Reforming Wisconsin's Tax System for Fiscal Sustainability

1. Presentation to Wisconsin Park and Recreation AssociationNovember 8, 2006 By Craig Maher Assistant Professor Masters of Public Administration Prgm. University of Wisconsin - Oshkosh

2. Understanding Wisconsin’s Tax Rankings and Possible Solutions [Or, Do Local Governments Need Another State Intervention to “Control” Property Taxes?]

3. “…After generations of trying to reign in out-of-control taxes, it is time to let people decide on a new approach.” Wisconsin State Senator Glenn Grothman

4. “The present tax and spending situation in our state cannot stand. We cannot afford to continue the pattern…” Wisconsin State Representative Frank Lasee

5. “With Wisconsin losing jobs, being ranked as the most costly state to retire in, and having the 5th highest taxes in the country, we need to let people exercise their right to place limits on government” Wisconsin State Representative Jeff Wood

6. Which of the Following is the Correct Answer? • Based on US Census data, When Combined, Wisconsin’s State and Local Tax Collections in 2004 Ranked: • 5th • 12th • 15th • 20th

7. Of Course, the Answer is: All of the Above

8. State and Local Revenue Per Capita • Total Revenue $6,455 • 20th highest • $6,447 Nat’l Average • Taxes $3,714 • 12th highest • $3,447 Nat’l Average • Fees/Charges $958 • 26th highest • $985 Nat’l Average • Federal Aid $1,319 • 35th highest • $1,452 Nat’l Average

9. State and Local RevenuePer $1,000 of Personal Income • Total Revenue $200.55 • 15th highest • $195.38 Nat’l Average • Taxes $115.39 • 5th highest • $104.45 Nat’l Average • Fees/Charges $29.76 • 29th highest • $29.84 Nat’l Average • Federal Aid $40.99 • 33rd highest • $44.01 Nat’l Average

10. Possible Explanations For WI’s Above-Average Rankings • Expenditures • Economies of Scale (are there too many small governments?) • Service Provision (contracting out) • Revenue Mix

11. Does WI Government Stand Out in Spending?

12. Does WI Government Stand Out in Spending? (Con’t)

13. Per Capita Expenditures NHH* Number of Households Explanation #2: Economies of Scale

14. Counties are Generally Below 100,000 Population

15. Most Cities are Below 50,000 Population

16. Villages are Typically Below 5,000 Population

17. Towns Tend to be Under 2,500 Population

18. Here’s the rub: We want smaller local governments in a Jeffersonian sense to enhance effectiveness but it comes at higher costs due to economic inefficiencies.

19. Economies of Scale Continued • According to Work by UW-Economist Steven Deller: • Average number of households in WI: 2,400 • Madison: 89,019 • Milwaukee: 232,188 • Based on this analysis the “optimal size” city would be bigger than Madison, but about half the size of Milwaukee (118,300)

20. Explanation #3: Contracting Out • It is a common belief that public services can be more efficiently delivered when contracted out to private or not-for-profit firms. • Based on survey work done in 2004, 83% of the responding counties and municipalities contract out some service. • The most frequently cited services that are contracted out include solid waste and recycling collection.

21. Explanation #4: Fiscal Partnership Between State and Local Gov’ts • Current Policy in WI (Source: Kettl Commission Report) • Fiscal Partnership. State raises money. Entrusts local government to manage programs and deliver services. Think about services in Wisconsin, how many are actually provided by the State versus local gov’t. Does “home-rule” really exist? • Shared benefits. Recognize benefits to non-residents of a locally provided public service or good. Education benefits society as a whole as well as those receiving the education. • Equalization. Offset tax base disparities. Key programs in Wisconsin: Shared Revenues and Equalization Aids

22. Current Policy Con’t • Property tax relief. Reduce dependence on property tax (e.g., 2/3rds, tax “freeze”). Wisconsin first state to adopt income tax in 1911, why? Sales taxes in 1962, and county portion in 1986, why? • Tax policy. Modify who pays what portion of the tax burden. • Lost tax base. Offset a narrowing of the local tax base. M&E Exemption, Personal Property (e.g., computers) • Required services. Provide funding for mandatory duties.

23. Taxes and Fees Paid Services Received Federal Aid State Services State Receipts Paid To State Citizen Taxpayer $5,136 State Aid Paid To Local Local Receipts Local Services Federal Aid Source: Kettl Commission Report

24. Is Current Policy Sustainable? • State continues to face fiscal pressures (some say structural deficit, particularly according to GAAP standards) • WI a “tax hell”, with property taxes among highest • WI distributes 2/3rds of GPR funds to local government • Lack of accountability at both state and local level

25. Top Ten State Expenditures

26. Good News for Schools… Not So Good for Counties and Municipalities

27. School Aids Double Total GPR Growth

28. Property Tax “Freeze” Coupled With Flat Shared Revenue A Major Cause of Stress

29. Intergovernmental Aid • One of the areas where WI stands out is the degree and type of intergovernmental aid • WI’s Shared Revenue Prgm. is relatively unique when compared to other states • Other states tend to give local governments more revenue options • Sales tax • Motor vehicle tax • Chicago area has own income tax, gas tax, sales, etc!

30. Local Revenue Contribution to Local Spending

31. WI’s Shared Revenue Prgm. • Initiated in 1911 when WI became 1st State to adopt an income tax the purpose of providing property tax relief • Current model created in early 1970s following M&E exemption • State now collects all income taxes, most sales taxes, all utility property taxes • Through the Shared Revenue Prgm., WI redistributes some of these revenues on the bases of: • Need (aidable revenue entitlement: 82% of formula) • Population • Utility • Hold Harmless

32. Aidable Revenues Component (Current Model) • Distribution based on equalization • Assumes need to equalize tax rates at the local level through state distribution (if expenses are equal, so too should be tax rates) • Redistribution based on • Per capita property wealth • Net local revenue effort • Thus, if wealth is low and revenue effort is high – high aidable revenues entitlement

33. Aidable Revenues Con’t • Formula compares local per capita value to a standard valuation adopted by the State (a per capita figure that is manipulated based on available state aid) • If local revenue is high compared to others – need more aid to reduce tax burden • Corollary: if you spend a lot – logic is you must need more aid • If property value is low compared to a standard value – need aid to keep tax rate low • Hold harmless – protects communities from big swings in formula benefit; communities receive no less than 95% of previous year’s revenues. The maximum increase is set annually to fund the 95% guarantee

34. Impact of Shared Revenues • Pros • Provides equity across communities re. service provision • Provides some property tax relief • Offsets state decisions to exempt certain types of property • E.g., M&E exemption in 1970s

35. Shared Revenues • Cons • Inefficient • “Flypaper” Effect • “Fiscal Illusion” (Kettl Commission) • Formula has disincentive for efficient service delivery • Very Expensive • One of the most expensive State GPR expenses • Greater State Intervention – limits “home rule” • Why not give local governments more revenue options in exchange for “significant” reduction in shared revenues

36. My Research With Steven Deller • shared revenues increase local government spending, meaning that when comparing two communities with the same general characteristics, the one that receives more shared revenues will spend more; • shared revenue payments are related to reductions in property taxes, meaning that as shared revenues increase, local property taxes decrease; • in general, municipalities that have received lower shared payments over recent years, have responded by replacing those aids through a combination of increased property taxes, fees and debt service; • communities that lose shared revenues are most prone to replace funds for “core” services such as police and fire than for services such as culture, education parks and recreation.

37. Recommendation #1 • Explain why there is a problem: • State needs to realize its role as cause • There has been a tendency over the past years to treat property tax limits (TABOR, or “simple” levy limits) separately from shared revenue payments. This is not practical in WI for the simple reason that local governments have limited revenue options. So, when state lawmakers freeze shared revenues as they essentially have done since the mid-1990’s, it should not be surprising that property taxes rise at a faster rate.

38. Recommendation #2 • Cut Shared Revenues “substantially” and give municipalities more revenue options. The most common in other states is a sales tax. • A local tax for municipalities would enable the State to address some of its fiscal woes by reducing shared revenues and simultaneously provide property tax relief. In addition it would force local policy makers (including myself) to be more accountable for their budgeting practices in two ways: 1) they would no longer be able to blame the State for the lack of growth in aid payments and; 2) given that sales taxes are sensitive to economic cycles, communities would be forced to budget accordingly.

39. Local Revenue Option, Con’t • Several recent study, including one of the Chicago metropolitan area, where municipalities have a number of local tax options including sales, income and gas taxes, found that communities with greater revenue diversity have lower tax effort. This suggests that when communities have a broader range of revenue available, they act more efficiently, thus lowering taxes.

40. Recommendation #3 • Local governments need to reevaluate their budgeting processes. • Too much incremental budgeting • What is missing from most of local budget deliberations in WI is a discussion of the broader, and I believe, more important matters such as: • Whether services/programs are necessary • How well services are being provided • What are the expected outcomes from programs • How well did the program meet its outcome objectives the previous year

41. Thank You Questions?