Mo. SC rejects challenge to earnings tax law

JEFFERSON CITY, Mo. (Legal Newsline) - The Missouri Supreme Court this week shot down a challenge to a 2010 law requiring one of the state's largest cities to hold elections on its earnings taxes.

In its ruling Tuesday, the Court affirmed a Cole County Circuit Court judgment dismissing Kansas City Manager Troy Schulte and labor leader Pat Dujakovich's second amended petition with prejudice.

Judge George W. Draper III wrote in the high court's eight-page opinion that Schulte and Dujakovich's petition "failed to demonstrate" they were entitled to a declaration of rights.

Both Schulte and Dujakovich, who is president of the Greater Kansas City AFL-CIO, had appealed the circuit court's grant of judgment on the pleadings against them in their challenge to the amendments to the state earnings tax statutes.

In particular, they argued: the amendments violated the Missouri Constitution by using the initiative for the appropriation of money to pay the election costs to continue the earnings tax; the requirement to hold recurring elections without providing state funds constitutes an unfunded mandate in violation of the state's Hancock Amendment; and the amendments violate the state constitution by using the statewide initiative process to amend a city charter.

In 1963, the state General Assembly enacted the enabling legislation, which authorized Kansas City to levy an earnings tax for general revenue purposes.

In 2009, an initiative petition proposing to amend chapter 92 was submitted to Secretary of State Robin Carnahan. The Secretary of State certified the ballot title to be placed before Missouri voters.

The certified ballot title stated:

"Shall Missouri law be amended to: repeal the authority of certain cities to use earnings taxes to fund their budgets; require voters in cities that currently have an earnings tax to approve continuation of such tax at the next general municipal election and at an election held every five years thereafter; require any current earnings tax that is not approved by the voters to be phased out over a period of 10 years; and prohibit any city from adding a new earnings tax to fund their budget?

"The proposal could eliminate certain city earnings taxes. For 2010, Kansas City and the city of St. Louis budgeted earnings tax revenue of $199.2 million and $141.2 million, respectively.

"Reduced earnings tax deductions could increase state revenues by $4.8 million. The total cost or savings to state and local governmental entities is unknown."

After certification of the ballot title, the initiative petition was circulated by Let Voters Decide, which gathered signatures of registered Missouri voters.

The group then submitted their petitions to the Secretary of State for determination of whether sufficient signatures were gathered. The Secretary of State certified the initiative petition, and it appeared on the statewide ballot on Nov. 2, 2010 as "Proposition A."

Schulte and Dujakovich filed their lawsuit Aug. 13, 2010. Let Voters Decide, President Travis Brown and spokesman Scott Charton intervened.

On Sept. 17, 2010, the circuit court held an evidentiary hearing.

In November, Proposition A was approved and adopted by a majority of voters.

After the general election, discovery was conducted and Schulte and Dujakovich filed a second amended petition.

The intervenors, the Secretary of State and the State then filed separate motions to dismiss their petition, along with suggestions in support of their individual motions. Schulte and Dujakovich filed motions in opposition.

After a hearing on all of the motions, the circuit court dismissed all counts with prejudice in its Aug. 15, 2011 judgment.

The state's high court sided with the lower court, saying there was no de facto appropriation.

"Here, any cost of an election is within the pure discretion of Kansas City. Further, there is no prohibition against using the money raised from the earnings tax to pay for the costs necessary to continue the city's authorization of assessing a future earnings tax," Draper wrote.

As to the Hancock Amendment issue, the Court concluded it was not violated.

Proposition A also did not amend Kansas City's charter, the Court said.

"Kansas City only has the powers which are granted to it by the Missouri Constitution," Draper wrote.

"Appellant did not state a claim for a violation of an amendment to the city charter of Kansas City because the charter was not amended by Proposition A."

Kansas City residents -- along with those in St. Louis -- voted to keep their 1 percent earnings taxes during elections held last April.

According to The Associated Press, additional elections in 2016 would be required to continue the tax.

The tax has accounted for $200 million of Kansas City's budget, the AP reported.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.