This presentation was made to the Wisconsin State Assembly’s Committee on Community Development on October 23, 2019, during an informational hearing on housing, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, and their relationship to community development and growth.
This testimony drew from the property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. recommendations set forth in Wisconsin Tax Options: A Guide to Fair, Simple, Pro-Growth Reform. During the process of researching and writing this publication, our team visited the state numerous times, speaking with Wisconsinites in all four corners of the state about what’s working (and what isn’t) in Wisconsin’s tax code.
During those conversations, many Wisconsin residents expressed frustration over the state’s high property taxes: Wisconsin has the 6th highest average property tax rate on owner-occupied housing and the 14th highest property tax collections per capita.
While Wisconsin’s property taxes are indeed high compared to much of the rest of the country, the state is doing many things well in terms of how its property tax is structured. The strong Uniformity Clause in Wisconsin’s constitution promotes neutrality by requiring (with limited exceptions) all real property within a community to be taxed using the same rates and assessment ratios.
Wisconsin also avoids many pitfalls that remain all too prevalent in other states, like estate and inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. es, inventory taxes, capital stock taxes, and other duplicative and distortive taxes on intangible property. Additionally, Wisconsin has dramatically reduced its reliance on tangible personal property taxes (TPP) over time, an antiquated tax with little justification for inclusion in a modern tax code. Moving forward, Wisconsin policymakers ought to continue working to eliminate TPP taxes entirely.
While Wisconsin’s real property taxes remain high, they have been on a downward trajectory in recent years. Over the past decade, Wisconsin’s property tax levy limits have reduced overall property tax collections by limiting the amount by which local property tax revenue can grow apart from voter approval. Levy limits like Wisconsin’s are less distortive and more effective than most assessment limits and rate limits employed in other states, but policymakers ought to remain cognizant of how property tax limits can, over time, contribute to increased state subsidization of local public services.
Currently, Wisconsin’s local governments rely heavily on non-local revenue sources, with cities and counties receiving 43 percent of their funding from the state (compared to the national average of 32 percent). Much of this comes from Wisconsin’s shared revenue program, which allocated $822 million in state revenue to local governments in 2017. Tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s are another factor: the state currently offers multiple credits to offset taxpayers’ property tax liability, both by reimbursing local governments for revenue lost to property tax credits and by offering state income tax credits to compensate taxpayers for some of the amount they pay in property taxes. There’s no doubt tax credits are politically popular, but it’s important to keep in mind that these policies divorce local spending from local revenue collection and increase reliance on more economically harmful taxes like the income tax.
Ultimately, taxes exist to generate revenue for government services, and tax structure is all about trade-offs. As much as possible, the tax code should aim to raise revenue in an economically efficient manner while keeping tax burdens as low as feasible.
Wisconsin would therefore do well to preserve the many competitive features in its property tax structure, while taking steps to further enhance its neutrality. In conversations about large-scale tax reform, however, the highest priority ought to be given to areas of the tax code where the state’s economic well-being is most at stake: namely, the income tax.
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