Budget '25: Shared Revenue Analysis

The State of Wisconsin maintains tight limits and controls on local governments’ ability to tax their residents, in large part because it doesn’t trust them to do so responsibly. As a tradeoff, the state provides local governments with aid historically referred to as “shared revenue” through the county and municipal aid program. Local governments rely on that program for about a quarter of their funding.

The state is providing $4.1 billion in shared revenue to local governments in FY25, up from $3.2 billion last year. That puts the total for the current biennium at $7.3 billion. About $3.1 billion of it specially comes from sales tax revenue.

Local governments have been frustrated with the shared revenue program for decades. The state introduced levy limits for municipalities in the 2004 budget, while at the same time reducing the amount of shared revenue due to the post-9/11 recession. (Local officials like to compare their current level of funding to the highwater mark in 2003.) There was another reduction in the 2010 budget, due to the Great Recession. A third reduction came in 2012 after the passage of Act 10, which helped to permanently close the state’s habitual budget deficit. Act 10 gave local governments more flexibility to address their expenses, which enabled the state to lower its level of support to them. Obviously, none of those reductions went over well with local officials. Their lobbyists increasingly put pressure onto lawmakers to do something to increase local governments’ revenue. That directly led to big changes in the last state budget.

Shared Revenue used to come from GPR up until the last budget. It now comes from a segregated account called the “local government fund,” which is funded by a transfer from GPR. Every year the state plans to transfer 20% of its sales tax revenue to the fund, which is then distributed as aid to local governments.

The local government fund supports twelve aid programs. The largest and most important is the county and municipal aid program. It dispersed $753 million last year, and it is projected to disperse $770 million this year.

Four of the twelve programs were just created in the last budget, including the supplemental county and municipal aid program. The purpose of that program is to specifically support essential public services including police, fire, EMS, public works, courts and transportation. This program dispersed $275 million last year and is projected to disperse $281 million this year.

There are three main reasons why the state provides aid to local governments. The first reason is property tax relief. The more money the state gives to local governments, the less they need to collect from local residents.

“Using state aid to help finance local government may improve the overall equity in the state-local tax system. The state income tax, in particular, is generally perceived to be more progressive, equitable, and better related to the taxpayer's ability to pay than the property tax,” according to LFB.

The MacIver Institute believes this is misguided, because it disincentivizes taxpayers from participating in local government. Self-government requires active civic participation, especially at the local level. Taxpayers are more likely to participate in local government, when local decisions directly impact their tax bills. State aid creates a layer of separation between tax bills and local government decisions that results in low civic engagement at the local level.

Secondly, state aid is meant to help fund services that are required by state law. It rarely covers the full amount. Local officials often complain about “unfunded mandates.” This is what they’re talking about.

The MacIver Institute believes the best way to address the financial burden of state mandates is to reduce the number of mandates, not increase state aid.

Thirdly, the state believes it needs to redistribute wealth throughout the state in the name of “tax base equalization.” This policy is applied indirectly through the shared revenue program. It is not a factor in the distribution formulas, although the overall level of funding helps to promote this policy.

The MacIver Institute believes this policy goal is antithetical to free market economics. It is not the state government’s responsibility to ensure every local government and community is successful. Most communities go through a natural lifecycle. Our state’s history is full of communities that were established, thrived, declined, and then were abandoned. Those resources then went to newer communities better positioned for economic success and higher qualities of life. By propping up failed and failing communities, the state is preventing that progress when occurring.

The big decision lawmakers will face during the budget process is whether to increase funding for the municipal and county aid program, by how much, and from what funding sources. The local government fund relies on transfers from the general fund. Increases could either come simply from the general fund, or they could be tied to specific revenue amounts in the general fund, such as sales tax revenue.

Gov. Evers plan for shared revenue would increase payments by $330 million over the biennium as a tradeoff with local governments in exchange for not increasing local tax levies. He also wants to empower counties to increase their local sales tax rate to 1% and cities with populations over 30,000 to levy a sales tax of 0.5%. Both would be subject to a local referendum.