Less aid, less hotel $ + higher property taxes. Local govts are crunched

Two items in recent days illustrated the crunch that local governments are looking at as they determine next year's budgets. Both deal with a lack of state aids - one is yet another instance of a lack of shared revenues that dumps more of the burden onto local governments, and the other is dealing with the higher property taxes that homeowners are likely to face this December.

The first item comes from the Wisconsin Policy Forum, who released an intriguing report on the state's Payments to Municipal Services program this week. First of all, let's allow the Policy Forum to explain what this program does.

The payments offset the share of the cost of providing fire, police, and waste removal services to state facilities that otherwise would be borne by local property taxpayers. Other municipal services to state facilities, such as water, sewer, or electrical, are paid for by the responsible state agency in the form of user fees. While counties may not receive direct payments under the program for services such as law enforcement, they may be repaid indirectly through an inter-governmental agreement with the municipality where the state facility is located.

Because state agencies don't pay property taxes for their buildings, this is basically a services agreement allowing the locals to give protective services, pick up garbage, and perform other duties for these buildings.

The Policy Forum notes that these buildings are taking up a higher proportion of land values in many Wisconsin communities, if they were able to be counted on the property tax rolls.

The formula used to calculate MSP entitlements increases a municipality’s entitlement if there is an increase in the ratio of the property value of its state facilities to the values of all of its private real estate improvements, such as buildings. Land values, private or public, are not included in the state’s formula and neither are state highways. In the municipalities receiving payments, this statewide ratio increased in the last decade, from about 5.4% in 2009 to about 7.2% in 2019.

In one key example, the city of Madison in recent years saw the construction of large facilities such as the Hill Farms state office building and numerous buildings on the University of Wisconsin-Madison campus. This caused Madison’s ratio of state facility values to those of all real estate improvements to increase from 20% in 2009 to 23.8% in 2019.

The problem is that what the state is giving these communities isn't nearly as much as they could, if they fully funded the program.

State funding to reimburse municipalities for services linked to state-owned facilities was about $18.6 million in 2019, or 34.7% of what communities were eligible to receive — the smallest share on record (see Figure 1). This resulted in a total funding gap of more than $35 million for municipalities last year.

Not surprisingly, Madison gets the worst of this arrangement, as it could get another $15.8 million from the state if it fully funded the program. Yes, I know that having a lot of state jobs and the flagship UW school adds a lot of demand for property that might otherwise not exist, which raises tax base. But the Policy Forum notes that if the Mad City got that extra $15.8 million from the state, it would be double the $7.9 million that Madison motorists paid in the new $40 wheel tax this year...so there wouldn't be a need for the wheel tax.

When these services are dumped onto local governments, it often falls on the property tax to pay for them. And we found out Wednesday that Wisconsinites are already susceptible to higher property taxes this Winter, because the Legislative Fiscal Bureau gave their projections of how much the state would give out in the Lottery Fund, and it's taking a dive vs last year.

Lottery Fund property tax relief

Dec 2019 actual $271.74 Million

Dec 2020 budget $256.58 Million (-$15.16 Million vs 2019)

Dec 2020 actual $238.11 Million (-$33.63 Million)

So there's another $33.63 million in property taxes that Wisconsinites will be paying in a couple of months. On top of many of them facing higher bills due to the Bubblicious property values in their community.

Let me also remind you that another source of local government funding has also collapsed, and that's room taxes. Channel 6 in Milwaukee had this piece that followed up on an alarming report from the state's lodging industry.

"We've been saying a long time that our industry is devastated," said Bill Elliott, Wisconsin Hotel & Lodging Association president and CEO. "Now we're really seeing it start to take effect."

Elliott said the extent of damage caused by the COVID-19 pandemic is becoming clear. A recent internal survey shows a staggering 47% of Wisconsin lodging establishments could be forced to close in the next year without loan or grant assistance.

"We need help from the federal level," said Elliott. "We need help from the state level."

More than 50% of hotel staff in the state remain furloughed or laid off.

With fewer people staying in hotels, that means fewer room taxes for pay for services that the community relies on. And since almost all cities, towns and villages don't have sales taxes, that means the amount of resources that the property tax pays for becomes higher and higher....until it reaches the state's levy limits, which leads to layoffs and other cutbacks.

This is what's ironic about GOP complaints over defunding the police. Wisconsin's local governments have been so squeezed by the lack of shared revenues due to previous GOP policy, and the lack of lodging receipts due to the GOP President's botched response on COVID-19, that they likely will have no choice but to consider reducing police costs as they consider their 2021 budgets in the coming months. Among other things.