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Madison Wisconsin Skyline
As Gov. Tony Evers is defending his budget proposal for the 2021-2023 period, one change to local taxation is driving debate about Wisconsin’s unique system to fund local governments.
In Wisconsin, only the state government is allowed to collect income tax, as well as the 5% sales tax statewide. Under current state law, counties have the ability to impose an additional 0.5% sales tax that stays in the county. Evers’ proposal would allow counties another 0.5% sales tax increase, and larger cities like Milwaukee would be able to add their own 0.5% sales tax if approved by referendum, as well. If that budget proposal is approved and a referendum is successful in the City of Milwaukee, local sales tax could go from 5.5% currently to 6.5% in the near future.
This proposal has been received with a clamor of approval from local elected officials. “We are very appreciative of the Governor’s efforts and his recognition that we need to hit the reset button in our fiscal relationship,” said Milwaukee mayor Tom Barrett, adding that increasing local taxation would mean “placing Milwaukee in control of its own future.” That is a sentiment mirrored by Madison mayor, Satya Rhodes-Conway, who applauded efforts to balance local budgets and support services delivered by local governments. “For years, the state has restricted our ability to raise revenue and preempted local control, which has harmed our communities,” she added.
Why Is the Current System Faulty?
Wisconsin’s taxation system is unlike the norm seen in other states because it is top-down and stacked against local governments. By Wisconsin law, the ability to levy income tax and general sales tax is exclusively reserved to the state government, which then redistributes a portion of the money to smaller units of government through a shared revenue program.
Currently, the City of Milwaukee receives most of its revenue from three main sources: state aid, property tax and charges for services delivered. A study by the Wisconsin Policy Forum found that property taxes represent about half of the tax revenue of any American city comparable to Milwaukee, while it represents 96% of Milwaukee’s tax income. State aid is a relatively minor source of income for peer cities—the median for comparable American cities is that state aid represents only 14% of the intergovernmental and tax revenue, while it represents 48% of Milwaukee’s revenue.
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The city’s budget highlights the fact that “Milwaukee is unusual” because “most cities with a population of 300,000 or more have a more diverse revenue portfolio. While Milwaukee’s total revenue per capita is significantly less than that of most comparably sized cities, Milwaukee’s unusually narrow revenue portfolio results in relatively higher property taxes.”
Why this Reliance on the Property Tax is a Problem
The reliance on relatively high property tax to fund Wisconsin municipalities introduces major difficulties: It largely increases the property tax burden on residents, which itself is limited by state caps on property tax, which leads to a degradation of public services provided by local governments such as public safety, drinking water, sanitation and infrastructure. This is especially true for Milwaukee, which has uncommonly high expenditure needs and runs its own pension system.
This unreasonable reliance on property tax is largely due to the failure of state aid to keep pace with the budgetary needs of localities. From 1975 to 1997, state aid provided more revenue to cities than property taxes did; today, property taxes account for more than double the revenue provided by state aid.
“The fundamental problem is that shared revenue is not even growing with inflation,” explains Rob Henken president of the Wisconsin Policy Forum. “No matter where you stand, it makes sense that the local government needs to be able to see at least inflationary growth in order to continue to provide the services that it has been providing. If those revenue sources are not growing, there needs to be service cuts. You can’t have it both ways. That has been the fundamental problem for the city of Milwaukee.”
“Milwaukee receives a shared revenue payment of about $230 million a year, but that amount is not growing like it should.” Henken continues. “The amount of state aid that the city received in 2020 was roughly the same amount it received in 1995.” In 1995, that shared revenue from the state could pay for the city’s police and fire departments with millions of dollars to spare. In 2020, it did not even cover the budget of the police department alone. “It takes a lot of money every year just to keep pace with police salaries and costs. Essentially, any revenue growth that the city does see needs to be put into the police department, now,” Henken adds.
If the shared revenue from the state had kept pace with inflation, according to the Bureau of Labor Statistics, Milwaukee should be receiving nearly $400 million today—but that amount has remained frozen at $230 million for more than two decades. Not only did the shared revenue program not increase Milwaukee’s income, the program has in fact been distributing less money in absolute terms, while the importance of shared revenue in Wisconsin’s state budget, in relative terms, continues to dwindle year after year. As tax revenue has grown for the state government, it has refused to share that growth with local governments.
Why the City of Milwaukee has a Difficult Challenge Creating a Budget
“When the city’s budget team gets together to determine next year’s budget, in an ideal world, that conversation ought to be about which are the areas in our community where we would like to make greater investments,” says Henken. “It should be about determining what programs seem to be having an impact and where we should be expanding strategically. However, because of the situation that the city of Milwaukee has found itself in, the starting point for budget deliberation is, as always, where we are going to cut next year. You can never get into the conversation about whether we should be investing.”
There are potential solutions to this issue. In its award-winning report On the Money?, the Wisconsin Policy Forum identifies several models that could provide Wisconsin cities with the required funding to provide services that all citizens expect while potentially lessening the reliance on property tax. Options range from establishing an entertainment tax, or income or parking or local service tax, or a diversified portfolio of several smaller taxes that could spread out the tax burden further while fortifying Milwaukee’s budget. It would also draw more income from people who live outside of Milwaukee, and therefore don’t participate in the property tax that the city relies on, but who work and entertain themselves in the city.
Wisconsin cities currently have a funding system that is unreliable and frankly not enough to meet the basic expenditure needs of our local communities. Fundamentally changing the taxation system would be a massive undertaking that remains impossible as long as the Republican-controlled state legislature refuses to cooperate. However, experts agree that there are potential solutions that could be introduced by Evers, who has demonstrated willingness to work towards that goal. Starting in July 2021, if his budget proposal is accepted, Wisconsin communities could start seeing new flexibility allowing them to be more in line with other states.
