Federal tax reform is grabbing attention nationally, even though its likelihood is uncertain. It’s the opposite in Wisconsin. Important property tax reform has been progressing incrementally, but few have noticed.
What reform is, and isn’t
At the outset, it should be said that tax cuts are not necessarily tax reform. Cutting tax rates but leaving a complex, outdated tax system is akin to the proverbial lipstick on a pig.
Reform has an element of design and intention. It can modernize or rebalance a tax system. It can simplify a tax by omitting tax breaks and lowering tax rates.
Tax reform is goal-oriented. It can ease the compliance burden of taxpayers, reduce tax-agency administrative costs, promote economic efficiency and growth, or enhance equity. Tax fairness, of course, has as many meanings as there are taxpayers.
Failed relief, flawed system
Since 2014, Wisconsin’s reforms have come largely from the legislature and focused on the property tax – with good reason. First, at nearly $11 billion per year, it is the state’s largest tax, even though it is mostly local. Surveys also show it to be the least popular tax.
Second, in the past century, even though the state tried to relieve property taxes by periodically increasing aids to schools and local governments, as well as state credits on local bills, levies still rose. State-imposed revenue and levy limits have slowed growth in dollar amounts but not reversed them.
Third, the property tax is the state’s most confusing and among its least transparent taxes. Unlike income and sales tax rates, property tax rates are not fixed but float with spending and property values. The assessment process is widely misunderstood, and the tax impact of valuation changes is even less understood.
The property tax’s biggest flaw, however, is probably its broad use. In the Badger State, six types of government have levied the tax: the state, technical colleges, school districts, counties, municipalities, and special districts, such as lake districts.
This “many-fingers-in-the-property-tax-pie” phenomenon has made it nigh impossible for citizens to hold those levying the tax responsible for their actions.
The litany of blame is familiar. State officials blame their local counterparts for high property taxes. Local officials, in turn, blame the state for inadequate aid. And, with so many governments levying property taxes, they all point fingers at each other.
Taxpayers are left confused, compromising a fundamental principle of representative democracy. Since citizens cannot identify the source of any tax discontent, those levying taxes cannot be held accountable at the ballot box.
Lesson suggests new direction
For all these reasons, a number of analysts and lawmakers have come to realize that, despite attempts to reduce property taxes, state efforts have been a mixed success.
About half of the state’s general fund budget goes to various forms of state assistance to local governments. Yet, new census figures for 2015 show Wisconsin’s property tax ranks 15th highest in the U.S. and 11 percent above the national average.
In 2014, state legislators showed this history had taught an important lesson: An alternate approach to property tax relief is to reduce the number of governments using the tax.
That spring, they committed $406 million to “buying down” the technical college property tax and limiting its future growth. When tax bills came out that December, the “tech college” levy had been halved from $797 million to $417 million.
That summer, the legislature created two committees to look at tech college funding and the personal property tax.
Since 1848, Wisconsin has chipped away at the personal property tax on furnishings, livestock, crops, machinery, inventories, and so on. It is now so riddled with exemptions and inequities, that some ask: Does tax revenue amounting to less than 2.5 percent of all levies warrant the public and private costs of collection?
Steps to reform
Fast forward to the 2017-19 state budget that removed the personal property tax from machinery, tools and patterns (not considered manufacturing property) and provided $74 million in state income and sales taxes to compensate local governments for lost revenue. The move reduces taxable personal property to less than 1.5 percent of all full-market property value statewide.
The newly enacted budget took an even more important step by using about $90 million annually in income and sales taxes to end state government use of the property tax (for forestry purposes).
Status report and next steps
Taken individually, ending the state forestry tax and reducing the personal and tech college property taxes are small steps toward reducing the property tax.
Taken together, these moves are significant. Wisconsin is within striking distance of permanently eliminating what this year would be about seven percent of all property taxes. It has eliminated the state property tax and is positioned to permanently end the tech college tax, as well as the personal property tax.
Finishing the job, perhaps in the next state budget, will not be a cake walk. The new state general fund budget spends $233 million more next year than its revenue. That imbalance must be corrected in preparing the next state budget.
Nevertheless, Wisconsin is poised to pull two fingers from the property tax pie. That would simplify the state’s largest tax, limiting its use mainly to schools, counties and municipalities. Doing so would increase the public’s understanding of the property tax and its ability to hold local officials accountable.
While Washington talks tax reform, Wisconsin has quietly and incrementally “walked the walk” toward real property tax reform.
Since 1955, the Wisconsin Taxpayers Alliance has published the state’s only textbook on state and local government. The 19th edition of Your Framework of Wisconsin Government is now out. Complementing the text is a digital tool kit for teachers full of extra teaching and learning materials. Learn more at wistax.org.