September 2000

TO: Dr. Don Kettl

FROM: Edward J. Huck

RE: Regional Tax-Base Sharing

At your and West Allis Mayor Jeannette Bell's request, here is an outline of tax-base sharing and how it relates to possible regional solutions for the delivery of services by Wisconsin's state and local governments.

In our state's historic partnership between state and local governments, Wisconsin shared a state tax base with local governments. Wisconsin is unique in the role it has played since 1911, when 70% of revenue from the new income tax was shared with municipalities, and 20% was shared with counties. Until now, there has been no review of the partnership.

As it has evolved, state shared revenue is a mechanism for sharing the benefits of the more progressive income tax and other statewide general revenues in order to mitigate the rapid suburbanization that brought with it the separation of rich and the poor in different municipalities.

In order for the program to work, the pot from which shared revenue is distributed must grow at an adequate rate. That rate is determined by two things; the fiscal health of the state and the willingness of the Legislature to live up to its responsibilities under the state-local partnership. One is threatened by business fluctuation, the other by politics.

In fact, the main shared revenue program has been frozen at $950.6 million since 1995.

2. THE MINNESOTA MODEL FOR TAX-BASE SHARING

In 1971, the Minnesota Legislature adopted a tax-base sharing system, under which each community in the Twin Cities region contributes to a regional pool 40% of the growth of its commercial and industrial tax base since 1971. Money is distributed to each community from the pool based on lack of commercial and industrial tax base. Currently about $393 million a year, or about 20% of the regional tax base, is shared each year.

In 1995, Minnesota's governor vetoed a plan that the Legislature approved to share the growth in value above $200,000 on high-value homes. Had the plan been adopted, 83% of communities in the region would have received tax base from the remaining 17%.

• Ideally, tax-base sharing should use total values. Using the increase in value, while politically more feasible, locks in existing inequities. A way to get around that drawback is to combine tax-base sharing with state shared revenues.
• Minnesota's system shares only the growth in commercial and industrial property values. As a result, communities with high residential property values but little commercial and industrial base benefit disproportionately under the Minnesota model.
• Minnesota's system can't be translated directly to Wisconsin, because the Wisconsin Constitution has a uniformity clause, and Minnesota doesn't. That results in entirely different tax treatment of residential property in Minnesota compared with other classes of property.
• Minnesota shares only property tax base. That doesn't take into account some of the same factors that are ignored by Wisconsin's shared revenue system: personal income and need.

One possible alternative would be to merge the current state shared revenue program with tax-base sharing. Under this program each municipality will have a tax base of the following: all residential, commercial and industrial property values within its borders less a percentage of the total net growth over the prior year. This percent of growth, as the growth of all property with the metropolitan area, will become part of the pool. As always the tax base (less the percent for the pool) will be used by all taxing entities, including overlapping taxing districts. The pool will be comprised of value increments times the local tax rate of the municipality. The pool, which is governed by a board, would distribute the money on some kind of need basis. The value increments dedicated to the pool would not be counted in the school aid formula.

The tax-base pool this plan envisions could be substantial: 40% of the statewide growth in equalized value in the past year amounts to $7.9 billion. At the statewide average property tax rate in Wisconsin of $21.30 per $1,000 of value, that would raise $168.2 million. At the municipal rate it would raise significantly less.

In Wisconsin's metropolitan areas, the growth in equalized values looks like this:

The growth in values in Wisconsin's metropolitan areas represents nearly two-thirds of the entire growth in equalized values statewide.

The column labeled "40% of growth" is included for illustrative purposes only. The percentage of growth that would be assigned to a regional pool if a tax-base sharing plan were adopted would have to be the subject of more careful analysis than I can make at this time.

Tax-base sharing can contribute to a reduction in the growth of, if not a decrease in, overall tax burden.

While tax-base sharing is a mechanism that reduces fiscal disparity, its main focus is to close the gap between services that citizens expect to receive - the Badger Birthright, if you would - and local government's ability to finance those services, it has some significant side benefits. It can support regional objectives such as planning for roads, development with better environmental considerations and consolidation of municipal services, which can reduce spending both by the state and local governments. It also reduces the competitive struggle for tax base that currently drives our fragmented industrial development policies here in Wisconsin.

If Wisconsin should decide to use regional tax sharing for the Metropolitan Statistical Areas (MSAs) to either supplement state shared revenues or replace state shared revenues, no single formula is likely to meet every region's public policy needs.

In needs and expectations from government, Dane County and the Milwaukee metropolitan area are light years apart. If revenue other than property taxes is shared, the formula for redistributing the shared tax base may be different from region to region.

Secondly, a state revenue-sharing system would need to be maintained in order to take care of the municipalities outside of the metro areas. What is most difficult is maintaining an equalization element.

Setting public policy goals is essential. As you know the current shared revenue formula is based on the property value per capita compared to a state per capita standard value and local spending.

Let's take each variable separately. First, revenue sharing does not have to include just property tax increments. Revenue sharing could include increments of all the taxes currently collected by the state within the region. It could include 40% of all new property value growth. It could include 60% if one wished to force development into established municipalities.

It is likely, however, that it would not require as great a percentage of growth as Minnesota's 40%, because in Wisconsin we would be using the entire property tax base while Minnesota does not.

Or, the pool could consist of all growth in property values since 1990. That is $107.6 billion statewide. Incredibly, equalized value growth in Wisconsin in the past decade has been 76%, not adjusted for inflation.

The bottom line is each formula has its policy and political pluses and minuses. Measuring of tax capacity will depend on the taxes included in the revenue raising element.

Spending is another important issue. Many have criticized the current shared revenue formula because it rewards spending. One alternative is to base the formula not on spending but on need. Most stressed communities have common variables that create spending pressure above their capacity to raise necessary revenues. Those variables include: age and density of housing stock; density and density squared of population; percent of the state's population living below the poverty level; number of children receiving free or reduced priced lunches; etc.

Comparing each municipality within a region on each variable would allow for a ranking of relative need in the metro area. Then the gap between need and tax capacity could be measured. It all depends on the public policy goals.

Finally, it should be apparent that the state does not currently collect and update necessary data in order to examine all the potential public policy alternatives. Once again the need for a centralized public policy body to collect data, examine the implications of that data and make recommendations for solutions becomes paramount.

I realize this memo does not solve your current dilemma. However, metropolitan revenue sharing can have a place in Wisconsin's future. Once the public policy goals are established and data collected, the formulas can be created. I truly hope your commission takes this into consideration and agrees.

Thank you for this opportunity. If you have any questions, please call.

(Huck is executive director of the Wisconsin Alliance of Cities, which represents 38 major cities, ranging in size from Milwaukee to Ashland, on state/local issues)