What do you think the public reaction would be if a political leader suggested that instead of increasing property taxes, the city should raise $7 million by taxing water? We don’t tax food or medicine, but water? Could there be a more regressive tax? A tax that requires large families to pay proportionately more than individuals regardless of their ability to pay?
The fact is that Madison already indirectly taxes our water. The city levies a huge tax on the Water Utility that in turn gets passed onto consumers. The tax doesn’t show up on our bills as a “sales tax,” but it shows up on the Water Utility balance sheet as an expense called a "Payment In Lieu of Taxes," or PILOT.
This Water Utility tax, or “PILOT fee,” is much higher than the sales tax of 5.5%. It’s about five times higher than the tax on our electric utility, and of course many multiples higher than the state beer tax. In 2018, the city levied a tax of $7.1 million, although the Water Utility only sold $33 million of water. That’s a tax rate of over 20%. The only tax that comprises such a large share of the cost of a product is the state's tax on cigarettes.
The rationale for the tax is that non-profit and governmental agencies do not pay property taxes, but use the same municipal services (public safety, roads, etc.) as for-profit organizations. Unlike other non-profit organizations that pay no fees, the Water Utility and the three other affected city agencies pay substantial fees for their administrative services such as IT and attorney fees. This 20% tax is in addition to those fees.
It’s complicated, but the tax is not based on the sale of the water, but instead on the value of the property owned by the utility as determined by the city assessor. However, the assessments of the city-controlled entities subject to PILOT fees are often difficult to rationalize or explain.
The city’s assessment of the property value of the Water Utility is more than a quarter of a billion dollars and constitutes more than a fifth of its budget. In contrast, the city’s assessment of Monona Terrace is only about $10 million, even though it was constructed at a cost of about $25 million. In the case of Monona Terrace, the city provides a subsidy of over $4 million each year and then takes back $335,000 as a PILOT fee.
The fee paid by the Parking Utility increased 27% in 2018. This increase will be passed on to parking users. Certainly, the value of its property didn't increase at that rate in one year. Obviously, because these utilities and the city assessor are controlled by the city of Madison, it is not likely that any city agency will "contest" their assessment before the Board of Assessors.
The PILOT fee paid by the golf courses increased from $100,000 in 2017 to $175,000 in 2019. This coincided with a deep slide in revenue which, in turn, spurred debate on a proposal to sell one or more golf courses. If the revenue decreased so sharply, why would the value of the golf courses increase by 75%?
Altogether, the PILOT fees paid by the public increased over $1 million in one year. These fees and the related increases in consumer costs were not reported in any news account of the budget or city finances because they are buried in the fine print and detail of each individual agency budget.
In addition to the regressive quality of the tax and the fact that it is hidden from consumers, the tax is falsely described as a “fee” for municipal services. However, when the city collects $5,000 in property taxes from the average homeowner, $2,150 is transferred to the school district and $800 to the county. But when $7 million in PILOT fees are collected from the Water Utility, all the funds are retained by the city. Other major cities such as Boston and Philadelphia that collect PILOT fees from their private universities share the revenue with local schools.
The primary defense of the regressive tax by elected officials is that it has been in place for many years and would be difficult to replace. The arguments, “we know it’s wrong but it’s been around a long time,” and “it’s too big a problem to effectively address” are the defenses generally reserved for the indefensible (think of our dysfunctional health care system and ever-greater greenhouse gas emissions).
Madison residents have had to absorb a 40% increase in water fees in the last two years. Our water is now among the most expensive in the state, in part due to this tax. If city leaders had any real — not merely rhetorical — progressive agenda, they would eliminate this deeply regressive tax in the upcoming budget.
David Ahrens is a former member of the Madison City Council.
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