Momentum growing behind changing Wisconsin’s shared revenue system

Wisconsin’s original tax bargain with local governments has fallen apart, says Wisconsin Policy Forum (WPF) president Rob Henken.

“If this were truly shared revenue, then as state income and sales tax, and other revenues grow from year to year, some portion of that growth would have also been shared with local governments,” Henken said in an interview with the Wisconsin Examiner. 

The amount the state dedicates to shared revenue — money that is given to fund local governments — has stagnated in recent decades, hovering around the $900 million mark since the early 2000s. Local municipalities, which are constrained in the way that they’re able to bring in money, are calling for an increase, so they can continue funding local services like public safety, emergency medical services and transportation.

The 2023 budget cycle — with a projected $7 billion surplus providing some flexibility for priorities — represents an opportunity to update the system and increase the money local governments receive. Momentum for this is growing, especially as Wisconsin’s Democratic and Republican leaders appear to be in agreement about what shape the change could take. 

‘Essentially a state appropriation’  

Local governments in Wisconsin are restricted in their ability to levy taxes, and shared revenue system was meant to make up for those restrictions. 

Wisconsin created its shared revenue system around the same time it became the first state in the U.S. to levy a state income tax in 1911. Henken says state leaders at the time opted to preclude local governments from being able to do the same, and in exchange, the state committed to sharing a portion of the revenue with local governments. 

Henken says a similar concept applied when Wisconsin later adopted a sales tax. According to a Legislative Fiscal Bureau report, counties may impose a local sales and use tax of up to 0.5% on top of the 5% state sales tax, but the additional revenue is minimal compared with what the state takes in. Of Wisconsin’s 72 counties, 68 have adopted the county sales tax.  

In recent decades, however, shared revenue has “essentially been a state appropriation,” Henken says. “State leaders at their discretion — both Democratic and Republican — have said, ‘sorry, we can’t afford to share that growth. We’re just going to give you the same amount in the next state budget that we did in the previous state budget.’”

State law also limits local governments and school districts from increasing property taxes unless they hold a referendum — something more local governments have begun to do.  Last year was a record year for such referendum requests, with voters approving around $11.4 million for local services, according to a WPF report.

“The state has been able to see growth in its key revenue streams, but for local governments growth in their key revenue streams have been restricted because of the flat nature of revenue appropriation, and because of the significant restrictions on their ability to raise their property tax levels.”

Budget surplus lending some opportunity

There are three reasons for recent movement in discussions, Henken says: the projected $7 billion budget surplus, recognition of the severe fiscal crisis in Milwaukee and Milwaukee County and the tight budgets being faced by municipal and county governments across the state that can’t be remedied without reform. 

“Municipal governments and county governments are all really pinched, particularly in areas like public safety,” Henken says. “The year after year after year after year of being significantly restricted with regard to their revenue growth has really hit home in large measure because of the high rate of inflation. It’s a lot more serious if your revenues are only growing 1 or 2% per year and now you have to get 4 or 5% minimally pay increases to your personnel because of inflation.”

Gov. Tony Evers, who is looking to tackle a number of issues this budget cycle by tapping the $7 billion surplus, has said he supports a budget provision that would dedicate up to 20% of the state’s sales tax revenue to shared revenue. 

Evers said the change would provide $500 million more in funding to local governments to fund emergency medical services, fire and law enforcement services, transportation and local health and human services.

“The bottom line for me has always been making sure our communities have the resources they need to meet basic and unique needs alike,” Evers said during his State of the State address. “But there are a lot of different ways we can find compromise to achieve that goal, and together we will.” 

The proposal is similar to what Republican lawmakers have been publicly considering since December 2022. Assembly Speaker Robin Vos (R-Rochester) earlier described dedicating one cent of Wisconsin’s five-cent sales tax per dollar to shared revenue. 

“That’s actually similar to the plan that we’ve been working on with the three levels of local government, so it’s good to see that he may be somewhat supportive,” Senate Majority Leader Devin LeMahieu (R-Oostburg) told reporters after the State of the State address.

Evers had earlier said he was committed to increasing shared revenue, but this signified the first time the Democratic governor showed he was willing to support a plan initially discussed by Republican leaders. 

“We definitely want to have an increase in shared revenue,” Vos said after the State of the State. “We are nowhere near finding a conclusion.” 

The proposals from state leaders would essentially create a dedicated revenue source, Henken says, and increase the likelihood that local governments would see an increase in revenue each year, since the shared revenue pot would grow proportionally to sales tax. 

“If sales tax collections grow 3% in a given year … that one-fifth of the sales tax that goes to shared revenue would also grow by 3%,” Henken says. “What you would again start to see is the likelihood of some annual growth in shared revenue payments from year to year for local governments, and that’s what they’ve been lacking.” 

The likelihood of yearly growth would address the problem of local government’s share of revenue remaining mostly stagnant in recent decades.

The League of Wisconsin Municipalities, Wisconsin Counties Association and Wisconsin Towns Association expressed their support for recent conversations over a deal to bolster shared revenue.

“Both sides of the aisle seemingly agree that the current system of funding local governments in Wisconsin is broken, and everyone must come to the table to find a long-term solution,” the lobbying groups said in a joint statement. “This issue transcends partisan politics, and our leaders recognize that local governments are critical to providing and delivering numerous services taxpayers rely on daily. With rising inflation and increased demand for services, local governments require additional and sustainable state resources to maintain infrastructure, public safety investments, and human and social services.”

Enough for the state’s largest recipients? 

Milwaukee and Milwaukee County receive the largest portion of Wisconsin’s shared revenue. As with overall shared revenue, that number has been stagnant for many years.

Due to relatively low per capita property values and the previous design of the state’s shared revenue program, Milwaukee has traditionally relied more heavily on state aid than other wealthier cities, according to a September 2022 Wisconsin Policy Forum report. The city is “approaching a day of reckoning” when it comes to its financial structure, in part because of the stagnant payments.

“With the exception of a recent influx of federal pandemic aid, the city of Milwaukee has seen the growth in its revenues flatten over the past decade and fail to keep pace with the rate of inflation,” states the report. “That is particularly true if we look at the revenues that are most important to financing core city services such as police, firefighting, street maintenance, public health, and libraries.”

Milwaukee received $240 million in 2001. Last year, the city received $229 million. Milwaukee County received $51 million in 2022, compared with $57 million in 2001. 

The money has made up a significant portion of the city’s revenues. Milwaukee received 40.7% of its general revenues from state aid and only 21.1% from local property taxes in 2000, according to the WPF study. By 2020, overall state aid represented 27.6% of Milwaukee’s general revenues.

Unlike many larger cities across the country, Milwaukee does not have many opportunities to raise its own revenue through a sales tax. The county is already at the cap for what it can raise through property taxes, and raising certain fees would not address the larger budget shortfalls, says Milwaukee County Executive David Crowley.  

Crowley says the county is looking to find the resources just to maintain its current level of services, including state services, some of them mandated. 

“We are looking just to continue our current level of program, continue our current level of services that we provide,” Crowley told the Wisconsin Examiner. “Whether we are talking about the whole continuum of public safety — when you think about the jail, the community reintegration center, or even the courts — that puts us in a bind to making sure that those needs [are] adequately funded.” 

Crowley says it’s essential the county is able to continue funding services that aren’t necessarily mandated by the state, such as parks, senior and disability services and the Milwaukee County transit system. It’s difficult to consider what cuts would have to be implemented if the revenue is not addressed because the cuts would likely be egregious, he adds.

“The fact that not only the governor as well as the Republican-controlled state Legislature are on the same page as it relates to making sure that we do something around shared revenue across the state, I will say is a good thing,” Crowley says. “It leaves me with optimism knowing that we’re having some conversations about really moving the needle forward.” 

Crowley said as conversations are happening about changing the shared revenue formula, he is advocating for the state to adopt an increase in the shared revenue system and allowing Milwaukee County an optional 1% local sales tax. The optional tax would allow Milwaukee County to collect a total 1.5% in sales tax that it will be able to use to fund local services. 

He said the tax would address the scale of the problem the county faces by allowing Milwaukee County to leverage its own economic activity.

Vos recently said on WISN’s “UPFRONT” that there was the possibility he could back an optional sales tax for Milwaukee. 

“I think it’s possible,” Vos said. “As I look at the real problem, the mistakes that have been made are so gargantuan, it’s almost impossible to solve without some new revenue.”

However, he’s also previously said he wants to see reform in the Milwaukee and Milwaukee County’s budgets before increasing revenue. The country’s pension system is one area where potential reform has been discussed. 

Crowley says it’s important to remember that reform takes time.  

“While it’s great to be talking about consolidation and things of that nature and we’re willing to pursue some of them, some reforms are going to take time,” Crowley said. “At the county level, we don’t just represent the City of Milwaukee. There are 18 other municipalities that we provide services for so it’s extremely important to know if their services will be interrupted and how they are affected.” 

Details of an exact proposal are still being worked out among state leaders. Evers will present his official budget proposal later this month. The Joint Finance Committee will then spend a few months rewriting the budget before the Legislature votes on the spending plan and then sends it  to Evers to be signed.