Distributing Sales Tax in St. Louis County: Conflict, Compromise, and Scenarios for the

Future

Jim BrasfieldWebster University

Based on a project for the Applied Research Collaborative

Presented to St. Louis Research Exchange Brown Bag Session

February 26, 2015

Local Option Sales Tax in Missouri

• State sales tax depression era response to gain revenue

• 1960s and 70s many states authorized local option sales tax

• Missouri did so in 1969

• By 1974 many cities in STL County had adopted 1 cent

• As typical across the country, cities kept what they collected

Fast History of Sales Tax Conflict

• 1976 -1982 Era of the Grand Compromise

• 1983-1993 Era of Annexation and Incorporation

• 1994 to present Post Reform Era

1976 -1982 Era of the Grand Compromise

• 1973-77 Proposals offered to distribute all sales tax in STL county to cities by population

• 1977- legislation allows for countywide tax to replace local option subject to voter approval-

• – Cities that had tax could retain Point of Sale status (A cities)– Other cities and STL County would share on per capita basis (B cities)

–An A city could opt to enter the pool, but B cities could not change status–Once A city entered pool could never return

1983-1992 Era of Annexation and Incorporation

• Annexation and incorporation (in early 1980s)– City of Olivette vs Graeler (1960)– City of Town and Country vs St.Louis County (1983)

• After Town and Country STL County Government could no longer veto annexations and incorporations

• Many cities began to look for shopping center “opportunities”– This was viewed as serious threat to pool

• 1983 compromise legislation froze the pool– New annexed areas and new cities stayed in the pool

• Late 1980s- debate and discussion about pool “fairness”

1993 to present Post Reform Era

• Westfall Reform plan- – Enacted by legislature Spring 1993

– Political Dynamics

– Proposal details

• Reform implementation

• Additional local option sales taxes

• Current Issues

Westfall Reform PlanInitial Proposal

• County Ex Buzz Westfall in December 1992 proposed a major change in sales tax distribution

– Freeze per capita receipts for A cities at 2x county-wide average from the base year

– Distribute the extra POS funds to the pool– Allow cities to enact a quarter-cent tax to offset loss

• Expectation was that most A cities would join pool either in 2000 or 2010 because POS revenue would be less than pool share

Reform Plan Dynamics

• POS cities responded with organized effort to defeat or modify Westfall Plan

• Counter proposal– All cities and unincorporated areas become POS– Cities above countrywide average contribute to a shared fund with

those below countrywide average– Cities authorized to enact quarter-cent also with partial sharing

Compromise PlanAfter period of intense negotiation a compromise was reachedJoint effort to secure legislative passage

Reform Plan CompromiseThe Details

• POS cities above countywide average (CWA) to share one-cent based on a sliding scale (range of 7.5% to 25%)

• After 2000 minimum sharing 7.5 for cities over CWA and 12.5% for cities over 1.25 CWA

• Optional quarter cent available to all cities with sharing scale but less sharing of quarter cent

• County to retain a portion of loss due to future annexation and incorporation

Reform Plan Implementation

• New Plan phased in over three years• Goal was to have 18.5% sharing by 2000

• Most cities satisfied with compromise– Some A cities did not agree

• The end of the long standing dispute opened the door to additional optional sales taxes– Capital Improvement– Park and Storm Water

• 18% goal was achieved and sharing continues to be approximately at that level

Reform Plan Current Issues and Dissatisfaction

• Some high sales tax generating cities wish to retain a larger share

• Some cities with quarter cent argue that it should be shared only with other cities which enact quarter cent

• Formula is hard to understand and should be simplified

• Some cities argue that County Government receives too large a portion of shared taxes– Special annexation adjustment no longer needed– County government not authorized to enact quarter-cent but receives

large slice of that sharing as pool member

2013 Sales Tax One Cent Summary

• $157, 000,000 collected• A cities receive 76% of tax generated• B cities receive 107% of tax generated• County receives 139% of tax generated

• TIF payments are removed before distribution• Total TIF withdrawal $6.2 million• 4 jurisdictions accounted for 65% of TIF

Sales Tax Projection

• 2014 total increase 5.6%; (2nd highest since 95) – Return to 2007 level

• 2013 and 2012 were 1.1 and .1

• Charts show 1% and 2% average increase • Various factors seem to limit increases– Online sales– Growth of St. Charles retail sector

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 -

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

Gross Sales at 1% per year

Gross Sales

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 -

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

Gross Sales at 2% per year

Gross Sales

Today and TomorrowFive Scenarios

• Two Outliers– All one cent sales tax shared per capita

– All one cent sales tax point of sale (pre- 1977)

• Three Incremental– Status Quo with Universal Quarter Cent

– Reversal of the 1983 Point of Sale Restrictions

– County Government Adjustments

All Point of Sale

• Idea- All cities and STL County become POS (pre-1977)

• Analysis

• $15,000,000 shifted to A cities• A few B cities see substantial gains• Most B cities see significant losses

All Shared Per Capita

• Idea- eliminate POS – all money is shared in common pool

• Analysis

• $19,000,000 shift from A cities to B cities and cities with annexed areas

• $24 per capita gain for B cities and County

Status Quo with Universal Quarter Cent

• Idea- Sharing under quarter-cent would only be distributed to those cities that have added the tax, thus encouraging universal adoption of the tax

• Analysis• Current generation $15,000,000 (net of TIF)• Additional generation, if universal, $23,000,000 (gross)• This includes County, which requires legislative authorization

• Additional money generated could in part be used to address claims of unfairness in other elements of the system

Reversal of the 1983 Point of Sale Restrictions

• Idea- the 1983 freezing of the pool was in response to an unjustified concern about piecemeal annexation and incorporation- This is not fair to newly incorporated cities especially-

• New cities & cities with annexed areas should be able to select POS status.

• Analysis• Would shift $22, 000,000 from pool, but population down 140,000

• Per capita pool distribution would be reduced from $127 to less than $100

County Government Adjustments

• Ideas- • County Annexation adjustment no longer relevant• County should not participate in quarter-cent distribution unless

authorized to adopt the tax• Use tax distribution to County (1/3) was part of 1993 law, but tax never

adopted (failed in 2008 vote); if use tax adopted, this could fund other adjustments

• Analysis• Annexation adjustment represents about $2,000,000; pool gain about $1 per

capita with part going back to county as part of pool share• If County did not receive share of quarter-cent this would return about $900,000

or $3 per capita to pool• There is not a current good estimate of the use tax yield• Use tax currently in place in both St. Louis City and St Charles County

Peek into Future or Polish the Crystal Ball

• Sales tax is the most important revenue source for all – This will not change

• Low aggregate growth will increase pressure for some modification

• Zero sum game change is very difficult

• Growth of 1 to 2 % per year is most optimistic projection

• Past history suggests that change is the result of compromise among players in St. Louis County and affirmed by the State Legislature

• New money potential makes compromise easier– Without quarter-cent the 1993 compromise was not possible

The Municipal Players

• High A cities• Low A cities• Hybrids-- A city with annexed B area• B cities that want to be A cities• B cities permanent• St. Louis County

• Agreement is not just reconciling A and B cities but taking into account the variations within each group

The End

• The talk is over but the issue will probably never go away

• There is no perfect system

• In American politics incremental adjustments to existing systems is the common way of doing business

• Lindblom argued more than half a century ago that incrementalism is not only the typical method of policy change, but the best way.