Missouri Sen. Kurt Schaefer leads a crusade to eliminate Kansas City’s earnings tax

Eric Schmitt sees a problem with the way Missouri cities try to make more money.

The state senator from St. Louis County is seated before a group of lawyers, finance experts and civic types in a boardroom at Kansas City law firm Lathrop & Gage, where Schmitt also works as a lawyer. He laments how municipalities over the years have relied on traffic tickets to generate revenue. Missouri cities aren’t supposed to make more than 30 percent of revenue from traffic, but Schmitt reminds the room that Macks Creek Law — named for the unincorporated central Missouri burg notorious for its speed traps — was a toothless measure. “It became more and more about revenue generation,” Schmitt says. “And that’s not right.” He tells his audience that the Missouri General Assembly has lowered the cap on revenue coming from municipal fines to prevent what he calls a “backdoor tax.”

Then he mentions that cities have a way to make more money: Ask voters to approve a new tax or a higher rate on an existing tax. It’s an obvious opening for what many in the room want to talk about.

A hand belonging to famous Kansas City investment banker Jack Holland shoots up.

“Speaking of people voting to tax themselves, what’s going on with the earnings tax bill?” Holland asks, addressing not Schmitt but the man to the senator’s right.

Seated there is one of the most powerful and polarizing figures in the Missouri General Assembly: Kurt Schaefer, a Republican senator from Columbia.

Schaefer had reason to expect Holland’s query. He sponsored a bill that remains alive in the Missouri General Assembly, which would strip Kansas City and St. Louis of their 1 percent tax on the earnings of people who live or work in Missouri’s two biggest cities, as well as on the profits of businesses located in them. Since 1963, the earnings tax has been among the biggest sources of revenue for both cities.

Without the earnings tax, Kansas City’s budget would be harder to assemble. City leaders warn that its loss would result in cuts to services, particularly public safety. And revenue would have to be restored through other tax and fee hikes, such as property tax rates.

An election is already scheduled for April in both cities to ask residents whether they want to renew the tax for another five years. The last time the question went before voters in Kansas City and St. Louis, in 2011, voters approved the earnings tax overwhelmingly.

Schaefer doesn’t want to wait for that vote. His bill would eliminate the earnings tax all at once, rather than using the 10-year incremental phase-out that would be triggered should voters elect to kill the earnings tax. He says the earnings tax is an unconstitutional double-taxation scheme; he points to a 2015 U.S. Supreme Court ruling in which a narrow 5-4 majority invalidated Maryland’s personal income tax on residents who earn money for work they do in other states, but for which they don’t earn a full credit in Maryland.

Schaefer argues in favor of his bill, saying that both cities should get rid of it now because someone will file a federal lawsuit challenging the earnings tax regardless, which would leave the decision in the hands of a judge. “Right out of the box, Kansas City and St. Louis are going to have to deal with this issue,” he says.

Schaefer’s argument about the constitutionality of the tax is a new tactic for him. He didn’t raise constitutional questions last summer, when he first broached the idea of ridding Kansas City and St. Louis of the earnings tax. Rather, he proposed the move as a punitive measure for those cities seeking to increase their minimum wage beyond the state-proscribed $7.65 an hour. In a June 12 letter to his colleagues, Schaefer proposed eliminating the earnings tax as a means of giving money back to employers and employees.

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“In the event that St. Louis and Kansas City move forward with a $15 minimum wage while clearly lacking legal authority to do so, the only way employers will have the money to pay those wages is if the General Assembly takes immediate action to eliminate the 1% earnings tax currently imposed in both cities,” Schaefer wrote. “Furthermore, if the goal of the proposed minimum wage hike is to put more money in peoples’ pockets to later spend in the local economy as stated by [St. Louis] Mayor [Francis] Slay, the best way to accomplish this is to allow the more than 12,000 businesses and all their employees to keep 1% of their paychecks.”

There was no mention of the Maryland verdict, which had been rendered by the Supreme Court a month before the letter went out.

That Schaefer is changing tunes is nothing new to anyone who has tracked the public career of this political shape-shifter.

Legislative colleagues say Schaefer changes his views and positions to suit his political surroundings — more avidly than the norm for career politicians.

Jeremy LaFaver, a Democrat in the Missouri House who represents parts of central Kansas City, tells The Pitch that Schaefer has “shown a pretty successful adeptness at doing political cartwheels.” He adds, “He and his team have a history of saying one thing one way and turning around and saying something different with no political consequences for it.”

In 2002, Schaefer lobbied the Democratic Committee for the 13th Judicial District to score himself a nomination for a judgeship in Boone County, Missouri. Schaefer told the Columbia Tribune in 2012 that he had sought the Democratic nomination because Democrat Bob Holden was Missouri governor at the time; to be selected judge, he said, “that is where you had to go.” Schaefer didn’t get the nod from Boone County Democrats, so he kept his political powder dry until 2008, when he was elected to the Missouri Senate as a Republican.

In 2008, Missouri remained a bellwether state, a place divided nearly down the middle between Democratic and Republican voters. Back then, a stridently conservative stance wasn’t a politically expedient path to prominence, so Schaefer cast himself as a moderate. In his 2012 campaign literature, he touted his bipartisan credentials, including an endorsement by the Missouri AFL-CIO, a prominent labor group that typically supports left-leaning causes.

But as Missouri has veered further to the right, so has Schaefer.

While Schaefer in recent years has opposed the expansion of Medicaid, he has advocated for the expansion of gun rights, including firearm sales to those who have prior felony convictions. He was a proponent of Amendment 5, a 2014 ballot measure that set out a number of gun-rights planks. Since its passage, some courts have interpreted the amendment as permissive to the question about whether felons can carry firearms. He has also sought to cut ties between the University of Missouri and Planned Parenthood.

Schaefer’s earnings tax bill deepens his conservative brand, even as his residence in Columbia — squarely in the middle of the state, far from either Kansas City or St. Louis — prompts questions about his stake in either city’s finances.

“I have constituents in Boone County … because they are part owners of businesses or other circumstances where they don’t even go to St. Louis and Kansas City and they still pay this [earnings tax] on their income,” Schaefer told the Missouri Senate Ways & Means Committee on January 14.

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Schaefer was there to testify in support of his bill. His bill was originally referred to the Senate Jobs, Economic Development and Local Government Committee, which is chaired by Schmitt. That committee has two Kansas City–area senators, Jason Holsman and Kiki Curls, as well as St. Louis Democrat Jamilah Nasheed.

Suddenly, though, Schaefer’s bill was sent to Ways & Means — a significant move because that committee’s chairman is Lee’s Summit Republican Will Kraus, an outspoken critic of the earnings tax

Kraus picked up $100,000 last year from Rex Sinquefield, the retired St. Louis–area billionaire who devotes some of his fortune to influencing Missouri politics. His influence — and the checks that come with it — is the reason why the earnings tax is once again coming up for renewal.

Sinquefield criticizes any tax on income and has lobbied Missouri to consider the approach led by Kansas Gov. Sam Brownback. He doesn’t see the financial trouble that Brownback’s 2012 income tax cuts have leveled on Kansas finances, but instead sees what he thinks is a favorable tax climate for Sunflower State businesses. In 2015, he published a column in Forbes magazine touting Kansas’s post–tax cut economy, zeroing in primarily on growth in Kansas private-sector gross domestic product in 2013. His piece ignored the various examples of government service cuts that have afflicted Kansas institutions, including education, mental health and law enforcement.

Sinquefield has funneled far more money to Schaefer than to Kraus. Finance records show Schaefer has pulled in $750,000 from Sinquefield directly, a haul made possible by Missouri’s limit-free political spending laws. Schaefer has received thousands more indirectly from Sinquefield through Grow Missouri, a free-economy political action committee that is funded in large part by Sinquefield.

Many see Schaefer’s earnings–tax bill as a way to appease and get more money from Sinquefield, though his motivations are likely more complex than that.

Schaefer is running for Missouri Attorney General in a competitive Republican primary. He’ll face off against Josh Hawley, a candidate with firm conservative credentials. Schaefer’s stance on the earnings tax has gotten him plenty of media attention and may burnish his conservative bona fides among outstate primary voters.

Schaefer’s seat in the 22nd-floor boardroom of Lathrop & Gage’s local headquarters offers the senator a wide view of downtown Kansas City. It’s a scene that local leaders say would be disrupted by the elimination of the earnings tax, even a drawdown spread out over a decade.

Randy Landes, Kansas City’s finance director, says the 10-year approach would at least allow some reaction time from local leaders. “If you have to do it all at once,” he adds, “it’s calamitous.”

His contention is supported by basic math.

Kansas City has a $1.5 billion annual budget, which makes the $230 million from the earnings tax seem small. But much of KC’s income is tied up for specific uses. When people pay their water and sewer bills, the money must go to water and sewer services. Revenue generated by Kansas City International Airport must be spent on the airport.

After that, another big chunk of Kansas City’s budget comes from special, dedicated taxes. The public-safety sales tax has to go toward capital improvements for the Kansas City Police Department. The transportation sales tax has to be used for transportation. (Kansas City is often criticized by municipal finance experts as having too many dedicated tax sources, which leaves the city with an inflexible budget.)

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Once the spoken-for elements are accounted for, Kansas City’s budget is pared down to the general fund: $533 million a year, nearly 75 percent of which goes to police, fire protection and the municipal court. Forty percent of the general fund comes from the earnings tax.

Kansas City Mayor Sly James told the Senate Ways & Means Committee on January 14 that eliminating the earnings tax would lead to cuts in public-safety personnel. Schaefer has scoffed at this notion, insisting that governments should look at budget lines other than public safety to realize savings.

But in Kansas City, public safety would be much of what’s left to cut. In the past 10 years, Kansas City has cut 650 non–public safety jobs. Police and fire personnel numbers have largely held steady by comparison. After public safety, the largest spender of general-fund revenue is administration and finance, which takes a 7 percent cut.

About half of the earnings tax is paid by non–Kansas City residents who work in the city. Schaefer and other earnings-tax critics say that means people are paying a tax that they haven’t voted on. (The same, of course, could be said about sales taxes.)

City leaders counter that an earnings tax not limited to residents is fair because the city performs services that benefit the broader metro, such as running a public health department and assisting with police and fire-protection services in neighboring municipalities.

Critics of the earnings tax say losing it would lead to business and population growth. Patrick Ishmael, director of government accountability for the Show-Me Institute, acknowledges that business growth may not offset revenue losses from the elimination of the earnings tax. “Growth isn’t going to account for $230 million next year,” he says. But he argues that KC would ultimately be fine without it. “If you’re talking about removing the earnings tax 10 percent over 10 years,” he says, “whatever cataclysmic concerns the city has melt away in the light of reality.”

Ishmael argues that the city should dial down its tax incentives, too. Of the $230 million in earnings tax revenue, about $19 million comes off the top to pay for various tax-increment financing and other economic development plans scattered throughout the city. About $6 million of earnings-tax revenue goes into the city’s annual payment of $12 million to service the debt on the Power & Light District.

Kansas City Manager Troy Schulte tells The Pitch that the city would have to pull that money out of the general fund to make up the difference if the earnings tax went away — or consider defaulting on its debt.

The city has forecast that if the earnings tax eroded over 10 years, uniformed police — 1,424 full-time positions exist today — would be pared back to 614. The city’s 976 firefighter positions would shrink to 426. That’s if the city doesn’t try to make up revenue some other way.

Its options are limited. The City Council could vote to use a portion of its property-tax levy to support debt service, a move that would free up $28.7 million a year. It could also increase utility taxes; a 3 percent annual bump would bring in $13.5 million.

Other revenue increases would require a public vote. Those include sales tax increases, property tax increases, and charging residents for trash and recycling pickup, a service for which residents aren’t billed.

City and civic leaders are taking Schaefer’s opposition to the earnings tax seriously. As the chairman of the Senate Appropriations Committee, he wields significant power. James was flanked by the Civic Council of Greater Kansas City and the Greater Kansas City Area Chamber of Commerce when the committee heard testimony against Schaefer’s bill.

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So far, the bill remains in committee, and Gov. Jay Nixon has signaled that he would veto it. There may not be enough Republican support to override Nixon’s veto, if Schaefer’s bill goes that far. Sen. Ryan Silvey, a Kansas City Republican, has indicated that while he’s not a fan of the earnings tax, he believes the question should be left to voters.

Meanwhile, Schaefer tells his audience at Lathrop & Gage, where he is a partner in the firm’s Columbia office, that he wants to find solutions to work out Kansas City’s and St. Louis’ reliance on the earnings tax.

A woman in the audience asks him what those solutions would look like.

“I don’t know,” Schaefer says. “Probably with a combination of things.”