Arguably the week’s biggest piece of political news is the mayor’s announcement of an executive order calling for the formation of a "Long-Term Revenue Advisory Council" that will advise the city on increasing revenue streams. This new commission’s formation was of course preceded by the long-anticipated loss of earnings tax revenue from remote workers that live in the suburbs and no longer commute to offices in the city. That loss is not only going to impact the budget, it has already led the city to settle another suit over earnings tax refunds to remote workers. After the “return to normal”, our downtown has had a highly publicized decline. Many of our office workers haven’t been returning to downtown. Many have stayed remote. Others now work in smaller suburban campuses that are more cost effective for hybrid offices. The stubborn vacancy in our central business district has been covered extensively by local and national outlets, so the change is very real and quantifiable.
In the face of this new, long term change to how we work and the city’s revenue picture, the city is convening this panel to recommend ways to increase the city’s income. This increase is essentially just to try and stay even with where we have been in recent years. The past few years of internet-sales-driven use tax revenue increases had really helped our fiscal picture. This was made possible by a change in state law. Even before this, the city had some agreements with digital commerce companies that put some money in city coffers. That said, the change in state law really opened this revenue stream up for sustained growth. Even in the face of a slowing construction boom, and the related permitting fees, new use tax revenue from internet shopping delivered in the city limits has changed a basic dynamic in the region’s sales/use tax paradigm. For decades, retail sales via malls, big box stores, etc. had driven sales tax revenues into suburban governments, essentially subsidizing suburban communities and allowing them to keep their own taxation rates lower. In turn, the city raised its tax rates to capture more revenue from what shopping remained inside the city borders. This dynamic is still evident, today. Many of the suburban communities have kept their sales tax rates below the city’s, which continues to draw sales to their communities. Then came COVID, and Americans’ usage of internet shopping exploded. This has continued, even as life has largely reverted back to pre-COVID ways. When combined with changes in state law that allowed municipalities to collect taxes on their residents’ internet purchases via the use tax, this has essentially allowed the city to recapture lost sales tax revenues from city residents’ shopping. After years of regularly having to make small cuts to balance the city budget, we were finally able to stabilize things and increase spending, here and there. Also, the city’s reserve fund was allowed to recover and stay at a decent level, which is a very good thing.
It wasn’t meant to last, though. The city’s logic for keeping charging earnings tax on remote workers employed by city-based companies was extremely flimsy. It survived a very poor legal challenge, but most folks knew that a legit firm would likely be able to win the argument. They recently did. When coupled with the aforementioned widespread vacancy in the central business district, we are looking at a future where the recent years’ lack of cuts will seem to be more of a aberration, within a longer trend of cutting. Just since the recent court decision, we’ve seen an immediate impact on our city budget. This brings us to the recent announcement of a commission.
Who Will Be On The Panel?
The membership hasn’t been announced, but we know that the commission will be assisted by the mayor’s staff. Really, it’s unclear if it matters who gets seated on the commission. Many of our city’s commissions, advisory councils, etc. just rubberstamp a set of recommendations that come from city staffers. Rarely do the commissioners, etc. actually do the research, policy creation, etc. It is unclear how this one will be any different. The mayor did instruct the commission to avoid revenue ideas that would “disproportionately burden residents with lower incomes.” My guess is that the commission will have some folks from the nonprofit industrial complex to bolster that messaging. I’m sure it will also have representatives from the Treasurer’s and the Collector of Revenue’s offices. The position of Comptroller is being retired, so I wouldn’t be surprised if they didn’t bother placing a representative from Green’s office.
What will be hilarious is if they put folks from the universities on the panel. These institutions have expanded far beyond being just schools and are also major parts of the for-profit development ecosystem, via their “reinvestment corporation” arms, yet they pay reduced taxes. This is a problem that’s received lots of discussion in recent years. Besides the occasional outburst of WUSTL students trying to seem edgy by suggesting their schools should do Payments In Lieu Of Taxes (PILOT), there’s basically zero motion towards making this a reality. It’s just a thing that folks dust off every couple of years to sound “smart” and like they are interested in solving the problem. In reality, it never goes beyond the semi-regular online petition and an OpEd. It likely won’t, either. To say that there is not political will to force the universities into paying PILOTs is a massive understatement.
Rather, the city regularly packs these commissions, etc. with folks from the universities. Not only is there no real movement toward getting them to pay, they are still given exalted and influential positions that then sets the city’s policies in a lot of areas. They get to both skimp on taxes and still run things. Great work if you can get it. Truly the American meritocracy at work. It would seem that putting people from the universities on this panel would be pretty outrageous, but the city is constantly jumping every available shark, so who knows? Even if they don’t have representatives on the panel, the universities themselves will likely have a massive influence on the outcome. As the city’s big private employers, the universities and related hospitals will essentially have a veto over recommendations. They always do. Again, folks know they should pay taxes/PILOTs, but nobody ever really does anything about it. Like the recent farce that was the charter commission, whatever they vote to recommend will be predetermined. These commissions don’t really craft policy.
What Will They Do?
Now for the “what”. This is where things get murky. The city doesn’t really have a ton of options. As mentioned earlier, the city passes numerous sales and property tax increases over the past decades, seeking to fill fiscal holes created by declining population and shopping moving to the suburban shopping centers that the interstates helped encourage. This is to the point where we’ve exhausted most of the possible sales and property tax levies that are possible under state law. Compared to much of the state, we are a very high tax rate jurisdiction. That this was done back when property values were far lower doesn’t really matter. We are where we are: a relatively high tax jurisdiction that has already levied most all that we can levy. That means when the mayor says she’s not suggesting a tax increase, there’s no reason to assume that she’s lying. KSDK’s coverage of the announcement makes it sound like new taxes are a foregone conclusion. I don’t think that’s right. Basically, I think it shows that the reporter is highly ignorant of the city’s fiscal realities. That ignorance appears to have manifested in the assumption that the panel will recommend tax increases that aren’t really possible. Might as well look at a few options, though.
PILOTs from the universities - Maybe I’m too jaded and this is gonna be the moment that they step up and start paying their fair share of taxes. It would be nice. Better late than never, as they say. I’m just not gonna hold my breath. With the wave of Millennials now past, universities are in major competition for students and many have been facing major financial difficulties. There just aren’t likely to be as many students in the next decade, compared to the last. It’s built into the nation’s general demographic trends. Also, we’re seeing a surge in interest in trade schools, meaning traditional academic universities are also fighting over a smaller slice of the already smaller pie of young students. I don’t think they’re in the mood to give up money, despite their massive endowments. We’ll see.
Fees - This is the biggest potential stream. While the city has limitations on its ability to raise a lot of tax streams, it can increase fees. We’ve all seen the recent increases in our water/trash bills. It’s also talking about nominally raising fees on AirBnBs, etc. Raising fees also has the advantage of not requiring a public vote, which are required to increase tax rates under Missouri’s Hancock Amendment. The question is what kinds of fees can the city pursue, especially if it is to honor the mayor’s directive to avoid raising the fees paid by residents with lower incomes. Permitting fees might be a possibility, but higher capital costs and the macro-cultural shift back to the suburbs is limiting development in the city. That means increasing permitting fees may only get us back up to where we were, pre-rate hikes. As we return to a lower interest rate environment, we should see permitting in the city increase, but the resurgence in the popularity of suburban living will likely remain a drag on investment returning. Also, we have been building a lot of apartments, while the city’s population has been declining. At a certain point, we’ll likely see a decline in demand for new apartment buildings. I think we’re already seeing this in the hotel sector, where a decade of subsidized hotel openings has resulted in a mini-bust downtown. There’s also the reality that many formerly city-based things are becoming available in the suburbs. Whether it is concert venues or microbreweries, the suburbs now feature many amenities that were once mostly associated with the core city. I’m sure that the city will be creative, here, but I’m not really sure what kind of fee could be levied or increased that would generate sizeable revenue. At least not that are politically feasible. The trend has been to cut permitting complexity and fees on small businesses in the city. I don’t see that reversing. One interesting thing would be a fee levied on owners of vacant buildings. I could be wrong, but I think that would legally possible in the state of Missouri. I bet there are a lot of things that I’m not thinking of, but I’m just not aware of a lot of options that are both likely to pass the Board of Aldermen and not inherently regressive, like the recent flat increases in trash fees were. Of course, if you allow more regressive ways of collecting new fees, there are probably a good bit more in the way of options.
Progressive fines - Another avenue would potentially be progressive fine structures. An example of this would be fining the owner of multiple vacant properties had to be mowed by the city, due to the owner not keeping the grass down. In a progressive fine structure, they would be fined more for each additional property, instead of a set fee for all of them. Due to the way people keep properties under different corporate names and LLCs, there is a real-world limit to how much this could raise. This would likely meet the mayor’s criteria for not disproportionately burdening residents with lower incomes. Most folks that own multiple pieces of property are low income. There will be some who inherited things, but most folks lots of property have money. The wrinkle would be the LLC thing, as lower income folks would be less likely to have their property ownership broken out to multiple corporate entities. That would mean they could a higher likelihood of being charged these fines, compared to savvy investors that understand how to use LLCs. I know of no perfect solution for this under Missouri law.
TIF and Tax Abatement Moratorium - 😂🤣😂🤣😂🤣😂🤣. It’ll never happen, but it would actually be a way to help stop the fiscal bleeding. Just figured that I should at least mention it.
Increased taxes - We’ve exhausted most possible levies. There could possibly be more taxation districts set up, and these could take over paying for certain budgetary items. Still, there aren’t a lot of great options. Setting up more CIDs and TDDs also would fail the test of being regressive ways to raise revenues. Also, the state outlawed taxing services in a 2016 ballot measure, cutting off that possibility. This is a place where they would have to be extra creative to make stuff happen.
Anyway, just some food for thought. Have a great Juneteenth!