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

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

“…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

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

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

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: Based on US Census data, When Combined, Wisconsin’s State and Local Tax Collections in 2004 Ranked: 5 th 5 th 12 th 12 th 15 th 15 th 20th 20th

Of Course, the Answer is: All of the Above

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

State and Local Revenue Per $1,000 of Personal Income Total Revenue$ Total Revenue$ th highest 15th highest $ Nat’l Average $ Nat’l Average Taxes$ Taxes$ th highest 5th highest $ Nat’l Average $ Nat’l Average Fees/Charges $29.76 Fees/Charges $ th highest 29th highest $29.84 Nat’l Average $29.84 Nat’l Average Federal Aid $40.99 Federal Aid $ rd highest 33rd highest $44.01 Nat’l Average $44.01 Nat’l Average

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

Does WI Government Stand Out in Spending? AmtRankUS Avg. Direct general expenditure $ 6,67016 $ 6,493 Higher education $ $ 591 Elementary & secondary $ 1,58516 $ 1,542 Public welfare $ 1,24615 $ 1,144 Hospitals $ $ 329 Health $ $ 215 Highways $ $ 403 Police protection $ $ 238 Fire protection $ 9318 $ 97 Correction $ 2109 $ 193

Does WI Government Stand Out in Spending? (Con’t) AmtRankUS Avg. Natural resources $ $ 79 Parks and recreation $ 9925 $ 104 Housing and community development $ 8135 $ 127 Sewerage $ 1389 $ 121 Solid waste management $ 7915 $ 70 Financial administration $ 8742 $ 123

Explanation #2: Economies of Scale Per Capita Expenditures Number of HouseholdsNHH *

Counties are Generally Below 100,000 Population

Most Cities are Below 50,000 Population

Villages are Typically Below 5,000 Population

Towns Tend to be Under 2,500 Population

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. 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.

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

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. 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. 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. The most frequently cited services that are contracted out include solid waste and recycling collection.

Explanation #4: Fiscal Partnership Between State and Local Gov’ts Current Policy in WI (Source: Kettl Commission Report) 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? 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. 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 Equalization. Offset tax base disparities. Key programs in Wisconsin: Shared Revenues and Equalization Aids

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? 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. 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) 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. Required services. Provide funding for mandatory duties.

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

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

Top Ten State Expenditures

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

School Aids Double Total GPR Growth

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

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

Local Revenue Contribution to Local Spending

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

Aidable Revenues Component (Current Model) Distribution based on equalization 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) 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 Redistribution based on Per capita property wealth Per capita property wealth Net local revenue effort Net local revenue effort Thus, if wealth is low and revenue effort is high – high aidable revenues entitlement Thus, if wealth is low and revenue effort is high – high aidable revenues entitlement

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) 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 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 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 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 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

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

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

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 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; 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; 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. 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.

Recommendation #1 Explain why there is a problem: Explain why there is a problem: State needs to realize its role as cause 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. 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.

Recommendation #2 Cut Shared Revenues “substantially” and give municipalities more revenue options. The most common in other states is a sales tax. 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. 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.

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. 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.

Recommendation #3 Local governments need to reevaluate their budgeting processes. Local governments need to reevaluate their budgeting processes. Too much incremental budgeting 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: 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 Whether services/programs are necessary How well services are being provided How well services are being provided What are the expected outcomes from programs What are the expected outcomes from programs How well did the program meet its outcome objectives the previous year How well did the program meet its outcome objectives the previous year

Thank You Questions?