Part II: Fiscal Impact
These anti-democratic structures are especially worrying in light of the fact that the plan seems designed to put the new Metro City in a financial box, forcing a series of painful cuts. Better Together's financial story is simple: consolidation will generate savings that can fund tax cuts.
Unfortunately, this story breaks down at every level. The projected savings are speculative and reflect the same kind of magical economic thinking that Rex Sinquefield's advisers used to devise trickle-down economics, and that resulted in Kansas' fiscal failure. Furthermore, any realized savings should be reinvested in our community, not used to eliminate a tax regime that enjoys broad democratic support.
Illusionary Savings: Voodoo Economics
Better Together asserts that merging will bring efficiencies that save the region more than $3 billion from 2023 to 2032. These projections are not based in rigorous financial analysis. In fact, Better Together only cites $6 million in specific operational savings. Instead, they are based on a faith that rejects the expert consensus, articulated in a series of studies that fail to find any relationship between consolidation and reduced spending.
The closest that Better Together gets to justifying its guess that merging will save the region hundreds of millions annually is its assumption that merging will allow St. Louis' $1,900 in regional spending per capita to fall closer to Indianapolis and Louisville's spending rates of $1,100 and $1,300. The truth, however, is that these dramatically different spending rates are a function not of these governments' efficiency, but of their decision to provide a lower level of public services to their residents. In fact, when a Pennsylvania think tank analyzed the Indianapolis and Louisville mergers on behalf of Pittsburgh, their research found that significant budgetary savings were neither expected nor realized from consolidation.
Furthermore, if you compare St. Louis' regional expenditures to those of the 100 largest American cities, we are precisely in the middle of the pack — 48th — while Louisville and Indianapolis are well below average, spending the 18th and 11th least, respectively. If we take a closer look at the data, there is no reason to believe that a lower rate of expenditures per capita is associated with municipal prosperity.
After merging, St. Louis would become a city of over one million people. Of the nine cities with a population over one million, all but one, San Antonio, spends more than $2,000 per capita. New York is at the top, with $8,700 per capita, but Austin spends nearly $4,000, Chicago spends $2,704 and Phoenix spends more than $2,300. While I am not arguing that St. Louis should spend more — each city finds its own balance — there is no basis to claim that St. Louis can or should be spending less.
Earnings Tax Phase Out: A Quixotic Quest
This plan relies on these imaginary savings to justify phasing out the earnings and payroll taxes, which together generate more than $200 million in revenues. The legal dynamics of the earnings tax phase-out are a little tricky, so it's worth pausing to discuss how it would work.
A state law pushed by Rex Sinquefield currently provides that the earnings tax gets phased out over ten years unless St. Louis votes to re-approve it every five years. Yet section 7.2(a) of Better Together's plan would prohibit the new city from going to its voters for re-authorization, triggering an automatic ten year phase-out of both the earnings and payroll taxes starting in FY 2022. Through this vehicle, Sinquefield finally gets around the pesky requirement for a local vote.
Sinquefield's vendetta against the earnings tax has no basis in economics. Even a study he commissioned found in 2011 that alternatives to the earnings tax were not fiscally sufficient, politically feasible or economically desirable. (Unsurprisingly, this study has since been taken down, but you can read my summary, written back in 2016, here.) Independent studies, including one by the Brookings Institution, have found that "different sources of tax revenues have dramatically different impacts on growth, with property taxes exerting consistently negative effects, and income and corporate taxes usually exerting positive effects." Finally, while many in St. Louis are struggling, the idea that our region is too impoverished to justify an income tax is a myth. James Bullard, president of the St. Louis Federal Reserve, has noted that, when you adjust incomes for local cost of living, St. Louis places twentieth out of the nation's 381 metropolitan areas, and seventh of the nation's 53 largest metro regions.
The earnings tax is not perfect, but regional consolidation is actually an opportunity to make it fairer and more progressive. A regional earnings tax would apply to city and county residents equally, regardless of where they work, and generate enough revenue to fund the establishment of a progressive rate. Hypothetically, an individual's first $25,000 in income would be tax free, and the tax rate would ramp up gradually to one percent for income above, say, $200,000. Such a tax regime would place our region on solid financial footing and help finance the overdue collective investments that we have failed to make for decades. We should be working to ensure that residents across our region feel safe and that parents across our region feel confident that their kids are getting a good education. The city alone has a backlog of hundreds of millions of dollars worth of critical infrastructure needs. The truth is that crime, struggling schools and crumbling infrastructure hold St. Louis back, not an unremarkable tax regime.
Delusional Financial Projections: Misleading and Dangerous
Unfortunately, this plan threatens the new city's capacity to address these long-term challenges. While Better Together claims that the city will have more money than it knows what to do with ("revenues to Metro City are expected to exceed expenditures by up to $342 million by 2032"), these rosy financial projections have no basis in reality.
Better Together's "Pro Forma Budget" assumes that government expenditures, which typically grow at a pace of two percent, reflecting inflation, will instead shrink by one percent annually for ten years. That means that in real terms the region is expected to cut roughly $75 million (three percent) out of the budget annually for ten years, cumulatively shrinking government by 26 percent.
The idea that local budgets are riddled with useless fat is a myth. I can only speak for the city of St Louis, but having gone through the budget process, I can assure folks that the recession left the city's finances extremely lean. I'm sure there's some waste, and good people are constantly working to find it, but cuts will mean hard choices and a real reduction in services. I fought, with varying degrees of success, to restore funding to St. Louis youth jobs, drug courts, recreation capital and the Affordable Housing Trust Fund in the 2017-2018 budget, but there's only so much you can do with creativity, and at some point you have to cut positions: nurses, engineers, neighborhood improvement specialists and more. Though we were successfully able to avoid layoffs by cutting temporarily vacant positions, it will be all but impossible to implement the cuts imposed by Better Together's plan without eliminating occupied positions.
Better Together's claim to the contrary hinges on the assumption that these cuts will be paid for out of operational savings, but as the Pittsburgh think tank's research shows, there is no evidence that consolidation is likely to generate dramatic savings.
The financial analysis consistently fails to reflect reality. For example, one could be forgiven for looking at Better Together's "Pro Forma Budget" and concluding that, because "Status Quo" expenditures do not exceed "Total Revenues" until 2026, cuts are optional and the Metro City can simply choose to run smaller surpluses. In fact, however, the dollar figure that Better Together claims the region will spend in 2023, roughly $2.4 billion, and which is subsequently indexed to inflation through 2032, is what the region is currently spending in 2018, as the Pro Forma acknowledges.
That means Better Together's "Status Quo" does not factor in four years of natural inflationary growth, effectively reducing government spending upfront by roughly $200 million. This may be a reflection of a tool that Better Together deploys to force governments into making cuts: Section 5(6)(a) imposes a mandatory budget freeze. That is, before we cut taxes — before we even start shrinking government by three percent a year — government will already have been forced to shrink its FY 2022 budget back down to FY 2019 levels.
The Financial Box: A Manufactured Budget Crisis
This gets us to the real core of the problem. It's not really Better Together's laughable projections, which future elected officials can choose to ignore, but that the plan imposes its assumptions in the form of a series of mandatory cuts — which will force the city to reduce services dramatically. The budget freeze, earnings and payroll tax phase-outs, as well as property tax reductions, are all locked in by an affirmative statewide vote, and will put local government in a deep financial hole. Even provisions that make sense in the abstract, like the requirement that the new city save three percent of its revenues, as St. Louis County already does, effectively impose yet another two percent tax cut, as two-thirds of regional expenditures are not currently subject to this limitation. Together, these require the region to shrink its budget by a little over eleven percent.
Furthermore, the new city's financial laws explicitly insulate certain accounts from cuts. The first is debt service, which the amendment bends over backwards to emphasize is the new Metro City's number one priority. Next are municipal property and utility taxes, which are explicitly protected from redistribution. Finally, in one of the plan's strangest moves, it carves out a roughly $300 million property tax revenue stream for a new Metro City Fire Department governed by its own board of directors. Bizarrely, the plan takes one of the few St. Louis city departments that could benefit from some serious consolidation (and that city budget staff have long believed may have some politically protected fat) and expands its budget. While the city's budget shrinks at a rate of one percent, Better Together's Pro Forma shows the fire district growing from a budget of $278 million today to $299 million in 2023 and $357 million in 2032.
When you combine parts of the budget that are legally insulated from cuts with the pieces that are politically untouchable (namely the half-billion we spend on policing) and the components that are operationally untouchable (refuse, water, streets, etcetera), I worry that the cuts can't help but focus on discretionary services like public transit, parks, the county's Children's Service Fund and the city's Department of Human Services, which disproportionately benefit vulnerable populations.
To be fair, there are ways out of this self-imposed financial crisis — they just aren't desirable. The city could raise sales taxes, a regressive mechanism disproportionately impacting low-income families, or it could sell the airport for a short-term solution. The unfortunate reality, however, is that while these measures would buy us breathing room, they would not set us on a sustainable financial path capable of funding transformative collective investments in our community.
Conclusion: We Can Get This Right
This analysis is meant to be constructive. All of these problems can be fixed by amending the text of the proposed amendment. I hope the plan's proponents, many of whom I respect, realize that the text does not do what the marketing materials claim, and seize the opportunity to align the product they are selling with their rhetoric. For example, if we want the new city to be inclusive, why not provide for the reorganization plan to be the product of a public commission, with appointments made by both co-executives and approved by the County Council and Board of Aldermen, with certain requirements to ensure adequate geographic and demographic representation? Similarly, if we want to set our city on strong financial footing, let's stop kidding ourselves with magical thinking. Instead, let's be serious about how we can make the earnings tax better, specifically by providing those who can't afford to pay with tax relief through a progressive rate.
Some compromises will be necessary for unification to pass at the local level. County municipalities will demand certain protections, and practically speaking, the regional balance of power will not permit the new city to embrace a wholly progressive agenda. But the new city should not reflect a radical libertarian vision either, and its formation cannot be an excuse to entrench establishment political forces.
If, however, no changes are forthcoming, we must reject the false dichotomy that the only way to end the city-county divide is to acquiesce to the whims of the same billionaire who broke Kansas, and who is using our region's deep desire for unity as a carrot to advance his vision to destroy government. The truth is that rewriting our laws will take years of hard work. It represents a serious investment of time and energy, and though we can't afford undue delay — our fragmented government has a very real human cost — it will not translate into real change unless we get it right.
We cannot rely on a private process to define the future of our region. Instead, the vision must emerge organically from an inclusive, public process that builds off the valuable work that's already been done. While I can't predict what such a process will produce, it should place equity at the heart of its analysis, and I hope it engages with hard questions about our tragically fragmented school system and innovative ideas like rank choice voting, which would strengthen our democracy instead of weakening it.
This is an opportunity to think boldly about the future, about what we demand from our democracy and the type of community we want to build together. We cannot afford to waste it.Nahuel Fefer previously worked as director of economic policy for the city of St. Louis. He is currently a student at NYU Law. Reach him at [email protected] or via Facebook or Instagram.