According to Ken Cowan at the Wisconsin Department of Transportation (DOT), distances shown on highway signs (e.g. Madison 45, Waunakee 9, etc.), are measured to a major intersection or prominent building at the geographic center of the municipality. DOT’s procedure follows the Manual of Uniform Traffic Control Devices, as published by the Federal Highway Administration.
Similarly, for the mileage log on the official state highway map, DOT uses GIS software to determine the center point. Then they pick the nearest major intersection, and use that point for computing distances between cities.
A common misconception is that distances shown on highway signs are always measured to the location of the main post office in the municipality. This probably stems from the historic methods the U.S. Geological Survey (USGS) used for identifying populated places on the their maps. According to the USGS Geographic Names Information System (GNIS) metadata: “The primary point of a populated place is the center of original place, if known, such as the city or town hall, main post office, or town square regardless of changes over time.” Although it was once safe to assume the post office was in the center of town, times have changed, and that is no longer the case.
All that said, I’ll probably tell my kids “we’re here” when we hit the city limits on our next road trip!