As Governor Tony Evers defends his budget proposal for the 2021-2023 period, a change in local taxation is fueling the debate about Wisconsin’s unique system of funding local government.
In Wisconsin, only the state government is allowed to collect income tax and the 5% state sales tax. According to current state law, districts have the option of levying an additional sales tax of 0.5%, which remains in the district. Evers’ proposal would allow counties a further 0.5% increase in sales tax, and larger cities like Milwaukee could levy their own 0.5% sales tax if approved by a referendum. If this budget proposal is approved and a referendum in the city of Milwaukee is successful, local sales tax could rise from 5.5% now to 6.5% in the near future.
This proposal was received with loud applause by the local elected officials. “We are very grateful for the governor’s efforts and realizing that we need to hit the reset button in our tax relationship,” said Milwaukee Mayor Tom Barrett, adding that an increase in local taxes would mean , “To put Milwaukee in control of its own future”. This is an opinion echoed by Madison Mayor Satya Rhodes-Conway, who welcomed efforts to balance local budgets and local government support services. “For years the state has curtailed our ability to generate income and forestalled local control, which has harmed our communities,” she added.
Why is the current system buggy?
Wisconsin’s tax system is different from the norm in other states in that it is top-down and against local governments. Under Wisconsin law, the ability to collect income tax and general sales tax is exclusive to the state government, which then redistributes some of the money to smaller government entities through a joint revenue program.
Currently, the City of Milwaukee receives most of its revenue from three main sources: government grants, property taxes, and fees for services rendered. A study by the Wisconsin Policy Forum found that property taxes account for about half of the tax revenue of any American city comparable to Milwaukee, while it accounts for 96% of Milwaukee’s tax revenue. State aid is a relatively small source of income for comparable cities – the median for comparable American cities is that state aid accounts for only 14% of interstate and tax revenue, while it accounts for 48% of Milwaukee’s revenue.
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The city’s budget points out that “Milwaukee is unusual” because “most cities of 300,000 or more have a more diverse income portfolio. While Milwaukee’s total sales per capita are significantly lower than most cities of comparable size, Milwaukee’s unusually narrow sales portfolio results in relatively higher property taxes. “
Why this dependency on property tax is a problem
The reliance on relatively high property taxes to fund Wisconsin communities creates major difficulties: it significantly increases the property tax burden on residents, which is itself limited by state property tax caps, leading to a deterioration in the public services of local governments, such as public safety, drinking water, sanitation and infrastructure. This is especially true for Milwaukee, which has an unusually high spending requirement and operates its own pension system.
This inadequate reliance on property tax is largely due to the fact that state aid does not keep pace with municipal budgetary needs. From 1975 to 1997, state aid brought cities more revenue than property taxes; today property taxes account for more than double the revenue from state aid.
“The basic problem is that shared revenues don’t even grow with inflation,” said Rob Henken, president of the Wisconsin Policy Forum. “No matter where you are, it makes sense that local government needs to see at least inflationary growth in order to continue delivering the services it provides. If these sources of income don’t grow, there must be cuts in benefits. You can’t have both. That was the fundamental problem for the city of Milwaukee. “
“Milwaukee is getting a revenue share of about $ 230 million a year, but that amount is not growing as it should.” Henken continues. “The amount of state aid the city received in 2020 was roughly the same as it received in 1995.” In 1995, this combined state revenue paid the city’s police and fire services millions of dollars. In 2020, she did not even cover the police budget alone. “It costs a lot of money every year just to keep up with the salaries and costs of the police. Basically, every sales growth that the city sees now has to be put into the police, ”adds Henken.
If combined state revenues had kept pace with inflation, Milwaukee should be receiving nearly $ 400 million today, according to the Bureau of Labor Statistics – but that amount has been frozen at $ 230 million for more than two decades. Not only has the shared-income program failed to increase Milwaukee’s revenue, the program has in fact paid less money in absolute terms, while the relative importance of shared-income in the Wisconsin state budget continues to decline year after year. As the state government’s tax revenue increased, it has refused to share that growth with local governments.
Why the City of Milwaukee has a tough budgeting challenge
“When the city’s budget team gets together to set the budget for next year, ideally they should talk about which areas of our community we want to make major investments in,” says Henken. “It should be about finding out which programs are having an impact and where we should expand strategically. But given the situation the City of Milwaukee is in, the starting point for budget advice is, as always, where we will cut back next year. You can never start talking about whether we should invest. “
There are possible solutions to this problem. In his award-winning report On the Money? The Wisconsin Policy Forum identified several models that could provide Wisconsin cities with the means to deliver the services that all citizens expect while reducing their dependency on property taxes. Options range from introducing an amusement tax, an income or parking tax, or a local service tax, or a diversified portfolio of several smaller taxes that could further spread the tax burden while bolstering Milwaukee’s budget. It would also draw more income from people who live outside of Milwaukee and therefore are not part of the property tax that the city relies on but who work and entertain in the city.
The cities of Wisconsin currently have a funding system that is unreliable and frankly insufficient to meet the basic spending needs of our local communities. A fundamental change in the tax system would be a massive undertaking that will remain impossible as long as the Republican-controlled state legislature refuses to cooperate. However, experts agree that there are potential solutions that could be put in place by Evers, who has shown a willingness to work towards this goal. Beginning in July 2021, if its budget proposal is passed, Wisconsin communities could see new flexibility allowing them to better adapt to other states.