Policy Forum Report Shows Sales Tax Critical to Local Government

A new report from the Wisconsin Policy Forum highlights how pivotal a role Milwaukee County’s sales tax plays in stabilizing the county’s budget.

In analysis of County Executive David Crowley‘s proposed 2023 budget, the forum extolls the county’s sound use of federal stimulus funding compared to the City of Milwaukee. But it notes the county’s stewardship of these federal funds was made possible in part by the county’s 0.5% sales tax and county departments managing spending to produce year-end budget surpluses in recent years.

In the short term, inflation appears to be helping the county out. Increasing consumer prices have also driven up the county’s sales tax revenue. And, as the U.S. Federal Reserve has pushed interest rates higher in order to combat inflation, the county’s earnings on investments are projected to “sharply increase,” the policy forum notes.

Along with short-term inflationary wins for the county, the approximately $12 million structural budget gap in 2023 was closed thanks to sound budget management by county departments in previous years. The county was able to set aside huge budget surpluses in recent years, thanks in part to federal stimulus funds protecting county policymakers from budget cuts. These surpluses allowed the county to use $7.3 million — that otherwise would have gone toward paying down county debt — to backfill the annual budget deficit.

But not everything in the report is rosy. The policy forum notes that major challenges remain for the county in the short and long term. One major challenge is the Milwaukee County Transit System, which faces a shortfall between $20 and $33 million by 2025 — depending on the actions taken in the 2023 and 2024 budgets. The second highlighted by the policy forum is the county’s capital project and deferred maintenance backlog.

Regarding the latter, the policy forum notes that the entire county budget was increased by $90.5 million in Crowley’s proposal, and nearly two-thirds of that comes from an increase in capital spending. But even with this significant increase, which also requires the county to blow past its annual cap on borrowing, the county isn’t making a dent in its growing capital project backlog.

Sales Tax and Federal Stimulus Funding

In its report, the policy forum is congratulatory to county policymakers for not succumbing to the temptation to backfill operational budgets with one-time COVID-19 stimulus funds that are, by definition, not sustainable sources of funding.

In the past decade, Milwaukee County has seen its state aid frozen even as the cost to maintain government increases each year with inflation.

“One might have expected that a government like Milwaukee County…would have felt compelled to violate the cardinal rule against using one-time revenues for general operating purposes – at least to some extent – in order to keep service levels intact,” the report stated. “That is precisely the situation for the city of Milwaukee, where the proposed budget uses $80 million of the city’s $394 million ARPA allocation to support general operations next year.”

The county set up a task force to review projects seeking funding from the county’s approximately $183 million allocation of federal stimulus funds. but it wasn’t just sound financial management that prevented the county from following the city’s suit. “one reason that Milwaukee County has not faced the same desperate need as the city of Milwaukee to plug ARPA funds into general operations is its 0.5% county sales tax.”

The policy forum said sales tax revenue has proven “critical” to the county budget in 2023, with the county projected to collect $98.8 million in 2023 through the sales tax.

Elected officials in the Milwaukee area, including county and municipal leaders, have been advocating for an increase in the county sales tax from 0.5% to 1.5%. Officials have argued that the new revenue is necessary to adequately fund local government, which is projected to see massive cuts in the coming years.

The policy forum said it does not take a position on the proposal, while adding, “The county’s recent good fortune with its sales tax collections certainly appears to buttress that case.”

Capital Spending and County Debt

In 2002, the county adopted a debt policy that currently only allows policymakers to increase the amount of new debt taken on by the county by 3%. In 2023, the county could only borrow $45.8 million if it sought to stay within the parameters of this policy. Crowley’s budget, however, calls for excluding $107.9 million in borrowing from the county’s debt cap.

The bonding authority would pay for the new Forensic Science Center ($62.9 million) and the county’s contribution to the new public museum ($45 million). The museum funding was approved first, but both projects represent the first departure from the county’s bonding cap since it was enacted

“While expensive, both of these projects will produce long-term savings by eliminating the need for tens of millions of dollars of repairs to existing facilities;” the report states, “and by generating an estimated $7 million of annual rental income in the case of the forensic science center (which initially will be used to help pay off the debt), and reduced operating contributions of $2.5 million annually in the case of the public museum.”

The report also notes this significant increase in spending on capital projects and maintenance still doesn’t come close to what is actually needed by the county. What’s more, the county cannot escalate its debt indefinitely. County legislators can legally increase property taxes to pay back debt. But there is a limit to this, the report notes. “Should debt service payments escalate by several million dollars each year as a consequence of increased borrowing, then county leaders may not be as willing to raise the operating levy for service and staffing needs to the amount allowed under the state limit.”

Bleak Outlook for Transit

As Urban Milwaukee has reported, MCTS is facing a massive budget shortfall in 2025 when federal stimulus funding runs out; and there are very few options for addressing it other than budget cuts.

In the 2023 budget, newly identified savings in pension and healthcare costs, and service reductions, have helped to ease the projected $32.5 million budget gap in 2025 down to a $20 million budget gap. Healthcare contributions, however, are currently a major sticking point in contract negotiations between the Amalgamated Transit Union Local 998 and MCTS. It was among a handful of contract items that led transit workers to vote to give union leaders the authority to call a strike.

“Unless ridership rebounds beyond expectations or additional infusions of state aid arrive in the next state budget, MCTS faces a frightening scenario when the federal funds are exhausted,” the policy forum report notes.

A copy of the full Wisconsin Policy Forum report is available on Urban Milwaukee.

Update: Story has been updated to reflect that projected sales tax collections in 2023 are $98.8 million, not $313 million.