them. (26) Perhaps the best example of the state's history of anti-tax sentiment was its passage of the Hancock Amendment in 1980, which froze state tax rates and required that any new taxes be brought to a popular vote prior to institution. (27)

   To understand the implications of the passage of Proposition A, it is essential to first appreciate Missouri's constitutional grant of home rule powers to its municipalities. (28) This designation of "home rule municipalities" led to the eventual birth of the earnings tax in the two largest urban areas of the state, St. Louis City and Kansas City. Both cities are governed by charters as home rule cities and are also subject to the laws and constitution of the State of Missouri.

   1. Missouri's Allowance of Home Rule Cities

      The power granted to the charter cities of Kansas City and St. Louis City to govern themselves and impose earnings taxes is found in the Missouri Constitution and the charter of each respective city. Article VI, section 19 of the Missouri Constitution provides authorization for cities to adopt a charter form of government. (29) The taxing power of local governments originated in the Missouri Constitution of 18 75. (30) That same provision remains in the current constitution at article X, section 1 and states: "The taxing power may be exercised by the general assembly for state purposes, and by counties and other political subdivisions under power granted to them by the general assembly for county, municipal and other corporate purposes." (31)

      The city charters of St. Louis City and Kansas City were adopted within just over a decade of each other, (32) and both contained language relating to taxation within the municipality. Article I, section 1, paragraph 1 of the St. Louis City Charter addresses the imposition of taxes and states that St. Louis City has the power "[t]o assess, levy and collect taxes for all general and special purposes on all subjects or objects of taxation." (33) Kansas City's special charter addresses the collection of earnings taxes and mirrors the enabling statutes in regard to the types of income taxed, limitation on the tax, calculation and collection of the tax, wage brackets, and the lack of a need to produce state or federal income tax returns. (34) Through the foundation of the state constitution, city charters, and enabling statutes, Kansas City and St. Louis City were able to lay the proper foundation for the earnings taxes. (35)

      The history of home rule cities in Missouri presents a checkered past with disagreement between the legislature and the cities as to the power and responsibility of each entity. (36) In the adoption of its 1875 constitution, Missouri was seen as an innovator by establishing constitutional home rule, (37) considered to be "the privilege granted to local communities to frame, adopt, and amend their own charters." (38) Missouri's delegation of home rule powers was seen as a "daring originality of spirit" in the world of politics since the authority was granted directly by the constitution and not from the legislature. (39) In theory, home rule was to provide cities with populations of greater than 100,000 the freedom to govern without undue interference from state government. (40) Home rule is based on the idea that local communities are better equipped to deal with local problems. (41)

      While a desire to ensure greater local autonomy may have been the basis for home rule in Missouri, the 1875 constitutional grant provided little support for the concept to stand. The language of the constitution required that city charters be "in harmony with and subject to the Constitution and laws of Missouri." (42) The state could not seem to let go of its authority, determining that the General Assembly would have the same power over St. Louis City (the only city meeting the home rule requirements at the time) as any other city in the state. (43) These clauses ultimately left St. Louis City with minimal autonomy since any charter provision put into place could later be overruled by state legislative action. (44)

      Through several court decisions, (45) it became clear that the state was unsure how to apply home rule when conflicts arose between the city charter and state constitution or statute. (46) Eventually, the Supreme Court of Missouri clarified that home rule charters were only required "to be in harmony with and subject to [general state laws] as distinguished from local concern." (47) This state-local interest test gave hope that charter cities would be able to govern with little state interference. (48)

      That hope proved to be short-lived as the courts continued to side with state statutes (49) over city charter in areas of conflict. (50) Finally, the Supreme Court of Missouri provided resolution in Kansas City v. J. I. Case Threshing Machine Co., holding that home rule cities have the power to legislate municipal affairs and the legislature could not affect those powers in municipal matters. (51) This decision helped lay the foundation for the process of instituting an effective earnings tax in home rule cities.

   2. The History of the Earnings Tax in St. Louis City and Kansas City

      Revenue generation has long been "the most important single issue facing home rule municipalities." (52) At the time the modern earnings tax was instituted, there was much concern among the residents of St. Louis City and Kansas City that a legislature comprised of...