Milwaukee Sales Tax Deal Reached, Referendum Dropped

Hans Christian Heg Statue at the Wisconsin State Capitol. Photo by Mariiana Tzotcheva.

A grand bargain is in hand that would change the course of Milwaukee’s future.

After Assembly Speaker Robin Vos cast doubt Wednesday on the potential for the City of Milwaukee and Milwaukee County to be included in a statewide local government funding plan, state officials announced an agreement Thursday that will allow the city and county to implement new sales taxes without a referendum. The proposal averts substantial fiscal cliffs that the city and county face and also directs millions to municipalities across the state that have been shortchanged by frozen shared revenue payments. But it comes with substantial policy provisions.

To receive the funding, the Common Council would need to make a two-thirds vote to establish a new 2% sales tax for the City of Milwaukee generating approximately $193.6 million in its first full year. The Milwaukee County Board of Supervisors would need to make a similar two-thirds vote to increase the Milwaukee County sales tax from 0.5% to 0.9%, generating approximately $76 million annually. The funds would need to be dedicated entirely to closing the governments’ stand-alone pension systems and paying for public safety costs.

The Assembly previously passed a proposal that would have required a referendum and Vos said he was “done negotiating.” But Mayor Cavalier Johnson and County Executive David Crowley lobbied for enabling legislation that would avoid the need for a risky referendum. Senate Majority Leader Devin LeMahieu said his body was likely to strip the requirement out, only to later say he didn’t have the votes to do so and, on Wednesday, join Vos in warning that Governor Tony Evers needed to accept the deal or see Milwaukee left out.

Then things changed.

“Sometimes the offer and the ability to get wins for things you believe in is so great you have to change your mind,” said Vos in a press conference Thursday on why he kept negotiating. He said the school choice component of the deal “saved the program” and was a key component of his change of heart. Per pupil aid would expand greatly, sending an additional $1 billion of public dollars to private schools.

“Today is one of those opportunities when each side brought their best ideas to the table,” said Vos. He said conservatives should be proud of the package. “We have a large number of conservative wins with things we have struggled to get across the finish line before.”

The City of Milwaukee faces a 2025 fiscal cliff that could result in 25% of its workforce being laid off without intervention. It has a $156 million structural deficit in 2024, 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. It planned to avoid the cliff in 2024 by drawing down a COVID-19 federal grant.

“One of the most important priorities in my conversations with Republican leaders has been not only investing in communities of every size statewide, but also the importance of ensuring the city of Milwaukee and Milwaukee County do not face an imminent fiscal cliff—something that would have devastating consequences for communities in every corner of our state and our state economy as a whole,” said Evers in a statement announcing the deal. “It’s why it has been especially important for me that this compromise provides the city of Milwaukee and Milwaukee County the critical opportunity to avoid the imminent possibility of bankruptcy.”

The shared revenue portion of the agreement would give every municipality with a population of 110,000 or less a 20% shared revenue payment increase. The amount, going forward, would be tied to 20% of the state’s collections on its 5% sales tax. “We have tied sales tax growth to their shared revenue, so it helps them keep up with the inflationary pressures we are all seeing,” said Mary Felzkowski (R-Irma), the bill’s Senate author. “The goal from the start was to fix kind of what we have all known was a broken shared revenue formula.”

The City of Milwaukee and Milwaukee County would receive a 10% shared revenue increase, which would net the city approximately $21.75 million annually. The Assembly initially offered a minimum 10% increase before approving 15%, while Evers had proposed 20% for every municipality.

“For too long, our communities have been asked to do more with less, and this agreement is critical to ensure our local partners have the resources they need to meet basic and unique needs alike,” said Evers. “This compromise will be transformative for our communities and our state, and coming to an agreement in principle on major parts of this proposal is a significant milestone in my negotiations with Republican leaders over the past few months.”

“I am just excited that we got to this position,” said LeMahieu at the Republican press conference.

Evers, in a press release, touted the increase in education funding. Each fiscal year would see a $325 per pupil state aid increase. Special education reimbursement would be increased to 33.3%, a $97 million increase. The low revenue ceiling for districts would be increased from $10,000 to $11,000, making more districts eligible for increased state aid. A parity provision would substantially increase voucher payments sent to choice schools. The current payment is $8,399 per K-8 student and $9,045 for high school students, but it would rise to $9,500 and $12,000 respectively. Private schools often engage in substantial fundraising to fill the gap between the voucher and their per-pupil cost.

The Wisconsin State Legislature must still pass the agreement, which is expected to parallel the adoption of the biennial state budget.

“I think there is some heartburn in our caucus with getting rid of the referendum,” said Vos. But he and LeMahieu both said they expect the agreement to pass.

“We are not bailing them out. We are giving them a tool to help themselves,” said Felzkowski.

“It truly could bankrupt the city in 2025,” said Rep. Tony Kurtz (R-Wonewoc), the Assembly author, of the city’s pension obligations. “I don’t think that’s good for the state to have our biggest city go bankrupt.”

Milwaukee County is expected to have a $22 million 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. “When you work on a bill as historic and far-reaching as this one, not everyone will get everything on their wish list. Nevertheless, this deal helps our organization avoid the single biggest threat to achieving its goals and sets our region up for long-term success,” said Crowley in a statement. “Anyone who wants to see Milwaukee County avoid the reported service cuts or staff reductions and continue its journey to achieve race and health equity should support this deal.”

The county’s new sales tax amount increased from 0.375% to 0.4% after lobbying from 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% as a result of the bill. Five percent 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.

“I appreciate all the hard work that has gone into this legislation.  As we approach the finish line, our top objective is within sight.  We have a proposed remedy to the fiscal challenges Milwaukee faces,” said Johnson in a statement. “There are aspects to this legislation that I strongly object to.  However, through the give-and-take, no party to these negotiations is completely satisfied with final product.”

“To be clear, there are steps ahead before the city’s top concerns are fully resolved.  I will work with the members of the Milwaukee Common Council to address their questions and encourage their approval,” said Johnson. Alderman Mark Borkowski and other council members at a meeting earlier this week said Johnson’s support of a council vote instead of a referendum left him with “no skin in the game.”

“With today’s announcement of a compromise agreement from the Governor and Republican leadership in the Legislature, we look forward to examining the final details of the legislation when they become available. As we have done throughout this process, the Milwaukee Common Council will continue to discuss the proposal with the community as we determine its impact on the future of the City of Milwaukee,” said Common Council President José G. Pérez in a statement issued shortly after this article was published.

New city and county employees would join the state’s pension system, and the local systems would be closed to new entrants. 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 to 7.5% to 8.24% 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.

The personal property tax would be eliminated statewide. The tax is currently levied on businesses for certain assets they possess that aren’t covered by real-estate-focussed property taxes. Rep. Mark Born (R-Beaver Dam), co-chair of the Joint Committee on Finance, said it amounts to a $173.8 million tax cut and has long been a target of his to eliminate. “Any tax cut is a good tax cut,” said Born. He said the tax had substantial paperwork requirements compared to what was actually collected.

Policy Provisions

There are several substantial policy provisions in the proposal that impact everything from the streetcar to police officers.

A release from Republican legislative leaders says the city may not use the new money on “frivolous things such as street cars and woke diversity and equity initiatives.” Any new spending would require a two-thirds vote of the Common Council or County Board.

The Milwaukee Police Department would be required to maintain a sworn strength of 1,725, with 175 of those being detectives. The current average sworn strength in the 2023 budget is 1,640. The Milwaukee Fire Department would need to be staffed with a minimum number of firefighters.

The Milwaukee Fire & Police Commission’s authority would be gutted as part of the proposal. “Even the city admitted they had the most powerful police and fire commission in the country,” said Kurtz. Policy-making power will now be handed to the police and fire chiefs instead of the appointed board. The commission, which would retain the authority to hire and fire the chiefs, would also need to add two members, one each from lists provided the rank-and-file police and fire unions. The mayor currently has the authority to appoint up to nine members.

The bill blocks the city from using “moneys raised by levying taxes” for developing, operating or maintaining the streetcar system. The city has used tax incremental financing districts as a local match for a federal grant to build the system. It relies on parking revenue and sponsorships to operate the system. The bill would not impact the lakefront line extension.

Twenty-five MPD officers would need to be placed at Milwaukee Public Schools as part of the bill. The school board had voted to remove officers in 2020 at advocates’ request but continues to employ security personnel and officers routinely visit schools.

The city would be prohibited from using the revenue to fund positions to promote diversity, equity and inclusion. It would also prohibit using race as a factor when issuing contracts.

An audit of the Office of Violence Prevention would be required.

A COVID-19 legacy item is also included. Local health officers statewide would be prohibited from issuing health orders to close a business for more than 14 days to prevent a disease outbreak without a local government body voting to approve the change.

Advisory referendums by local or county governments would be banned statewide.

“This is a good day for the state to give Milwaukee the opportunity to correct years of mismanagement,” said Kurtz. City leaders for years have contended that they have been good fiscal stewards, but have had to deal with substantial state restrictions on revenue while inflation eats away at purchasing power. Adjusted for inflation, the City of Milwaukee alone estimates its annual shared revenue proceeds are down $155 million annually since 2000.

Kurtz credited former Senator Dale Kooyenga, now with the Metropolitan Milwaukee Association of Commerce, and Rep. Jessie Rodriguez (R-Oak Creek) with laying the groundwork for the bill last session. He and Vos also said the new Milwaukee executive leaders, Johnson and Crowley, were key in getting a deal done.

The proposed amendment has not been released. Details on specific provisions are from statements of officials or prior iterations of the bill.