Henken: Milwaukee’s Obsolete Financial Structure
You have reached the age of 70, but your financial plan for retirement is not going as you expected. You saved diligently and thought you were living comfortably on your healthy nest egg and Social Security withdrawals. Unfortunately, your key assumption that you would be able to increase your withdrawals every year as growing health care needs and inflation further eat into your budget, is not coming to fruition.
The culprit is your faulty investment portfolio. Its poor performance prevents you from increasing your savings withdrawals from year to year. Although your Social Security income increases at the rate of inflation, it is only a part of your total income, and it does not keep up with your increasing costs.
So what would you do? Without a doubt, one of the first things would be to critically examine your investment portfolio to determine if the assumptions you made years ago were still valid. Then, in all likelihood, you would make changes in an attempt to ensure annual growth.
The city of Milwaukee faces a similar scenario and a critical review of its revenue portfolio is urgently needed. The Public Policy Forum hopes to get the ball rolling with a report that we plan to release this week.
Like our hypothetical retiree, Milwaukee lives with an income structure that was created decades ago and no longer meets its needs. Under this structure, the city’s largest source of revenue – aid from the state of Wisconsin – rarely (if ever) increases. And, while the city has been able to generate growth in its next two biggest sources (taxes and property charges), restrictions on those sources still prevent it from facing the rising costs.
Further, since state law prohibits the leadership of Milwaukee from considering other means of taxation, an unfair situation has arisen. Tens of thousands of commuters and non-resident visitors use the city’s infrastructure and benefit from Milwaukee’s public safety protections every day, but they do not contribute anything directly to City Hall to pay for these services. This places the tax burden almost exclusively on property owners, as evidenced by the city’s high levels of taxes and property charges.
No other city of similar size works this way. Our analysis covers the remaining 38 cities in the United States with populations between 300,000 and 1 million (excluding those whose municipal governments are combined with counties or whose cities levy taxes for schools). We find that 30 have a general sales tax, while each of the other eight uses selective sales taxes on items such as restaurant purchases, parking, or entertainment. Many also use income or utility taxes.
On average, peer cities collect 44% of their local tax revenue through property tax and 41% through sales taxes, and most use at least three types of local taxes. Milwaukee is the only one of its peers that does not have the authority to levy sales or income taxes and that is required to use property tax as the sole means of major local taxation.
Our research also reveals that state aid is a relatively minor source of income for most peer cities, generally serving only as a supplement to locally generated income. Indeed, our analysis reveals that state funding represented 14% of total intergovernmental and local tax revenue for the middle city in our peer group. In contrast, state funding was equivalent to 48% of Milwaukee’s total intergovernmental and local tax revenues in 2015.
The report delves into the income structures of four peer cities in the Midwest: Pittsburgh, Cleveland, Minneapolis and Kansas City. Each uses multiple forms of local taxation that spread the tax burden among residents, commuters and visitors. While each city has its own revenue challenges, their ability to tap into several distinct local revenue streams – and have greater leeway to establish a structure that reflects their unique economic strengths – offers substantial benefits that are lacking. Milwaukee.
Overall, our analysis reinforces the need for an objective and informed discussion among policy makers, civic leaders, and citizens about the effectiveness and fairness of Milwaukee’s current financial structure. As a first step, this discussion should put aside the legitimate question of whether the city needs more revenue. Instead, it should focus on whether a structure imposed on Milwaukee over a century ago is still effective and relevant, and on the types of changes needed to ensure that the principles of fairness, reliability and balance can be observed.
Going back to the example of our retiree, I imagine many would say his first response should be to analyze where costs can be cut. We do not disagree and attest that any discussion of a new revenue structure for Milwaukee should also consider spending control strategies, including an objective analysis of the consolidation of certain functions with other jurisdictions.
But at the end of the day, just as the retiree has to fill prescriptions and eat three meals a day, the city can’t skimp on service levels when it comes to critical functions such as public safety, public works. and public health.
This hypothetical retiree is not trying to live a life of luxury, but is only looking for a reasonable income that increases with inflation and allows him to pay for basic necessities. With Mayor Tom Barrett already warning of substantial police reductions, let’s make the provision of basic necessities the starting point for a discussion of Milwaukee’s outdated financial paradigm and how it should be fixed .
Rob Henken is chair of the Milwaukee-based Public Policy Forum, an independent, non-partisan think tank.