Municipality Imposes Sales Tax Hike To Avoid Bankruptcy

The Milwaukee City Council recently approved a 2% increase to sales taxes in order to stave off bankruptcy. Next year, their sales tax rate will become 7.9%.

The municipality is struggling with a severely underfunded pension system. City leaders also stated that they didn’t have enough money to pay for essential city services like police, fire, and other emergency services.

The city has been able to balance its books in the past few years based on the additional funds it received for pandemic relief. But without the new increase, they warned of laying off 700 police officers, 250 firefighters, and another 400 city workers.

The sales tax hikes probably aren’t finished yet because Milwaukee County faces a similar situation. Their current portion of sales tax revenues is 0.5%. They have received the ability and are expected to raise that to 0.9%.

Detroit is the largest municipality to ever file a bankruptcy in the US. They emerged from bankruptcy court in 2014 after having restructured $7B in debt. They’re also mandated to follow specific spending guidelines and have been able to build up a cash surplus in recent years.

It should be noted that during the 1950’s, Detroit was the richest city in America. Some say it was the richest city in the world.

If you’ve been there recently, you know that in order to be safe, you need to stay within a few blocks of their lakefront. Making the mistake of going further out lands you in a city that looks like a nuclear wasteland.

Let me leave you with this.

These are difficult situations to consider. Where you land on this argument has everything to do with your political leanings, but I’m writing this to overstate a basic point.

It costs significant amounts of money to run a city.

I have several conversations every year with clients who are thinking about moving to a state that has no income tax. Somehow Texas, Florida, and Tennessee are the favorite choices, but there are three things that should be considered.

1 – States that don’t levy an income tax need to be cheap in several areas. They don’t have the money to handle some of what we consider to be basic things that a state should provide.

2 – These states make up for that revenue shortfall by raising other fees and taxes. You see ridiculous fees for everything from car licenses and city stickers to additional taxes on entertainment and leases.

3 – Even if you do end up saving some money on your taxes, most who move say that the cultural differences are enough to gag a maggot.

I have one client who made the move and actually returned for those three reasons.

It should be noted that in many instances, these sales tax rate hikes are nothing more than putting a bandaid on a wound. If you have a municipality like Detroit that’s losing the majority of its resident and business base, how will you ever keep up with your pension obligations?

I’m just trying to get you to consider the other side of the coin.

We’re all going to get through this. Let’s get through it together.

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