Why Ferguson, MO Treats the Poor like ATMs

Blame the Legislators

One of the many problems raised in the recent Justice Department (DoJ) report on Ferguson, MO is the financing of the city through excessive fines and ticketing. According to a report from ArchCity Defenders, a legal advocacy group and nonprofit based in St. Louis County, fines and court fees were the second-largest source of revenue for the city. Though 22% of residents live below the poverty line and the city’s unemployment rate is 14.3%, Ferguson still managed to collect more than $2.6 million in municipal fines and fees — accounting for 20% of its budget. The DoJ report validated most everything ArchCity Defenders found in 2014, namely, that “Ferguson’s law enforcement practices are shaped by the City’s focus on revenue rather than by public safety needs.”

How this could happen in America? Financing a city by extracting wealth from its citizens, many of whom are low-income and struggling to make ends meet is wrong, and the city has been rightly — and widely — scorned for its discriminatory practices. But it’s important to remember this system wasn’t created in a vacuum: the state legislature played a large role in enabling Ferguson’s dysfunction.

Han-cuffing government

To understand how, it is helpful to know some of the history around Missouri’s budget laws, most importantly, a rather troubled constitutional amendment.

Born out of the late 1970s experience with “stagflation” — a period of simultaneous high rates of inflation and unemployment — and taking inspiration from California’s much-maligned Prop 13, Missouri voters passed a constitutional amendment that severely constrained the state’s ability to raise taxes in 1980. It was designed to go above and beyond what Prop 13 did. As the Missouri Secretary of State’s website explains, “Unlike California, in Missouri the effort was not designed simply to roll back property taxes, but to limit further taxes and the operations of state and local government.”

The change, known as the Hancock Amendment and named for the anti-tax legislator who spearheaded it, “require[s] any increase of local taxes, licenses, or fees to be approved by a citywide referendum, with very few exceptions.” As a recent piece in the Atlantic notes, “the Hancock Amendment, like similar laws in other states, radically constrains the possibilities of municipal governance.

Unable to raise tax rates, many municipal governments have only one tool at their disposal: lowering them. They can’t raise money, but they can give it away. And that’s exactly what policymakers at the municipal and state level have done.

Not surprisingly, the effects of the Hancock Amendment have been largely perverse. Closing off revenue streams inevitably leads to the creation of new ones. In Ferguson’s case, that meant tickets and court fees for minor violations, like speeding or having out-of-date tags.

Show me the money

Cities and the legislature have bled themselves dry giving away tax credits, and Missouri’s tax credit programs are out of control. Tax credit redemptions grew almost 408% from 1998 to 2010, according to the state’s Tax Credit Review Commission, which was created by Governor Jay Nixon in 2010 to review Missouri’s tax credit programs.

Of Missouri’s 61 tax credit programs, the Commission recommended eliminating or not reauthorizing a full 28 programs. It wrote the 28 tax credits “have outlived their usefulness and do not create a justifiable benefit in relation to their cost to taxpayer.”

Now comes the rub. The Missouri Legislature has not acted on any of the commission’s recommendations. That matters in places like Ferguson, which as the Atlantic points out, collects hardly any taxes from Emerson Electric, a Fortune-500 company with a large campus in the city.

Statewide, the legislature’s failure to act has big effects as well. Had the wasteful tax credit programs been rolled back, the Commission estimates it would have cut spending over 50%. A substantial sum considering Missouri spent $629 million on tax credit redemptions in 2011.

Who does pay taxes in Missouri? According to the Institute on Taxation and Economic Policy (ITEP), the Show-Me State has the 30th most regressive state and local tax system in the country. For instance, the effective rate for households making less than $18,000 is 9.5%, while the top 1% of earners — with at least $407,000 in income — pay a rate of only 5.5%.

And just last year, lawmakers overrode a gubernatorial veto to pass a nearly $800 million income tax cut that will eliminate the state’s top income tax bracket and introduce a 25% deduction for business income.

It’s a slightly more cautious approach than their tax cut-happy neighbors in Kansas (there are revenue requirements that must be met before the cuts go into effect), but is still extraordinarily regressive. ITEP estimates that as the result of the law “the poorest 20 percent of Missourians would see a tax cut of just $6 while the top 1 percent of families would see an average tax cut of $7,792.”

Empowering stupidity

Here is what Missouri’s experiment with the Hancock Amendment and out-of-control tax expenditures can teach us: When you handcuff government’s ability to raise revenue through traditional means, it doesn’t get smaller — it just looks elsewhere. In the case of Ferguson, the city found ways to raise funds that do exponentially more harm than a higher corporate tax rate.

In essence, state policy made it very easy for cities to make dumb choices, even funneling them towards policy solutions that were harmful to their community’s social and economic health.

Now, the legislature is attempting to walk things back. It passed — and the governor is expected to sign — a bill capping the amount of revenue municipalities can generate from fines and preventing courts from jailing people for such offenses. The bill caps revenue from fines at 20% statewide and 12.5% in St. Louis County, home of Ferguson. It is a well-intentioned first step, but may have unintended consequences.

As we saw with the Hancock Amendment, closing revenue streams without drastically cutting services requires that new ones be found elsewhere. While financing a city through excessive and discriminatory ticketing and fining is disgusting and should be ended, one has to wonder, what new scheme will cities come up with to keep the lights on?