Bonds

Legislative proposals would lift Milwaukee, take bite out of St. Louis

The fiscal health of two major Midwest cities would take divergent paths under tax-related legislation being pursued at their state capitals.

The Missouri House this week approved and sent to the Senate legislation that would strip St. Louis of its ability to collect an earnings tax on remote work.

In Wisconsin, the legislature’s GOP majority this week unveiled a plan to raise local governments’ revenue sharing aid while also giving Milwaukee the opportunity to raise its sales tax for pension funding.

The Missouri legislation would exempt non-resident workers of Kansas City and St. Louis from paying those cities’ 1% earnings tax for work done remotely, beginning with tax returns filed after January 2024. Remote workers could also seek refunds. Kansas City already is exempting such work from its earnings tax.

That’s not the case for St. Louis.

“This is critical to the finances of our city,” said state Rep. Del Taylor, D-St. Louis, noting the city’s reliance on the funds for public safety. Backers say it’s only fair that the city be barred from collecting taxes for the work they do for city businesses if done remotely.

St. Louis officials warned that its 2022 earnings tax collections of more than $206 million represent its single largest revenue stream and account for more than one-third of its general fund budget, and say the legislation could eliminate as much as half that revenue.

“The potential loss of revenue which could exceed $100 million annually would jeopardize the city’s ability to maintain basic city services,” the legislature’s fiscal note reads quoting city commentary. “A loss of revenue of this magnitude would be a devastating blow to the city’s credit and fiscal condition, and would seriously impair the city’s ability to provide basic city services.”

The earnings tax must be renewed by city voters every five years and voters last approved it in 2021 by a 79% margin.

“The proposed legislation would seek to place further requirements by expanding the retention vote to voters not residing within the city itself which would be an intrusion into the city’s right of self-determination on a major fiscal issue and raises serious questions as to fairness on a variety of other taxes paid to municipalities throughout the state by non-residents of those municipalities,” the city warned in the fiscal note.

The fiscal note on House Bill 589 put the potential loss at $66 million but that was based on 2021 collections of $152 million and the state budget office’s calculations using U.S. Census Bureau data.

“The fiscal impact depends upon the number of workers (taxpayers) telecommuting or working remotely in St. Louis city. Work circumstances in future years may differ substantially from 2020/2021,” the fiscal report notes.

A dispute over the earnings tax on remote workers is also playing out in state courts. In January, a circuit court judge ruled in Boles v. City of St. Louis in favor of six non-residents who challenged being taxed on their remote work in 2020.

The city has appealed the ruling. Prior to the pandemic, the city had issued refunds for remote work but they declined to do so beginning for 2020 filings. While the ruling only impacted the six plaintiffs, class action status could be sought.

Wisconsin
Sweeping changes to Wisconsin’s local government funding are afoot and have support from the legislature’s Republican majority and Gov. Tony Evers, a Democrat, but they’ve yet to reach a final agreement.

Republican leaders unveiled their proposal earlier this week but changes are expected. Evers, who earlier this year unveiled his own proposal, has not commented.  

Milwaukee and other local governments have been clamoring for increases in their stagnant aid for years and for Milwaukee the issue has grown more pressing with a looming hike in pension contributions.

Under legislation filed this week, one penny from the state’s five-cent sales tax would go to help lift funding by about 10% for local governments. Milwaukee currently receives $218 million.

The state would establish a new program providing $227 million for public safety.

Milwaukee could also pursue a referendum to levy a 2% sales tax to help fund its pensions and Milwaukee County could seek to raise its .5% sales tax by .375%. New city and Milwaukee County employees would participate in the Wisconsin Retirement System. The city has said it could raise $120 million annually and the county $75 million from the sales tax measure.

“We’ve held our communities frozen since 2004, requiring them to cut fat in their budgets and find efficiencies. Many have fulfilled that request, and are now at the point where they cannot cut anymore — because there’s simply nothing left to remove,” state Sen. Mary Felzkowski, R-Tomahawk, said in a statement.

In exchange for the funding options, the legislation imposes new policies. The city would be required to maintain a minimum level of police and fire and some civilian board oversight powers of police and fire would be cut. The city’s public schools would be required to employ school resource officers. The city and county could no longer hold advisory referendum and local health officers could not order a business closed for longer than 14 days in order to control an outbreak or epidemic.

Evers’ plan would revamp the shared revenue program providing a new appropriation that earmarks 20% of sales taxes into the pool of funds for a $576 million infusion over the biennium. Providing a percentage of sales taxes allows the funds to grow in tandem with taxes and allow for a local voter approved sales tax increase.

In November, Fitch Ratings cut Milwaukee’s general obligation rating by two notches to A from AA-minus and S&P Global Ratings cut it by one notch to A-minus from A. Both assign a negative outlook. Moody’s Investors Service in September downgraded the city to A3 from A2 and left a negative outlook on the rating.

“Growing expenditures well above the rate of revenue growth and the inability to independently increase revenue may lead to significant declines in financial resilience if the city does not receive an infusion of revenue or implement large cuts to core services,” Fitch said. State shared revenues provide the largest source of city revenues at 40% followed by property taxes at 30%.

Evers and the GOP leadership remain at odds over the budget with the Joint Committee on Finance scrapping hundreds of funding items this week from Evers’ two-year budget proposal as it crafts its own version.

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