Sales Tax Timing Is Burning Issue

Downtown Milwaukee. File photo by Jeramey Jannene.

The NBA Draft isn’t the only event with a countdown clock this week. Governor Tony Evers signed legislation Tuesday morning that allows the Milwaukee Common Council to enact a 2% sales tax.

The revenue would go a long way to addressing Milwaukee’s financial issues. The city faces a structural deficit of $156 million in 2024 and other changes in the bill related to employee pensions and minimum public safety spending will make the deficit grow.

Two-thirds of the council members must vote to enact the tax, which the Wisconsin Department of Revenue estimates would generate $193.6 million in 2024 and grow with inflation.

But a confluence of factors could change when the council might vote and how certain members might vote.

After any council vote and mayoral sign-off, the bill grants a 120-day minimum setup period before the tax goes into effect. The tax can also only start on the first day of the quarter – Jan. 1, April 1, July 1 or Oct. 1.

In order to have the policy in place for all of 2024, the council has three meetings scheduled that meet the timeline – July 11, July 31 and Sept. 1. It could also schedule a special meeting, possibly skipping part of its August recess.

It’s not immediately clear if at least 10 council members would vote today to enact the tax. But convincing 10 alders to vote yes was still viewed as an easier pathway by Mayor Cavalier Johnson‘s administration than trying to persuade tens of thousands of city voters in a referendum.

Swapping the voter referendum for a council vote was one of the key provisions Johnson pushed the Wisconsin State Legislature on.

The change doesn’t entirely avoid city voters. The mayor’s office and all 15 council seats will be on the ballot in April 2024.

Delaying past the January and April imposition dates, pushes the new tax up against the July 2024 Republican National Convention. One of the sticking points in the council initially balking at approving the convention was that the city wouldn’t directly receive revenue, but that would change with a sales tax. And even if the council wants to hold off until July on collecting the tax, it would need to vote for the tax before voters head to the polls.

Alternatively, imposing the tax as fast as possible would free up millions of dollars from the city’s American Rescue Plan Act grant that are otherwise slated to simply push the fiscal cliff off to 2025. Those freed-up dollars could fund a wide range of projects desired by city officials and residents. After receiving the first half of the $394.2 million grant in 2021, the council allocated funding to plug a then-smaller budget hole and lead abatement, fixing up 150 vacant homes, trying to reduce reckless driving through infrastructure changes, training childcare workers, replacing failing street lights and several other projects.

And even if the council delays, it will still need to decide how much of a delay relatively soon. The 2024 budget will be adopted this fall and whether or not the sales tax is included is certain to be a pivotal point.

Not acting would cause the council to struggle to adopt a 2024 budget and anticipate making major layoffs in the 2025 budget.

It would also need to swallow a number of new policy provisions that were included in the bill but not tied to the sales tax. No city tax dollars can be spent on expanding the streetcar, minimum sworn strength levels will be required of the Milwaukee Police Department and Milwaukee Fire Department, the Fire & Police Commission will lose its policy-making authority and a host of diversity, equity and inclusion restrictions will be instituted.

Some of those factors could ultimately be challenged in court, but they are included in the bill as approved.

Because the Republican-controlled Legislature passed the legislation outside of the budget, Evers could not use his powerful partial veto to change aspects of the legislation.

The City of Milwaukee faces a 2025 fiscal cliff that could result in 25% of its workforce needing to be laid off. The city’s fiscal issues are driven by rising pension costs, a state prohibition on enacting new revenue sources or increasing property tax revenue and long-flat shared revenue payments, the state system to rebate income tax payments to municipalities. The crisis has been looming for several years because the amount the city must actually pay into its pension resets every five years. Inflation and the flat shared revenue payments have compounded the looming cliff.

Johnson, who was first elected in April 2022, has repeatedly said his focus was on changing the city’s fiscal relationship with the state.

In addition to the new sales tax, the city’s annual shared revenue payment would grow by 10%, adding approximately $21.75 million annually.

The city, as part of the bill, can also enter a “soft close” of its pension system.

New city employees would join the state’s pension system, and the local system would be closed to new entrants but continue to service existing members. But, based on a preliminary estimate earlier this year, the impact of such a change to the city could cost approximately $50 million per year because the bill would force the city to use the state’s 6.8% assumed rate of return versus the 7.5% it currently uses and could need to pay off unfunded liabilities faster. Much of the city’s current financial woes can be traced back to an actuarial need to reduce the estimated rate of return from 8.24% to 7.5% and the resulting need to increase funding to maintain a city charter and court-ordered requirement to fully fund the system. The system, according to the Wisconsin Policy Forum, was 83.4% funded heading into the 2023 budget adoption cycle and exceeded the funding level for many other systems.

While the city debates if and when to enact the tax, a similar process will be playing out at the Milwaukee County Courthouse.

The Milwaukee County Board of Supervisors will face its own need to vote to adopt a 0.4% sales tax if it wants the revenue and to close its pension system. The new tax is expected to generate approximately $80 million per year.

Milwaukee County, which has dealt with fiscal issues for longer than the city, is expected to have a $22 million annual structural deficit over the next five years. The Milwaukee County Transit System, however, is estimated to have a deficit alone of $40.5 million in 2028.

The county’s new sales tax amount was increased from 0.375% to 0.4% after lobbying from County Executive David Crowley and a coalition known as Move Forward MKE made the case that the lower amount might not be sufficient.

The sales tax in the city of Milwaukee would be 7.9% if both the city and county levies are enacted: 5% for the state, 2% for the city and 0.9% for the county. An additional 0.5% tax on prepared food and beverages is levied countywide for the Wisconsin Center District.

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Related Legislation: Assembly Bill 245