Low Sales Tax Collections Spell Trouble for County

Milwaukee County Courthouse. Photo by Graham Kilmer.

Milwaukee County and the City of Milwaukee bet big on a new sales tax increase last year, and it paid off, literally.

But sales tax revenues are starting to decline, according to a new report by the nonpartisan Wisconsin Policy Forum, and while the city is on pace to meet its sales tax revenue expectations, the county is not.

In the wake of the COVID-19 pandemic, both locally and across the nation, there was a robust economic bounce back. This, coupled with rising inflation, led to significant increases in sales tax collections. Now that trend is reversing and the county is looking at sales tax collections coming in $10 million under what it budgeted this year, doubling a countywide budget deficit previously estimated at $9.3 million.

Sales tax revenues are important to government budgets at both the state and local level in Wisconsin. The sales tax levied by the state brings in approximately 30% of the government’s annual revenue.

In 2023, the county authorized a new 0.4% sales tax as part of a larger reformation of its broken pension system. When it came time to assemble the 2024 budget, the county had its first projected budget surplus in decades. Policymakers were able to make significant investments in county services and infrastructure after more than a decade of cuts. All of that was thanks to the new sales tax.

But while the sales tax can give, it can also take. The county’s sales tax collections as of May are $2.7 million behind its 2024 projections, according to the latest fiscal projection from the Office of the Milwaukee County Comptroller, which relies on data from the state. Based on sales tax revenue reported by local businesses, the Wisconsin Policy Forum estimates a similar decline for the county, noting “it appears that taxable sales in the county might be falling somewhat.”

The new 0.4% sales tax didn’t register in county sales tax data until March, the policy forum reported, but when it did show up the county saw a 67% increase in sales tax collections compared to 2023. But when the new sales tax is applied to 2023 sales during the same period, the policy forum finds a 7.2% decrease in county sales tax collections.

In any case, the 2024 budget was put together using projected sales tax revenue that accounted for the new sales tax. If revenues come in lower than expected, that will create a hole in the county’s budget.

The comptroller’s office noticed the dip in sales tax revenue after data for the first two months this year was released. In May, CJ Pahl, Financial Services Manager for the comptroller, said collections could rebound, but that the current outlook was “rather grim.”

Two months later, and sales tax returns are looking worse. “Unfortunately, I have worse news on the sales tax front,” Pahl told supervisors on the board’s Committee on Finance Thursday while briefing them on the budget deficit county government is currently projected to run in 2024.

“Since we released our [July] report, our office has done further investigation and believes that the sales tax is going to fall within a deficit of the $8 to $10 million range,” she said. “And that assumes that each of the remaining months of our collections comes in at last year’s level. If we continue to see collections that were below last year’s level, that deficit is likely going to grow.”

With low sales tax collections and cost overruns in other areas of the county, it’s expected the government will finish the year short $17 to $19 million, Pahl said.

The gap the county is already seeing could still be closed by collections that exceed expectations during the rest of the year. But, the comptroller report notes, “With 3 of the 4 months of collections received coming in below 2023, it is becoming more likely that future months will continue to create of deficit that will fall to the County’s bottom line.”

Read the full Wisconsin Policy Forum report on Urban Milwaukee.