October 19, 2000

TO: Professor Don Kettl
FROM: Edward J. Huck
RE: Tax-Base Sharing

In response to your e-mail, I can only elaborate slightly on the potential for tax-base  sharing in Wisconsin at this time, but the potential certainly is huge. In Racine County, for example, the growth in commercial, manufacturing and residential property values over the past five years was $1.7 billion.¹

Our organization has not taken a formal position on the issue of tax-base sharing, so I submit this as a private citizen with many years of experience working closely with the leaders of the state's largest cities.

I. Tax-Base Sharing as Part of a Regional Approach to Governance

But tax-base sharing need not be accomplished in one fell swoop. It could be phased in regionally to meet regional needs. This requires recognition by policymakers that we each are part of a regional economy, and our political and economic interests cross political boundaries much more than they follow them.

We don't have a perfect way of defining our regional economies today, but as you know the Office of Management and Budget in Washington is redefining Metropolitan Statistical Areas and urban areas, and soon we may have a better way of defining the economic engines that so greatly determine our fortunes.

In keeping with the Kettl Commission's citizen-centered philosophy, let's call these regions  Common Interest Areas, notwithstanding the unfortunate acronym. These CIAs would follow MSA lines or officially designated urban areas expanded to include census tracts in which 25% or more of the population is employed in the MSA or urban area.

If the Legislature creates Common Interest Areas using this approach, that will make CIAs dynamic, not static. They can be a new way for government to look at a region. Both state and local governments can use them to look at the area in terms of transit planning, arterial road planning, state highways and other transportation modes to move commerce and workers.

Other areas ripe for a Common Interest Area approach:

• Economic development based on existing industry.
• Cluster development of related industries to reduce the bottom line of existing industry, reinforce natural agglomeration and foster better location decisions that reduce auto and truck trips.
• Housing policies that reduce the concentration of poverty and race.
• Workforce development policies that educate and train worker for the industries that we already have.

But it is tax-base sharing that pays dividends to Common Interest Areas by reducing the desire of individual communities to compete for a business without regard to the unintended consequences — poor land-use decisions, environmental degradation, separation of poor people from jobs. CIAs allow all the local governments in the region to share in the rewards of an expanding economy. They also can help equalize the ability of poorer communities to provide basic services at reasonable tax levels.

To borrow a caveat from the Citizens League of Minnesota's analysis of tax-base sharing in Minnesota, tax-base sharing "is only one part — and by no means the most significant part — of a complex state strategy for equalizing revenue-raising capacity among communities."

Like Minnesota, Wisconsin has other strategies, including state school aids and state shared revenues.

But the Citizens League concluded that tax-base sharing is the only regional equalization tool among Minnesota's array of tax policies. If Wisconsin were to adopt regional tax-base sharing, the impact on school taxes, as in Minnesota, would be small. And the impact on overall taxes, as in Minnesota, would likely be moderate. But the impact for individual communities could be significant.

For the purposes of discussion I am offering the following models. They are based on formulas developed by the Metropolitan Area Research Corporation of Minneapolis. These could be combined, applied invidually, or other options could be introduced into the discussion.

The first models deal with the "pot of dollars" in a region's tax base. The pot of dollars could consist of the value of all pieces of real or personal property valued at more than a certain sum. It could consist of 15% of the tax base or 40% of tax-base growth over the last 10 years. It could consist of new growth and use existing state shared revenues as the base. It also could include a regional sales tax or regional income tax (linked to the taxpayer's place of residence) or a regional employment tax (linked to place of employment). Hold harmless provisions, or better yet caps on winning municipalities, may be necessary for political considerations.

To provide some ideas as to possible formulas, three alternatives follow.

The first alternative is based on income:

1. First take the average income per capita for the region. Next divide it by the average income of the municipality. This creates the "income index."
2. The "income index" is multiplied by population. This gives you the "distribution index."
3. Each municipality's individual "distribution index" is divided by the sum of all the region's distribution indices to determine the percent of the "pot" each municipality will receive.
4. Finally, the amount each of the municipalities has contributed is compared to the amount each of the municipalities is to receive to determine if there is a payment and how much.

This formula can be modified for poverty, or property tax base:

• (Avg Regional Income ÷ Avg Local Income) x Population = Income Index
• (Regional Poverty Rate ÷ Local Poverty Rate) x Population = Poverty Index
• (Regl. Property Values ÷ Local Property Values) x Popl. = Prop. Val. Index.
• Chosen Distribution Index (or mix) ÷ Regional total = Community's Share of Pot.

As I stated in my earlier paper, the distribution system can vary from region to region. The state could approve a variety of acceptable formulas and allow each region to decide which would best fit the region. If a region could not decide, one formula would be established as a fall-back formula. However, if property value is combined with a non property tax revenue source, with a base of state revenue for very poor property-value communities, winners should be more abundant. Fundamentally, unless tax-base sharing uses large chunks of property tax-base, the state shared revenue formula is more equalizing. Any tax-base sharing program should either supplement state shared revenues or include non-property-tax revenues.

Attached are printouts demonstrating the potential for tax-base sharing in Racine County, and a Minnesota Citizens League report on growth in the Twin Cities "fiscal disparities" pool, available at http://www.citizensleague.net/mj/2000/01/fiscal_disparities.htm.

Finally, let me recommend two sources for help in "putting some meat on the bones" of my earlier paper: Mr. David Wood, Senior Associate with the Center on Wisconsin Strategy, and Professor Myron Orfield, President of the Metropolitan Area Research Corporation. David can be reached at dwood@ssc.wisc.edu; Myron can be reached at morfield@metroresearch.org.

Thank you for inviting my input.