Public Policy Forum Blog

Fixing a broken financial structure

In Making Ends Meet, our September 2016 report assessing the City of Milwaukee's fiscal condition, we detailed the consequences of the City's "broken revenue structure." Among those was an inability to make new investments in public safety, community development, and/or other needs identified in the wake of the Sherman Park turmoil.

We found that the main culprit is the City's extreme reliance on aids from the State of Wisconsin, which have been stagnant for the past two decades. Furthermore, with its local revenue options limited by the State largely to property taxes and service fees, the City places an undue burden on property owners, despite the tens of thousands of suburban commuters and visitors who use City services each day.

In a report we release this morning, we offer perspective on potential fixes. On the Money?  explores how similar-sized cities across the country generate the revenues required to sustain core municipal services. Our hope is to spark a community-wide discussion on possible alternative revenue structures that might provide for healthier revenue growth while reducing the City's need for increased shared revenue payments from the State and increased property taxes and fees from its residents.

Our analysis begins with a high-level overview of the revenue structures of the 39 cities across the country with populations between 300,000 and one million (we exclude those that have combined city-county governments or that levy taxes for their school districts). Remarkably, we find that Milwaukee is the only one of those cities that is required by its state government to rely on the property tax as its sole major form of local taxation.

Other key findings from our review of the 38 peer cities include the following:

  • Milwaukee is particularly unique in its absence of general and selective sales taxes. Each of the 39 peer cities except Milwaukee has multiple taxes, and most have general or selective sales taxes (i.e. sales taxes on select items like entertainment, food/liquor, etc.). In fact, 30 have a general sales tax and each of the remaining eight generates substantial revenue from selective sales taxes and/or other forms of taxation besides the property tax.
  • As a general rule, cities with larger populations tend to draw more heavily on the sales tax and less upon the property tax. The analysis shows that on average, sales taxes comprise more than 40% of the local tax revenues collected by cities with populations over 300,000, but just 28% for those with populations between 150,000 and 300,000. Larger cities host greater numbers of non-residents who are engaged in business, employment, tourism, etc., and most seek to recoup some of the costs of municipal services provided to those users.
  • State aid is a relatively minor source of revenue for most peer cities. Among the 39 peer cities, state aids typically serve only as a supplement to locally-generated revenue. State funding comprised 14% of total intergovernmental and local tax revenue for the median city in the peer group, while it accounted for 48% of Milwaukee’s total in 2015.

Our report also takes a deeper dive into the revenue structures of four Midwestern peers: Pittsburgh, Cleveland, Minneapolis, and Kansas City. We see that each of the four makes use of multiple forms of local taxation that spread the tax burden among residents, commuters, and visitors. Furthermore, each has greater latitude to establish a revenue structure that reflects their unique economic strengths and that ties their financial well-being much more closely to local economic growth.

Overall, our analysis of peer cities reinforces the need for an objective and informed discussion among policymakers, civic leaders, and citizens about the efficacy of Milwaukee's current revenue structure.

Initially, this discussion should put aside the question of whether the City requires more revenue. Instead, it should focus on whether a structure that was imposed on the City by State government more than a century ago still is effective and relevant, and on the types of changes needed to ensure that principles of tax equity, revenue reliability, and administrative simplicity can be achieved.

Author: 
Rob Henken