The tools in Milwaukee's revenue toolbox

As the Public Policy Forum’s 2010-2011 Norman N. Gill Civic Engagement Fellow, I have completed my year-long project that analyzed how local governments raise revenue. The report, The tools in Milwaukee's revenue toolbox, stems from a 2009 Forum report that assessed the fiscal health of the City of Milwaukee. That report found that the city is over-reliant on state shared revenue as its main revenue source, and handcuffed by rising fringe benefit costs for city employees and growing expenditure pressures associated with police and fire services (which account for more than one half of all city operating expenditures).

Under the recently adopted state budget repair bill, the city has been granted cost-saving “tools” that will allow it to impose greater fringe benefit cost-sharing for non-public safety city employees. Yet, some city officials and policymakers are unsure if these tools, because they exempt public safety employees and are coupled with a cut in state shared revenue, will be enough to alter the city’s fiscal predicament. Consequently, my project explores the other side of the debate – the revenue toolbox. It asks what alternative revenue structures exist in other cities, and whether they are suitable for Milwaukee.

To answer these questions, we researched 15 cities that are comparable to Milwaukee, analyzed each city’s budget, and compared how each city generates revenue. Our key finding was that Milwaukee relies heavily on intergovernmental revenue (i.e. state shared revenue) to fund its budget (46% of general budget revenue), while the comparison cities raise the bulk of their revenues via the use of broad-based sales, property, and/or income taxes. In fact, no other city relies on intergovernmental revenue for even a third of its budget, and the vast majority has a dependence of less than 10%. Meanwhile, Milwaukee’s use of broad-based taxation for only 20% of its general budget pales in comparison to the other cities, the vast majority of whom use broad-based taxes for more than half of their general budgets.

Given these findings, we next examined the sales, income and property tax and their potential application in Milwaukee if city leaders were authorized to use them to reduce reliance on state shared revenue. Some of the insights we gleaned are as follows:

• Because Wisconsin has a relatively low sales tax compared to other states, implementing a city sales tax of .01% to 1% would not put Milwaukee out of line with comparable cities nationally, and could benefit the city by requiring non-residents to contribute toward the cost of city services. Milwaukee does not have the ideal sales tax base, however, because of the comparably low amount of retail sales that take place in the city, and because of Milwaukee’s high poverty rate.


• A city tax on individual income would allow for the possibility of shielding the poor from tax liability through specific tax rates for different income groups, or the ability to utilize deductions and credits. Also, such a tax potentially could be applied to non-residents who work in the city as well as residents, thus providing a mechanism to collect revenue from non-residents who use city services. On the other hand, even without a local income tax, residents in Milwaukee already have a relatively high state income tax burden, and adding an additional layer of income taxation could be harmful to the attraction of residents and businesses.


• Using a property tax to fund a greater proportion of the city budget could allow for a more predictable revenue stream because local governments would have some ability to change the tax rate to meet expenditure needs or to accommodate a decline in property values. Yet, because Milwaukee has comparably low assessed property values, funding a larger portion of the general budget with property taxes would require Milwaukee to add substantially to its already high property tax rates.


• An option in which city leaders were allowed to pursue a better balance of revenue sources by implementing a 1.0% city sales tax would allow for a sizeable decrease in property tax rates and reduced reliance on state shared revenue.

In the end, the report demonstrates that there are no easy answers to the City of Milwaukee’s revenue dilemma. In the event that the cost-saving tools contained in the budget repair bill are not enough to address Milwaukee’s longstanding fiscal problems, however, it also shows that it may be helpful to consider a balanced revenue structure that is more comparable to the other cities we studied.

Special thanks to the Gill family for their generous support of this project through the Norman N. Gill Fellowship, and the Public Policy Forum for their assistance and guidance throughout the year.

Are the right tools in the toolbox?

As the Public Policy Forum’s 2010-2011 Norman N. Gill Civic Engagement Fellow, I am working on a year-long project examining how local governments raise revenues. An earlier blog post on the project discussed alternatives to financing local governments, including a local sales tax. Overall, 33 of the 45 states that have a sales tax also allow their local governments to levy one. In addition, 43 of the 67 largest cities in the country have a local sales tax.

Under the governor’s proposed 2011-2013 state biennial budget, the city of Milwaukee stands to lose $10.3 million of state shared revenue. Shared revenue currently is a $271.6 million line item in the city budget and represents an unusually large portion when compared to other cities.

In return, the state would give local governments “tools” to help control costs, such as greater flexibility to impose higher health care and pension contributions on public sector employees. Yet, one tool that has been left out of the tool box is the ability for local governments to establish new revenue streams.

Milwaukee has no city sales tax and, by law, it is prohibited from implementing one. If the city could respond to state budget pressures by levying a sales tax, however, what might it look like? Assuming that the city’s tax would bring in revenue proportional to Milwaukee County’s sales tax, a 0.5% tax would generate estimated revenue of $40.3 million. This figure is consistent with economic studies about the city that show a 0.5% sales tax in Milwaukee would raise about $45 million. Therefore, a 0.5% sales tax would more than offset the cut in state shared revenue. In fact, a 0.1% sales tax would almost be enough.

There are several issues, however, that may limit the effectiveness of a local sales tax in Milwaukee. First, it makes sense that cities levying a sales tax should have a large tax base of retail sales. Oklahoma City, which has a 3.875% city sales tax, has more than $6.25 billion of retail sales per year. When measured on the basis of its population of 537,734, Oklahoma City’s retail sales per capita equals $12,057. On the other hand, Milwaukee, with a similar population, has far fewer retail sales. In 2002, Milwaukee saw $3.5 billion of goods sold, which is about $6,094 in retail sales per capita. Moreover, as the chart below indicates, Milwaukee’s retail tax base compares very poorly to similar cities with a city sales tax.


Another big hurdle is that unless a sales tax also is adopted by neighboring cities and towns, a sales tax in the city might put local retailers at a competitive disadvantage by providing even less of an incentive to shop in Milwaukee. For example, if Milwaukee were to impose a 0.5% sales tax to offset a cut in state shared revenue and meet other needs, then goods sold in Milwaukee would be subjected to an overall 6.1% sales tax rate, compared to a 5.6% rate elsewhere in the county. Furthermore, the difference would be even greater when compared to Waukesha County, which has a 5.1% rate. Lastly, the sales tax could disproportionately harm those Milwaukee residents without the means to shop elsewhere.

In return for less state shared revenue, municipal leaders might logically argue that Madison should equip cities with as many tools as possible to fix their budget woes. Were that to occur, however, Milwaukee policymakers would need to carefully consider the tools they use; what’s appropriate for Oklahoma City is not necessarily appropriate for Milwaukee.

The Forum is now accepting applications for the 2011-2012 fellowship year. For more information, go to the Norman N. Gill Civic Engagement Fellowship website. Applications are due April 30, 2011.

Wither Madison, wither Milwaukee?

As the Public Policy Forum’s 2010-2011 Norman N. Gill Civic Engagement Fellow, I am honored to be working on a year-long project that will examine how municipal governments in Wisconsin raise and spend their tax dollars. Over the next five months, I will be sharing some of my research with the blog. Ultimately, my research will lead to a paper that will discuss alternatives to financing municipal governments.

The Forum previously documented the fiscal problems that arise from the City of Milwaukee’s reliance on shared revenue from the state to fund its general purpose budget. Indeed, intergovernmental revenue represents about 45% of Milwaukee’s general purpose budget, which makes it the largest source of revenue.

The early stages of my research indicate that it is rare for a city to depend so much on intergovernmental revenue. Columbus, Oklahoma City, and Boston, for example, all offer different models that cities use to fund their general budgets without as much dependence on external revenue sources.

Columbus funds its general budget primarily through a city income tax. In Ohio, state law requires all municipalities to impose a flat individual income tax, and the maximum rate that a municipality can impose without voter approval is 1%. Columbus, through voter approval, imposes a 2.5% tax on earned income such as wages, salaries, and net business proceeds generated in the city. As a result, more than 70% of the general budget’s funding comes from the municipal income tax. Milwaukee, of course, has no city income tax.

Oklahoma City, meanwhile, funds its general budget mostly with a sales tax. It levies a tax of 3.87% on sales in the city, and about half of that revenue goes directly into the general budget. In fact, Oklahoma City uses property tax revenue only for capital projects (such as roads) and not for operating expenses. Milwaukee has no city sales tax.

Boston, meanwhile, funds more than 60% of its general budget through the property tax. The property tax rate in Boston is $11.48 per $1,000 of housing value, which is considerably less than Milwaukee’s $27.70. Boston benefits from having more expensive property; in 2010, the total assessed value of Boston’s property was $87.3 billion, compared to $28.9 billion in Milwaukee. This enables Boston to raise more money at a lower rate. Regardless, Boston has at least identified a main, locally-controlled tax base (property) to fund its operating expenses. Milwaukee, where property tax revenue is about 21% of the general budget, has not.

To be sure, these three distinct models to fund municipal budgets each have their own costs and benefits, which will be analyzed and discussed in my report. Yet, it is clear that Columbus, Oklahoma City, and Boston are relatively self-sustaining, while Milwaukee is enormously dependent on Madison for its survival.

The Forum is now accepting applications for the 2011-2012 fellowship year. For more information, go to the Norman N. Gill Civic Engagement Fellowship website. Applications are due April 30, 2011.