Earnings tax data shows “dampening effect”

Ducks and Economics is a really great blog if you haven’t wandered across it in your (tireless, I’m sure) search for economic analysis of the taxes we pay in Missouri.

Today the blog takes up the earnings tax debate in Missouri by looking at data from MSAs (Metro Statistical Areas) that levy an earnings tax and how they are growing.

There ended up being 57 MSAs listed in the population data that I identified as having earning taxes. They range from Flint, Michigan with a -1.12% growth rate in 2008-2009, to Denver, Colorado, who experienced a 2.1% growth rate over the same period. Of these 57 MSAs, 45 are in the bottom half of cities ranked by population grown (the average MSA in 2008-2009 had a population growth rate of roughly .87%) and 9 were in the upper 50%.

This of course is not the whole story. The data only gives us an incomplete glimpse into what’s happening at a specific moment in time and doesn’t give us any information about trends. I would assume that young cities with high rates of growth might implement an earnings tax but that the tipping point isn’t reached for a while, but without controlling for how long each of these earning taxes have been in place I can’t make that conclusion. There are also many other idiosyncratic determinants of population growth that the data doesn’t allow me to engage. There is also a substantial risk that my data selection is incomplete. Regardless, it is suggestive that close to 90% of identified MSAs with earnings taxes are below the average MSA population growth rate; it suggests that earnings taxes has a dampening if not negative effect on population growth, particularly in cities hit hard by the recession.

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A question of representation

One Kansas resident wonders about the Kansas City earnings tax, and where local governments get the authority to tax the earnings of out-of-state workers who do not have a say in their tax burden:

Today, the sneaky practice of taxation without representation is back, and practiced regularly in America. Two cities engaged in this practice are St. Louis and Kansas City Missouri. The city taxes levied on earnings for all people who work in these towns amounts to a one percent earnings tax on the gross income of workers.

A number of years ago, while working in a bank in Kansas City, I asked my employer why my wages were being taxed by Kansas City, since I did not live in Kansas City. Since I was not a resident of the city, it was my view that I did not have any sort of governmental representation in whether or not I should be taxed, and what the level of taxation should be. The question set off some alarms with my employer, and they began to protest that the money taken was a fair tax which provided a host of city services. When I did not buy that argument, and told them I still did not see how I had any sort of representation in determining how fair the tax was or how much I thought was fair, they scrambled to find an answer.

In response to my question, the bank representative told me that my governmental representation authority for the right to levy earnings tax was at the state level. They told me that since I was a resident of Missouri, it was the state legislature which had the governmental authority to allow cities within the state to levy earnings taxes on workers within their jurisdictions. At the time, I let the issue ride. Subsequently, I have had occasion as a resident of Kansas to work in Kansas City, Missouri, and my earnings continued to be taxed the one percent earnings tax by the city of Kansas City. Again the question arises regarding how a city in another state can get away with taxing the earnings of Kansas residents without appropriate governmental representation to determine if I should be taxed, and how much tax is due.

I am sure the response to this would be that the federal government allows state and local governments the right to create taxes for non-citizens, and my representation is on the federal level. Since the slippery practice of being forced to pay taxes to governments where I have no representation in how much or whether I should be taxed is sanctioned by the Federal level of government, cities, counties and states are allowed to dip their fingers into my earnings whether I have a voice or not.

Since taxation has reached a convoluted layer of being taken from earnings, purchases, property, services, and who knows what else, it is time to start asking my Federal representatives to allow me direct representation in all the taxes being drained from my income, or to pass legislation that disallows the practice of taxation without representation as it exists in American society today.

Earnings taxes are just one example of how citizens have been conditioned to paying taxes they have no control or representation in qualifying to pay. How much more money would the average citizen have in their pocket if this country truly held to the original concept of no taxation without representation? My guess is that there would be a lot of state, county, and city officials squirming in their seats if our Federal government forced them to rethink their processes of how people are taxed, and who has a say in determining how much tax is allowed.

To those who suggest that KC voters are the only ones who should be concerning themselves with their earnings tax, I say not so much. Many people are affected by the earnings tax without the opportunity to vote on it, including KC residents who haven’t voted on the earnings tax for decades. Many people would like to see this question revisited.

Michael Reagan: people moving from high-tax states to states with no income tax

How interesting it must have been to grow up with Ronald Reagan!

Anyhow, there is a chorus right now of “people and businesses are moving from high tax states to low tax states” in the news. Part of me just wants to say, “duh”, because all things being equal, there’s no reason not to choose a lower-tax state, like Texas.

The reason we still have people living in Missouri is that thankfully, all things are not equal: people have family here, they’ve already invested and established themselves in Missouri, they are comfortable here. But for people and businesses that get to make an untethered decision, there’s little Missouri can offer to the average business, say, one that isn’t going to win tax credits or other incentives.

Texas Passes NY in Fortune 500 List

Are some states driving people out with high state taxes?

If you tax them, they will leave

Disclaimer: your author was born in Texas. She has a mighty big soft spot for its enormity and bluebonnets.

Idiotproofing our taxes

Another Tax Day reveler thinks a state sales tax just makes more sense than an income tax:

I argue that Missouri’s ‘Fair tax’ proposal to eliminate the income tax and implement a revenue-neutral, broad-based sales tax makes intuitive sense to me on the grounds that it is relatively more idiotproof. That is, sales taxes are relatively easy to implement and monitor and a lot less costly to enforce relative to income taxes. Sales taxes also are hard to get out of paying relative to income taxes; you don’t lose money when people forget to send them in (or they get lost in the mail), cheat on them, or make mistakes.

Speaking of cheating on your taxes, here is a rather egregious story of tax fraud from CNN today:

Investigators say Monroe County jail inmates in Key West had been filing false tax return forms for jobs they never had as far back as 2004, and getting thousands of dollars a pop in refund checks.

Using a formula that kept their refunds to amounts under $5,000 per claim, inmates thought they would fly under the radar, investigators say. And they did for years, passing around cheat sheets that showed line by line how to fill out the complicated forms.

The scam however is not a local gig. Investigators and federal officials say it has been going on for decades in state and federal prisons around the country.

“These guys weren’t rocket scientists…They didn’t just wake up and come up with this great scheme,” Monroe County Sheriff Bob Peryam said.

Here’s how it allegedly worked: using names of defunct or made up businesses as places of work and a master cheat sheet for salary and other numerical information, inmates filled out 4852 tax forms — the ones you use if your employer didn’t provide you with a W-2.

The inmates sent the forms in and the IRS then issued refund checks, in some cases sending them directly to the county jail. But inmates didn’t just fill out the forms for themselves. For a $500 fee ringleaders at the prison filled out refund requests for other inmates, promising they would each get a return of about $4,500.

Some of the prisoners, homeless before their arrests, were unaware of the scam. They gave away their social security numbers for honeybuns, a sweet pastry that inmates can buy in prison. The scammers would then file more refund requests under those social security numbers.

Wow. Consider that without an income tax, this scenario is simply impossible.

I want to point out that I don’t have a philosophical objection to income taxes per se. Rather it seems to me a matter of pragmatism: how idiot-proof can we make our taxation and government mechanisms?

Kansas City Earnings tax blues

I don’t have the heart to regale you with the tale of my tax returns.  So here is another from a braver chap than I.

I won’t gripe about paying taxes. Except the Kansas City Earnings Tax. I think reasonable taxes are fine.

For the first time in quite some time, we did the taxes ourselves. By “we did the taxes ourselves,” I mean that I did the taxes. Ashley did her share of the tax work by signing the returns and asking “How much are we getting back?” and “Do you think we ought to take it to H & R Block?” repeatedly.

Like every other form of commerce, tax preparation can be done online. We filed electronically this year. My best estimate is that it added about six hours worth of work to the process.

Since we were e-filing, we had to fill in all the information that is included in the W-2s. Got that done. Didn’t like it, but I got it done.

Then I had to re-create Form 8823 for Noncash Charitable Donations. Check.

I filled out the Federal returns and filed electronically, only to be rejected because we needed a specific form for a contribution we made to a non-profit organization. No problem. I went back and attached the form, filling out all the necessary information and re-filed. It was rejected again because the specific form needed a supporting form.

The first one was easy enough. I’ll just go back and find the 1098-C form and attach it. After a half hour of looking, I came to the realization that Form 1098-C is not available. No problem.

I’ll just print everything and add the form and mail it in. Kickin it old school. That’s how I roll.

I couldn’t access my returns. My password didn’t match. Had I forgotten the password? No way. But I decided to reset the password through the website. Except that it didn’t recognize my email address.

Now I was in trouble. I gave up. Time for a beer and a couple of hours not looking at taxes. I stepped away.

When I returned to the computer, I decided to try one more time to access my returns on the website. It worked! All I had to do was print the returns, add the Form 8823 and 1098-C and I was golden.

Time to move on to the state returns. Because I worked in Kansas, I had to pay taxes in Kansas and declare a credit for the state of Missouri where I live. The Kansas form took 25 minutes to fill out. The Missouri form is 16 pages.

I finally got it done. I was done.

Then, and only then, did I realize that Missouri won’t allow you to e-file if you exceed a certain income. We exceeded it. And I was back to mailing it in. Old school.

OK… now I’m done.

Not so fast.

We live in Kansas City. I realized that I had to file city taxes too. Kansas City takes 1% off the top. No deductions. No credits. Nothing.

I went to the city website and got the necessary form. This was the biggest pain in the butt during the whole ordeal. Why? It’s one page. It’s one percent. Why’s it such a pain?

Each individual number was in its own box. And the tab key didn’t move the cursor to the next box. So putting in the income information wasn’t “65327.” It was 6 (move the mouse) 5 (move the mouse) 3 (move the mouse) 2 (move the mouse) 7 (move the mouse).

And each of the 14 freaking lines on the form was the same way.

So now I’m down to the wire. I just need to address the envelopes and pray that I have some stamps.

Daily Tax Quotes

And now, a little something extra to get you through…

Worried about an IRS audit? Avoid what’s called a red flag. That’s something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That’s a red flag.

— Jay Leno

Unquestionably, there is progress. The average American now pays out twice as much in taxes as he formerly got in wages.

— H. L. Mencken

[On completing tax returns].This is too difficult for a mathematician. It takes a philosopher

— Albert Einstein

Daily Tax Quotes

We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.

— Winston Churchill