Two bills, S.B. 365 and H.B. 688, that would have prevented St. Louis from levying its 1% earnings tax on income earned for work performed outside the city limits weren't approved before lawmakers adjourned this year's legislative session. St. Louis currently faces a proposed class action from noncity residents who argue that it is unconstitutional for St. Louis to impose its tax on employees who work remotely for city employers.
The residents lodged the challenge after the city changed its earning tax rules last year — when remote work spiked amid the coronavirus pandemic — to deny refunds for teleworkers who were working remotely but not required by their employers to travel. A state circuit court denied the residents' bid for a temporary restraining order May 10, saying they could protest their refund denials directly with Gregory Daly, the city's revenue collector.
The provision to block the city from taxing remote workers was originally introduced by Rep. Jim Murphy, R-St. Louis, as H.B. 688 but later inserted into S.B. 365, a wider-ranging bill that also dealt with tax credits and personal property taxes.
S.B. 365 was sent Thursday to a conference committee, which removed the telework tax ban provision, although the House of Representatives and Senate didn't vote on the conference committee substitute before finishing up their business for the year. H.B. 688 cleared the House Ways and Means Committee but never received a floor vote.
Murphy told Law360 that he believes lawmakers should have stepped in and prevented St. Louis from taxing employees who don't set foot in the city during the workday. The General Assembly, though, is a deliberative body, he said, and it can be difficult to push bills across the finish line.
"It's disappointing," Murphy said. "But laws are hard to pass in the legislature and I respect that."
During the House Ways and Means Committee hearing on H.B. 688 in April, Murphy said he believed that St. Louis' earnings tax policy was an overreach of its taxing authority.
"They're not entitled to collect tax from people that work outside their city," Murphy told the committee then.
The prohibition against taxing remote workers would have also applied to Kansas City, which also imposes an earnings tax, although city officials there have said that they won't levy the tax on employees working outside the city.
During the hearing on H.B. 688, Tom Vollmer, deputy revenue collector for St. Louis, told the House committee that the city believed it has the authority to tax teleworkers because they are earning money for and being paid by companies that are located in the city and use its services.
"The people that we are still taxing are … virtually doing the same job from sitting at their kitchen table," Vollmer said then.
Murphy said Friday that he will seek to file a similar bill in the next legislative session unless a court strikes down the city's policy.
The fiscal implications of such a bill could be significant for St. Louis, as about one-third of the city's general fund budget is derived from earnings tax revenue. A fiscal note on S.B. 365 projected the bill would have slashed about $67 million off the city's $175 million in projected earnings tax collections for fiscal year 2021, although Daly's office said the revenue reduction could exceed $130 million.
Murphy previously said that he wasn't concerned about the bill's fiscal impact on St. Louis because he believed that the city shouldn't be collecting any tax revenue from remote workers.
Mark Milton, an attorney for the proposed class of noncity residents, did not respond to a request for comment Friday.
A representative of Daly's office did not respond to a request for comment.
--Additional reporting by Abraham Gross. Editing by Neil Cohen.
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