GUEST COLUMN

Limiting taxes
would hurt economy

By Andrew Reschovsky

Last week four members of the Legislature proposed freezing property tax levies for the next two years. Under this proposal, if your city or your school district had $1 million in property tax revenues this year, they would not be allowed to collect a penny more next year and the year after.

Property taxes are used to finance police and fire protection, to maintain parks and libraries, to collect the garbage, and to provide clean and safe water, and of central concern to most Wisconsin residents, to provide our children with a high quality education. Combined with the reductions in state aid needed to close the state’s $3.2 billion deficit, this proposal will inevitably lead to big cuts in these public services.

Add to this the fact that the amount of money needed to maintain public services rises from year to year. Like everyone else, our police officers, firefighters, and teachers expect to receive at least modest raises each year. In addition, local governments must deal with rapidly rising health insurance costs and with price increases in everything from gasoline to power fire engines, police cars, and snow plows to paper on which to print property tax bills.

Over the past few years, state policy has imposed considerable fiscal discipline on both school districts and municipal governments. Annual spending increases have been limited for schools, while most local governments have had to restrict annual spending increases to below the rate of inflation as a condition for receiving state aid. As a result, most local governments in Wisconsin are operating quite efficiently. There is thus little question that the net effect of rising costs and frozen property taxes will be larger class sizes and smaller course offerings in our schools, and less police and fire protection, less frequent garbage collection, closed libraries, and fewer health and social services for the needy.

Given these consequences, why would members of the legislature propose freezing property taxes? According to press reports, they apparently believe that any property tax increase would be "bad" for the Wisconsin economy because it would discourage economic development within the state.

True, no one likes higher property taxes. However, a large body of research shows that the decisions by businesses and individuals to locate in any given state depend on the mix of public services and taxes. Tax cuts accompanied by reductions in public services are likely to weaken, rather than strengthen, Wisconsin’s competitive position.

UW Business School professor Stephen Malpezzi, one of the country’s leading experts on economic development, recently concluded that "research consistently fails to find a strong link between state and local government taxes and economic growth. It is the tax and services mix that matters." The fact is that few businesses and individuals are going to move to Wisconsin just because property taxes are a little bit lower. The evidence shows that they will pay higher taxes if these taxes pay for services they value, such as safe streets and high quality public schools.

Wisconsin has a number of characteristics that are important for its continued economic growth. These include a highly educated labor force, a generally clean environment, modest housing prices (at least compared with much of the rest of the country), and a tradition of high quality public schools and well-managed local governments. As the Legislature struggles with finding ways to balance the state’s budget, it is particularly important that it not take actions, such as prohibiting property tax increases, that would jeopardize the quality of local municipal services and public education.

Rather than limiting property tax rates, the Legislature should consider policies such as an expansion of the Homestead Credit that would target property tax relief to specific taxpayers facing high property tax burdens.

Andrew Reschovsky is a professor of public affairs and applied economics at the University of Wisconsin-Madison.

(Reprinted with permission.)