With no sales tax and businesses folding up, local communities and homeowners will pay the price

While the state will have its own budget issues, I wanted to go over a couple of recent items that discussed the looming budget problems for local governments in Wisconsin. For example, the Wisconsin State Journal told us over the weekend that due to fewer people going out, local governments are looking at a sizable loss of sales tax revenue in the coming months.

Wisconsin’s 5% sales tax generates roughly $5.4 billion a year, accounting for roughly a third of the state’s revenues, according to the Legislative Fiscal Bureau.

All but four counties — Manitowoc, Racine, Waukesha and Winnebago — collect an optional 0.5% sales tax that was expected to bring in about $462 million.

On average, local sales tax accounts for about 9% of total county revenues, though some counties rely on it more than others, said Dale Knapp, director of research for the Wisconsin Counties Association.

And it makes up a much bigger slice of the discretionary funding that isn’t tied to state and federal programs counties administer.

“It’s our second-largest source of general purpose revenue,” said Charles Hicklin, chief financial officer for Dane County, which projected the sales tax would generate about $68.2 million in the current fiscal year, or roughly 24% of the total.

Sales taxes are especially going to be hit because retail stores, restaurants, bars and car dealerships have had a big drop in business as a result of COVID-19 shutdowns. And while more food has been bought at the grocery store in these weird times, much of it is not subject to sales tax.

I still think that this state should allow for more communities to use sales taxes instead of property taxes, even with the drop that we'll see this year. You'll see why in the Fall, as local governments are going to need to generate even more of its own money through the property tax in 2020 and in their 2021 budgets. Even worse, property taxes are likely to have their own limitations in 2020 and beyond in Wisconsin for a few reasons.

The Wisconsin Policy Forum mentioned these issues as part of a larger article on what will happen to local government funding as the recession sets in, and notes that while some Wisconsin communities get a decent amount of their funds beyond property taxes and sales taxes, others don't get much at all.

While all cities and villages depend heavily on property taxes, the degree of reliance does vary widely. For example, some municipal governments make broader use of fees and receive higher levels of state aids. Figure 2 shows the variation among the state’s 20 largest cities and villages (by population). The state’s largest city, Milwaukee, had a total property tax levy of $261 million in 2018, but that comprised less than 30% of its total general revenue. Conversely, the $231 million levied by the state’s second largest city, Madison, comprised 60% of its total general revenue, largely because it receives far less in shared revenue payments from the state.

The good news for local governments is that even though property values typically do fall (and often sharply) during economic downturns, decreases in property taxes due for the current year do not decline because there is a lag between the onset of the downturn and the time it takes to conduct and incorporate new property assessments that quantify the loss in value. In fact, property tax levies set later this year for taxes billed in December and collected in 2021 will be based on valuations as of January 1, 2020, which means that the impacts of diminished values will not be reflected until 2022 budgets are adopted.

Even more important is that policymakers can choose to offset any decline in property values by raising property tax rates. Because state-imposed property tax levy limits are linked to the levy amount, there is no legal impediment preventing local policymakers from raising rates to ensure they are receiving at least the same amount of property tax levy from year to year despite a decline in values. The levy limits would generally prevent them, however, from increasing tax rates by an amount that would yield an increase in the operating levy that exceeds the increase in net new construction.

The problem is that businesses and individuals aren’t likely to have money to spend on new development with all of the job losses and spending cutbacks in many sectors, so there won’t be any new construction to allow for those levies to go up. Governor Evers did ask for a 1% increase in shared revenues to local communities, in his multi-part proposal for dealing with the COVID-19 fallout, which theoretically would lessen the amount of property taxes for this coming year. But nothing has been done on Evers' proposals as of this time, and the bills don't change levy limits either.

Another complication involves the fact that many people won’t pay their property taxes at all, if they’re out of work and/or out of business.

An immediate concern for many cities and villages is the almost certain substantial increase in delinquent property tax payments. While 2020 property tax bills were issued in December 2019 and some property owners paid those bills in full by the end of the year for tax purposes, most local governments give citizens the opportunity to pay their bills in installments during the first several months of the following year. Consequently, when the crisis hit, many governments had received only a portion of the taxes owed for 2020, and they may have difficulty collecting some unpaid amounts.

While creating an immediate cash flow challenge, unpaid property tax bills should not be as big a concern for many municipalities over the longer term because they turn over their delinquencies on real property to their county government to collect and they are paid in full for the unpaid taxes. Counties may benefit from this arrangement – depending on their success in collecting – by also charging interest-based fees for late payments. Municipalities do collect delinquent taxes on personal property such as certain equipment, but that is for lesser amounts.

Preventing homeowners and others from having penalties for delinquent taxes on their 2020 taxes is something the WisGOP Legislature had in their draft plan for COVID-19 relief, assuming some kind of "COVID repair bill" goes through next week. But while that'll help people that are behind in the short term, that won't make a big difference for local governments if businesses aren't around to be assessed and taxed for their 2021 bills.

And it seems logical that many businesses will not be assessed for what comes out at the end of this year, or if they got assessed, many of those bills will not be paid, leaving a sizable budget hole for 2021 in those communities. With less money coming in from businesses, that will leave it up to homeowners to make up the difference, based on home values that are still high (especially given that assessments have likely already happened). In a time when a lot of people are suffering hits to their income and struggling to pay bills, that is likely to translate into notably higher property taxes.

There's also another variable that seems like to raise property taxes. The Lottery tax credit was projected to give a lot to Wisconsin homeowners this Fall, based on sales staying strong in this fiscal year after 2 years of growth. Those projections were still on track when the Department of Revenue gave this report to Joint Finance 3 weeks ago.

But now lottery sales are crashing due to people not going into stores and gas stations, to the point that Powerball and Mega Millions are lowering their jackpot totals. As a result, we will either have to make up the difference through state tax dollars (beyond the $138 million in tax dollars in this budget that we are already giving toward the lottery), or homeowners will see even more taxes (due to smaller write-offs) in their bills.

And while there might be short-term aid coming from the Feds to bail out the state and local communities for the next year, a new budget cycle will start to be discussed in 9 months. And the State of Wisconsin will likely struggle to make its own ends meet, let alone have the flexibility to give much more in shared revenues to the locals.

You thought all the wheel taxes in Wisconsin during the Age of Fitzwalkerstan were bad? Look out folks, there are going to be serious local funding issues to be figured out for the 2020s, now that a decade of neglect from the state will be combined with Wisconsin's local communities not making any money themselves.