Analysis of a Local Sales Tax
in the City of Milwaukee
Carrie Hoback
Michael O’Callaghan
Alan Paberzs
Allison Schill
Samuel Wayne
Prepared for the Budget Office of the Division of Budget and
Management (DBM) of the City of Milwaukee
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Presentation Outline
1. What is Milwaukee’s current fiscal situation?
2. What are other cities doing?
3. How will a sales tax affect the economy?
4. What is the tax incidence of a city sales tax?
5. Revenue estimates: how much can it raise?
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Problem Statement
Costs of providing public services are
increasing at a faster rate than available
revenues creating a “fiscal gap”
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Revenue Sources
• State Aid (30%)
– Revenue receipts declining since 1999
– Projected to decline at rate of inflation
• Property taxes (25%)
– Political realities limit growth
– Projected 2% growth per year after inflation
• Other Revenue (User fees, etc.) (45%)
– Fees, charges not intended to cover general costs
– Projected to grow only at rate of inflation
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Expenditures
• Cost of maintaining current service levels projected to
increase annually at 0.73%, after inflation
• Projections
– 80% of the City budget is personnel related.
– Personnel cost increases 2006-2015:
Average difference of Consumer Price Index and
Employment Cost Index from 1996-2004.
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Milwaukee’s Projected Fiscal Gap
Projected Fiscal Gap in the City of Milwaukee, 2005-2015
(in 2004 dollars)
Dollars (in millions)
$860
$840
$820
$800
$780
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Year
Projected Expenditures
Projected Revenues
Source: Authors’ calculations
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Policy Question
Is a city sales tax a good way
to close the fiscal gap?
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What are Other U.S. Cities Doing?
• Cities with at least 250,000 residents (67)
• 43 of 67 large cities have a city sales tax
• Rate ranges from 0.5% to 4%
• Most common rate is 1.0%
• Most common collection mechanism:
– “Piggy-back” approach – state collects all sales tax
and sends back portion to city
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Geographic Distribution of City Sales Taxes
(Pop. Over 250,000)
1.0% or less
1.0-2.0%
2.01% or9 more
How will a City Sales Tax Affect the Economy?
• A local increase in the sales tax might
cause people to try to avoid the tax.
– Example: Going to suburbs to buy a new TV
• Analysis:
– Model the expected consumer reactions
• Cost of travel
• Distances from each city zip code to city shopping
centers and suburban alternatives
• Determine price at which at which a “costminimizing” shopper would leave the city
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Results of Lost Sales Model
• Assume 50% of residents are “cost-minimizers”
• 0.5% Tax
• 0.75% Tax
• 1.0% Tax
 0.47% decline in sales
 0.59% decline
 0.72% decline
• These are similar to academic predictions
• Projected declines in sales are modest and
should be considered acceptable losses
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Return to the Problem: Fiscal Gap
• If not solved with sales tax, then what?
• We assume that the alternative to a city
sales tax is an increase in the property tax
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Tax Incidence
• Property Tax vs. Sales Tax
• Residents and Nonresidents
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Tax Incidence on Nonresidents
• Property Tax Exporting
– Residential, Commercial, Manufacturing, and
Personal Property
– An estimated 25 percent of property tax is exported
• Sales Tax Exporting
– Three Mechanisms
• Commuters
• Visitors
• Business purchases borne by nonresidents
– An estimated 42 percent of sales tax is exported
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Tax Incidence on Residents
• Why so important?
Milwaukee has higher proportion of low-income
residents than the rest of Wisconsin
• State of Wisconsin Household Incomes
– 27% under $27,500
– 20% over $82,000
• City of Milwaukee Household Incomes
– 38% under $27,500
– 12% over $82,000
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Tax Incidence: Property vs. Sales
(Drawing local conclusions from state data)
8%
7%
Effective Tax Rate
6%
5%
4%
3%
2%
1%
0%
poorest 20%
2nd 20%
3rd 20%
4th 20%
Next 10%
Next 9%
Top 1%
Household Group
Sales Tax
Property Tax With Refundable Credits
Property Tax Without Refundable Credits
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Source: DOR Tax Incidence Study
Tax Incidence Conclusions
– Sales tax is similarly regressive to a
property tax
– More exporting potential with sales tax
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Estimating Sales Tax Revenue for
the City of Milwaukee
• Choosing a Reasonable Range
– 0.50, 0.75, and 1.00%
• Forecasting Sales Tax Revenues
– Methodology
•
•
•
•
Milwaukee County Sales Tax Revenues
Consumer Expenditures by Zip Code
Annual Growth in Real Personal Income
Accounting for Economic Competitiveness
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Sales Tax Revenue Estimates
Estimated Sales Tax Revenues for City of Milwaukee
in 2004 dollars (millions)
Sales Tax Rate(% )
Year
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0.50
$41
$42
$43
$45
$46
$48
$50
$51
$53
$55
0.75
$61
$63
$65
$67
$69
$72
$74
$77
$79
$82
1.00
$81
$84
$86
$89
$92
$96
$99
$102
$106
$109
Source: Authors’ Calculations
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Closing the Fiscal Gap
Projected City of Milwaukee Revenue with a Sales Tax and Currently
Projected City Expenditures and Revenues, 2005 to 2015
$920
2004 constant dollars
(in millions)
$900
$880
$860
$840
$820
$800
$780
2005
2006
2007
2008
2009
2010
2011
City Expenditures
Year
City Revenues
City Revenue with
0.75% Sales Tax Revenue
City Revenue with
1.0% Sales Tax Revenue
2012
2013
2014
2015
City Revenue with
0.5% Sales Tax Revenue
Source: Authors’ Calculations
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Conclusions
• A city sales tax of 0.75% would fill the fiscal gap
• Small decrease in total city sales (0.6%)
• Larger exporting potential than property tax
• Burden on low income residents similar to a
property tax
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