For earnings tax information, please read below. For detailed information on the Submitted FY 2011-2012 Budget, visit the Office of Budget and Management's webpage.
What is the earning tax?
It's a 1 percent tax on wages and salaries the City collects from individuals who live or work in Kansas City and on net profits of businesses and the self-employed doing business in Kansas City. About 50 percent of this revenue comes from people who live outside Kansas City, in Kansas and elsewhere.
Is non-employment income taxed?
No. The tax is not levied on dividends, interest, pensions, social security, unemployment benefits, worker's compensation, disability payments, IRAs or other retirement income.
What does the earnings tax do for Kansas City?
The earnings tax raises about $200 million annually, or about 40 percent of all of the City’s general fund revenue. The tax pays for services such as police and fire protection, economic development, health care programs, street repairs, affordable housing, environmental quality, trash collection, weed control, dangerous buildings removal and care of parks, boulevards and recreation centers.
What are we being asked to vote on?
Kansas City voters will be asked April 5 whether they want to phase out the earnings tax over the next 10 years beginning Jan. 1, 2012.
Why are we having this election?
A Missouri businessman named Rex Sinquefield last year funded a statewide petition to put before all of Missouri’s voters whether Kansas City and St. Louis residents should vote on their earnings taxes every five years. The issue, Proposition A, passed and the two cities were forced to set the election for April 5 if the issue was to be placed before the voters. If the earnings tax is upheld, it will again be placed before the voters in 2016 and every five years after that so long as the tax exists.
What will happen to the City budget if the earnings tax is phased out?
Unlike the federal government, the City is required by the Missouri Constitution to have a balanced budget. To provide the same level of services as currently exists, the City would be required to reduce spending for basic services, increase revenue through other tax or fee increases, or both. The cuts would likely mean layoffs resulting in a reduction in services including cuts, maintenance of streets, parks and boulevards and trash collection. There would also likely be proposed increases in sales or property taxes along with various fee hikes.
More facts on the e-tax
Fundamental tax is paid by many
• The 1 percent earnings tax is withheld by Kansas City-based employers regardless of what city or state the employee lives in. The amount withheld shows up on W-2 forms. Non-residents can apply for a refund from the City for days their work takes them outside the City limits. Kansas City residents pay the tax regardless of where they work.
• Of the total amount the City collects in earnings taxes, 81 percent comes from individual wage-earners and 19 percent comes from net profits reported by businesses and the self-employed.
• Responsibility for the tax is shared by people of all incomes. Unlike federal and state taxes, there is no minimum income threshold upon which the tax applies.
• Among people and businesses that pay the earnings and net profits tax are NFL and Major League Baseball teams and their players that visit and play at the Truman Sports Complex. The City collects about $400,000 annually from those visiting teams and players in addition to what is paid by the Chiefs and Royals. A profits tax is collected on groups that bring entertainers to the Sprint Center and other venues in Kansas City.
• The City uses several methods to locate people and businesses that owe the tax but are not paying it. Under a confidentiality agreement with the federal government, City officials match taxpayer records from the IRS with City records. The City also searches various public records to look for businesses in the City that are not paying the earnings or profit tax.
Potential service cuts or revenue increases
• The City would have to either cut payroll and services or increase revenue if the earnings tax is phased out. This would impact the 2011-2012 budget because the earnings tax revenues would be reduced starting on Jan. 1, 2012, with four months left in the City’s fiscal year.
• If the earnings tax is eliminated by Kansas City voters, nonresidents who now contribute to the City’s general fund for the services provided by the City from which they benefit while working in the City will no longer make that direct payment. If revenue must be increased, the increase will be carried mostly by the residents of the City if property taxes are increased.
• Persons who have worked and paid earnings taxes in Kansas City and are now retired, do not pay the earnings tax. If the earnings tax is eliminated and if revenue must be increased, those persons may be required to pay increases in other taxes to make up for the elimination of the earnings tax.
• The City already has cut expenses due to the current recession. Since the 2008-09 budget, the City has cut about $200 million in general fund spending, eliminated more than 500 non-public safety jobs, reduced spending on streets and parks maintenance, cultural activities, economic development and public safety.
• The decline of earnings tax receipts could negatively impact the City's bond rating, which is based largely on how reliably a government can pay its debts. A diminished bond rating could drive up the cost of borrowing in the future by increasing the interest paid by the City on bonds.
• Unless all of the reduced earnings tax is covered by reduced services each year, other fees and taxes have to be increased to make up the lost earnings tax revenue. The City could increase property taxes, as well as the emergency utility tax that was phased out several years ago. Other increases in the property tax and/or sales taxes could be proposed to the voters. An increase in fees for various licenses and permits could also be considered.
To fully replace the earnings tax with a sales tax, for example, residents would have to approve a 3.16 percent increase – more than doubling the current city sales tax rate of 2.375 percent. To fully replace the earning tax with property taxes would require a near-tripling of the current tax rates. After new authorization by the Missouri General Assembly either a sales tax or property tax increase would require City voter approval. However, the debt service levy could be increased by 435 percent, from 14 mills to 61 mills, without a vote of the people. This increased levy would be used to retire debt, replacing a portion now paid out of the general fund.
Public Safety, Public Works, and Parks and Recreation would be affected
• If the earnings tax is not replaced by other new revenue, the City would have to look to reducing public safety services funding. The budget for police could eventually be cut by one-third, meaning elimination of nearly 500 uniformed officers and about 215 civilian positions, according to City Manager Troy Schulte. The budget for the Fire Department could be reduced, with the number of personnel cut from 760 to 270 and with the closing of up to 20 of 35 stations, Schulte said.
• Public Works funding, particularly for the Solid Waste Program, could be reduced. Collection of trash, recycling, bulky items, dead animals and yard waste could be eliminated or alternative funding sources, such as payment by residents for these services, could be imposed to pay for the programs.
• Half of the City's streetlights could be eliminated. Street repairs and street marking programs could be curtailed. There would be no contingency fund to pay for snow removal costs when the primary snow removal fund is depleted, which often happens.
• Care of parks, boulevards and recreational centers would be impacted. Grass would be mowed half as often as it is now mowed, which even now is a reduced schedule from prior years. The same goes for tree-trimming. Spending could be cut by two-thirds in the upkeep of community centers, pools, fountains, playgrounds, ball fields and shelters.
• Funding of the Bruce R. Watkins Center, Liberty Memorial and Lakeside Nature Center could be slashed by two-thirds. Community centers could have to dramatically cut hours, if not close altogether, if user fees could not be increased to make up for the lost revenue.
• Property maintenance ordinances could be much less enforced due to a proposed 24 percent funding cut and the elimination of eight inspectors. Weeds and dangerous buildings would get less attention, as would animal health and safety programs.
E-tax has a history of support in K.C. and across U.S.
• The earnings tax dates back to 1963, when voters approved a half-percent tax by a 63 percent majority to improve basic services and to enhance parks and boulevards. Voters increased the tax to 1 percent in 1970, mostly for additional police officers and a citywide trash collection service.
• About one-fourth of large cities in the United States have an income or earnings tax.
For detailed information on the City's Submitted Budget FY 2011-2012