Historical Perspective on Local Taxes

by John W. Meara

I came to Kansas City in 1969. In many respects it was a big city with a small town feel. Among Kansas City’s advantages then were reasonably low taxes.

 

In 1969, the Kansas City earnings tax was only 4 years old and was still one-half of 1 percent. In 1971 the earnings tax rate doubled to its current 1 percent rate.

Many predicted that large employers that could easily “escape” to Kansas would do so to avoid the new tax and some would posit that Overland Park’s success in becoming an office Mecca was, at least, encouraged by the earnings tax. Often, the city would bargain with potential employers to rebate the earnings tax to encourage new employers to locate in Kansas City.

In 1969, the Missouri income tax had a top rate of 4 percent. The top rate rocketed to 6 percent in1971 where it remains to today. While competitive with most surrounding states, the 6 percent rate creates one more incentive for the retiring baby boomers to move to Florida or Texas [states without state income taxes] before they liquidate their business investments and retire.

In 1969, Kansas City and Jackson County had not yet levied sales taxes. The only sales tax was the Missouri sales tax of 3 percent. The current combined rate is 7.725 percent (Missouri 4.225percent, Jackson County 1.125 percent and Kansas City 2.375 percent). Add in the 2 percent restaurant tax, the rate approaches 10 percent. The combined rate has increased by more than 2-1/2 times and is currently among the highest rates for neighboring areas.

Property tax rates (mill rates) have not increased significantly since 1969. The property taxbase is the fair market value of the underlying property. My first home in 1969 was about average and cost $16,750 which was close to the average price of a home in the region at that time. The current average price of a home in Kansas City was $181,345 in 2006 according to “Money Best Placesto Live.” The result is that property taxes have increased by more than 10 times in the last 40 years due primarily to the increase in the value of homes.

Despite the swelling tax revenues from inflation which increased the base more than an estimated five-fold for all of the taxes (earnings, income, sales and property), rates too have increased significantly. Let’s put this in perspective. The wage earner who earned $8,000 in 1969 and owned an average home and spent about 40 percent of his or her earnings on items subject to the sales tax, paid a total of about $1,000 in all Missouri, Jackson County and KC taxes(earnings, income, sales and property) or about 12.4 percent of income in taxes. Today, that same individual would be earning about $57,000 and would be paying $9,500 in those same taxes or about 16.6percent.

So why have I picked this topic to address? It is my concern that recent economic realities could expose a weakness in the system. If earnings, spending and housing prices continue their current decreasing trends, tax revenues will decrease. Inlight of Missouri, Jackson County and Kansas City’s recent record highs in borrowing and spending, tax revenues will decrease at a time that these governments can least afford the lost revenues.

Let’s all hope that our state and local leaders will anticipate these financial problems before they become so serious that draconian “fixes” are necessary at the local level as they are currently at the national level.

John W. Meara is CPAMeara Welch Browne.
P     |    816.561.3838
E     |    john@meara.com
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