Wheel taxes — the taxes Wisconsin residents must pay annually for owning a vehicle — have tripled since 2017 as municipalities seek ways to increase funding in a state that heavily regulates how they finance themselves, according to a report by the Wisconsin Policy Forum.
In Wisconsin, residents pay wheel taxes — also known as vehicle registration dues, as flat fees — which by their nature are regressive, City of Madison Director of Finance David Schmiedicke said.
“In terms of percentage of someone’s income, it’s going to be a slightly larger percentage for those individuals of lower income compared to those of higher income,” Schmiedicke explained.
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Wheel taxes are one of the only taxes that Wisconsin municipalities can levy at their discretion, Schmiedicke said. Unlike in some other states, Wisconsin municipalities aren’t allowed to levy a sales tax or income tax. Instead, they must rely on property taxes and state aid, Schmiedicke said.
But since 2006, Wisconsin has capped the amount municipalities can increase their property taxes annually, according to a 2019 Wisconsin Policy Forum report. The report also found state aid to municipalities has decreased, falling 40.9% between 1998 and 2018.
The Wisconsin Policy Forum is a nonpartisan policy research center that provides Wisconsin policy analyses, according to their website.
As municipalities grow, it becomes more difficult for them to maintain their services, Sen. Melissa Agard, D-Madison, said.
“It feels like we put our local governments in a position where their backs are up against the wall,” Agard said. “They do need these resources in order to invest in and support the safety, security and prosperity of their communities. And, unfortunately, there’s not many other venues for them. So this [Wheel Tax] is something that they have many communities in Wisconsin having to do.”
In 2019, the City of Madison raised its wheel tax to $40 — the highest in Wisconsin. Madisonian vehicle owners must additionally pay $28 in wheel taxes to Dane County and $85 to the state, according to the Wisconsin DOT website. Owners of electric or hybrid vehicles must also pay a $100 or $75 surcharge, respectively, according to a Wisconsin Examiner article.
Wisconsin’s wheel taxes are still low compared to other Midwestern states — especially for new vehicles, according to the Wisconsin DOT website. For example, someone who lives in Milwaukee and owns a 2020 Toyota Camry and drives 10,000 miles a year is estimated to pay $248 a year in gasoline and wheel taxes, while somebody with the same car in Minneapolis is estimated to pay $467 a year, the Wisconsin Policy Forum reported.
The difference decreases as the vehicle gets older, according to the DOT. Minnesota, Michigan and Iowa base their wheel taxes on the age and make of a vehicle, instead of having a flat fee like in Wisconsin, according to the Wisconsin Policy Forum report. So while the owner of a 2008 Toyota Camry in Madison pays an average of $285 a year, they would pay less in Michigan and Minnesota.
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Wheel taxes in Wisconsin may keep growing if the state continues to limit other sources of revenue for municipalities, according to the Wisconsin Policy Forum report.
“At the end of the day, I think that it’s really important that we re-establish local control over other revenue sources,” Agard said. “And that would require legislative action.”
One way the state could help municipalities would be closing the “Dark Store” tax loophole, Agard said. The Dark Store loophole allows retailers to sue municipalities to lower and refund their property taxes, according to a USA Today NETWORK-Wisconsin analysis.
It stems from a 2008 Wisconsin Supreme Court case in which Walgreens argued that their property tax should be based upon the actual market value of their property, as opposed to how much income the property is taking in, according to the court opinion.
In 2017, Wisconsin municipalities stood to lose $700 million in property taxes due to retailers using the Dark Store loophole, according to the USA Today analysis. To make up the lost revenue, municipalities could potentially have to raise property taxes for other taxpayers, the analysis found.
Compared to other Midwestern states, Wisconsin municipalities heavily rely on property taxes to generate revenue. In 2015, Wisconsin municipalities received 42.2% of their revenues from property taxes with only 1.6% from sales and income taxes combined. Nationally, municipalities used property taxes to get 23.3% of their incomes, with an additional 21.3% from sales and income taxes, according to the 2019 Wisconsin Policy Forum report.
Historically, state aid has compensated municipalities for their lack of revenue diversity, but in the past two decades state aid has been stagnant, according to a 2017 Wisconsin Policy Forum report.
“State aid to cities has actually been reduced over the past 20 years, so not only has it not kept pace with inflation, it’s actually been cut by about $100 million since 2003,” Schmiedicke said. “So there aren’t very many funding options to pay for services in cities in Wisconsin compared to other cities around the country.”
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Madison voted to raise its wheel tax in 2019 to $40 to help close an $11 million budget hole, according to a Wisconsin State Journal article. The city used the money to help fund the proposed Bus Rapid Transit, according to Schmiedicke.
The city had also approved of a 2020 budget amendment to give 2,500 $40 gift cards to federal Woman, Infant and Children assistance recipients to offset the tax, according to WSJ. The program is still available but doesn’t see a lot of participation, Schmiedicke said.
Agard said she doesn’t foresee the current trend of increasing wheel taxes ending anytime soon.
“Unless we do something drastic, it’s unfortunate that we municipalities and counties are depending on tools such as the wheel tax,” Agard said.