Jeff Roberson/AP Photo
Kiener Plaza Park in downtown St. Louis, Missouri, March 17, 2020
St. Louis remote workers daydreaming about how to spend tax refunds now that they are logging in from a nearby suburb instead of a downtown office can dream on. St. Louis won its first battle over local income tax payments in early January, when a Missouri circuit court judge ruled that remote workers living outside the city would not be eligible for local income tax refunds. In the past, the city allowed people traveling for business or working at satellite offices outside the city to file for refunds. The plaintiffs in the class action suit, who plan to appeal, argued that the failure to issue refunds contravened this practice; the judge noted that workers have access to a refund appeals process if they choose to use it.
Preserving the prerogative to levy income taxes on workers is a quandary affecting a handful of cities nationwide. But for St. Louis and other municipalities that rely on local income tax revenues, those dollars are absolutely essentially to their continued fiscal health and well-being.
Most cities do not collect local income taxes. When mayors were asked which long-term pandemic concerns, such as residents’ mental health and trauma and small-business closures, worried them the most, the shift to remote work was cited by only 7 percent of those surveyed for the 2021 Menino Survey of Mayors. But for the municipal leaders who have to face up to these declining revenues, the shift could have cataclysmic effects on local services. The earnings tax revenue estimate for St. Louis in fiscal 2022 is nearly $180 million, down from nearly $190 million in fiscal 2021. Last year, voters extended the 1 percent tax for five years.
Data collected for a 2019 Tax Foundation report on local income taxes shows that nearly 5,000 local jurisdictions, including municipalities, school districts, counties, and special transportation and port districts in 17 states, levy some form of local income tax. Of those entities, most of them in the Northeast and Midwest, more than 75 percent levy local income or wage taxes. Municipalities or school districts collect most of those revenues; there are 649 such jurisdictions in Ohio and 2,506 in Pennsylvania. People who work but do not live in a certain jurisdiction fall into lower tax brackets, which are usually modest, or do not pay any tax at all. Philadelphia, New York, San Francisco, and Wilmington, Delaware, tax both residents and people who live outside the city.
But under Ohio’s biennial budget for fiscal years 2022 and 2023, people working from home pay local income tax to the municipality where they reside, regardless of where their company is. This change repealed an emergency ruling that allowed municipalities to continue to levy the taxes based on the location of the employee’s company. The Greater Ohio Policy Center, a research institute, found that Ohio’s largest cities—Akron, Cincinnati, Cleveland, Columbus, Dayton, and Toledo, collectively known as the “Big Six”—stand to see a net decrease of $306 million. Although Columbus is most dependent on local income tax revenues and Cleveland the least, all the Ohio cities rely disproportionately on these “own-source” revenues, since state funding has dropped off. A conservative Ohio think tank, the Buckeye Institute, has been one of the forces working to repeal the municipal levies on nonresidents and has filed lawsuits against local income taxes levied on remote workers during the pandemic in four Big Six cities.
Income tax collections are still below pre-pandemic levels in Philadelphia, the first city in the country to implement an income tax. Nearly half of downtown workers and roughly a third of all city workers are not paying the Philadelphia wage tax since they are still working from home in the suburbs—and they won’t have to, as long as an employer requires them to work from home.
For the municipal leaders who have to face up to these declining revenues, the shift could have cataclysmic effects on local services.
Even so, last July, Philadelphia cut its nearly 4 percent wage and earnings taxes for residents and 3.4 percent for nonresidents, but just a touch. (An employee pays one or the other based on several factors.) The taxes have long been cited as factors driving out businesses and residents to the suburbs. Yet the city has estimated that 15 percent of suburban remote workers won’t ever return to Philly offices—and these cuts, along with additional business tax cuts that lopped off about $180 million over five years, sparked early opposition from the city council’s progressive and moderate wings. Attempting to lure people back with a minuscule cut in income tax rates is a dubious strategy at best.
This is just part of a potentially catastrophic reduction in the tax base for downtown central business districts. Companies that shift to remote work are likely to cancel their leases for downtown office space. This could cause high vacancy rates, office building bankruptcies, and plummeting commercial property tax revenues for cities, in addition to lower sales tax revenues from fewer workers having lunches or running errands. If the corporate headquarters stay in place but workers go remote, cities with local income taxes will run into this separate issue. Overall, it could dramatically affect the ability of cities to provide basic services for their remaining residents.
Local income taxes pay for animal control, garbage pickups, park maintenance, police and fire services, snow removal, and other services, things that people expect to just happen. The suburbs where remote workers live are the major beneficiaries of the short-term revenue boosts, but declines in quality of life do not respect municipal borders. Neighboring areas celebrating new cash infusions sucked out of cities will see soon enough that decreased resources to fight fires, repair roads, and collect trash can spill over into their own enclaves. And the consequences are always obvious to the suburbanites who trek into city centers to enjoy the amenities and dash home again.
