How Milwaukee Can Meet its Fiscal Challenges
And avoid the pitfalls of complex local tax structures.
A report by the nonpartisan Public Policy Forum was recently released, highlighting the City of Milwaukee’s unique reliance on property taxes and state aid compared with peer cities, which utilize sales and income taxes at higher rates.
Why might this be a problem? Other than being unique, a heavy reliance on property taxes and state aid hurts the city’s ability to generate adequate funds for basic services, such as police and fire protection. Part of the reason is that this system doesn’t capture adequate contributions from non-residents who still use Milwaukee’s services and infrastructure. There are also concerns that property taxes are unreliable and inequitable – but I’m not so convinced.
The PPF study deserves kudos for describing Milwaukee’s distinctive fiscal situation, with good lessons and context to be found there. Property taxes aren’t ideal, but switching to another tax model, especially a sales tax model, comes with potentially serious disadvantages.
Public finance research highlights one very important observation: local governments heavily reliant on property taxes weather economic recessions much better than their counterparts. Moreover, overly complex local tax structures can actually increase revenue volatility, especially during recessions, making it harder to budget for cops and firefighters at a time when they are most needed. Holding higher fiscal reserves is much more important than revenue diversity in warding off fiscal stress and service cuts.
Switching to a sales tax model is also much more inequitable than Milwaukee’s current system. While municipal sales taxes can capture non-resident revenue, making sure tourists help pay for the city services they use when visiting, there are also major drawbacks with sales taxes. First, low-income earners would shoulder a greater share of paying for city services; sales taxes are highly regressive and much better suited for tourist-based economies such as New York City, Las Vegas, or Florida. Also, property owners would deduct less property taxes from federal and state income tax filings – diminishing that important homeownership incentive.
Still, the PPF report adds another important piece to this complex fiscal puzzle. It very accurately highlights the city’s heavy reliance on state aid. In fact, all of Wisconsin’s local governments rely heavily on state aid. State aid is basically just income and sales taxes collected by the state and redistributed to local governments, to help offset high property tax rates. Herein lies the real problem. When the state fails to share those income and sales taxes, it obviously creates tremendous strain on local governments in providing the most basic set of city services. Knowing this, former Gov. Tommy Thompson put together a Blue Ribbon Commission in 1999 that sought to cement state aid as the key link in the state-local relationship, but no one really listened. Milwaukee’s finances are thus strained not because it can’t use income and/or sales taxes, but because the state (during both Democratic and Republican administrations) has reduced its aid for the better part of two decades.
If any alternative revenue structures are considered for Milwaukee, public finance research shows that capturing income from non-resident earners is a much more equitable and reliable supplement to local property taxes. The PPF report offers examples from Cleveland, Pittsburg, and Kansas City as viable models worth consideration.
What’s the bottom line? In order to help Milwaukee meet the fiscal challenges of the 21st century, avoid a city sales tax. Progressive marginal income taxes are a better alternative – or even better yet, ramp up state aid to at least what it was 20 years ago.
John Kovari, PhD, is an Assistant Professor of Public Administration at the University of Wisconsin-La Crosse.