A Rebellion in Retreat?

The Tax Revolt, by Alvin Rabushka and Pauline Ryan Stanford, Calif.: The Hoover Institution, 1982, 288 pp., $16.95.

In The Tax Revolt, Alvin Rabushka and Pauline Ryan set out to explore the causes and consequences of the tax-reduction movement in California in the late 1970s that produced the now-famous Proposition 13. For those interested in and discontented with the burden of taxation, the book provides fascinating insights into the events and personalities that precipitated tax-cutting fever in California and other states without the esoteric jargon so typical of the work of economists. A reader who expects to discern a recipe or a "how-to" set of instructions for curbing the public sector's appetite for the incomes of private citizens is likely to be disappointed, but the study was not written for that purpose. Nevertheless, from this brief historical review, there are many lessons that have far-reaching implications for the future.

According to the authors, two essential ingredients came together in the late 1970s to precipitate Proposition 13: economic factors and the personality of Howard Jarvis. Throughout the decade, inflation had produced a devastating effect on real disposable (after-tax) incomes of California citizens by rapidly escalating property values and by pushing taxpayers into higher income-tax brackets. Other government policies such as no-growth restrictions further increased the assessed value of property and caused property taxes to soar. By 1977, Californians were paying about 16 percent of their incomes to state and local governments—well above the average for all other states—in addition to federal taxes.

Rabushka and Ryan contend that as long as their after-tax real disposable income grew, "taxpayers were willing to tolerate even more rapid growth in the public sector." Apparently, the straw that broke the camel's back was the decline in the purchasing power of taxpayers. Also, as government grew, so did the popular perception of rampant waste, inefficiency, and fraud. Economic events bred discontent, and the stage was set for a taxpayer rebellion.

Despite the dissatisfaction of taxpayers, the legislature made no decisive moves to reduce the tax burden, even though a sizable (and growing) budget surplus had developed in the state coffers. As in 23 other states, however, California's constitution provides for ballot initiatives through which citizens may attempt to convert public sentiment into laws or constitutional amendments. The personality of Howard Jarvis provided the driving force that focused voter outrage over taxation into Proposition 13, which offered tax relief to property owners.

As the tax-limitation proposal gathered momentum, a mad scramble by the vested interests ensued. Public employee unions and bureaucrats predicted catastrophic cutbacks in education, fire services, police protection, and other municipal services. Politicians who began to feel the heat also began to see the light and discussed tax measures in the legislature, but they did far too little too late. The machinations of Governor Brown in opposing Proposition 13 prior to its passage and taking credit for its success afterward are, indeed, awesome and entertaining.

The consequences of the tax reductions embodied in Proposition 13 are still not entirely clear, for most of the local revenue loss was made up from the state surplus. Economic disaster did not occur, but it is by no means clear that the tax revolt achieved its goals of reducing waste and inefficiency in the public sector. The authors assert that "in the first three years of the tax revolt, government in California went about its business as usual." In fact, little has changed, and some of the benefits of Proposition 13 are being eroded—as property is sold, it is reassessed to full market value. In the wake of Proposition 13, Proposition 4 was overwhelmingly passed a year later. This initiative, spearheaded by Paul Gann, was the logical counterpart to Proposition 13, for Proposition 4 set limits on government spending and permitted a direct vote on spending levels. As yet, however, there is little evidence that Proposition 4 has placed an operative ceiling on expenditures.

The tax revolt spawned yet another Jarvis-led initiative, Proposition 9, in 1980 which was to reduce state income tax rates by half, index the rates to inflation, and abolish the state inventory tax. The state politicians, however, took most of the steam out of the effort by indexing rates for two years, eliminating the inventory tax, and increasing state income tax credits. Proposition 9 failed, and Rabushka and Ryan conclude that "widespread public rage over state income taxes that would fuel an income tax revolt simply did not exist." In short, the tax revolt has largely fizzled and "government recalcitrance has prevailed over voter aspirations."

The authors view tax rebellions as episodes in which the public temper flares at greedy government for a brief period, legislation is enacted or initiatives are passed, and then business goes on as usual. Government finds other funds and continues to borrow and spend, and the taxpayer passively accepts the fact that nothing can be done to curb the public sector.

Such an assessment is unwarranted and shortsighted. The greatest tax revolt in history is now getting under way and gathering force with remarkable speed. This revolt is not being carried out through the ballot box—it is true that voters have learned that little effective control of government can be gained by exchanging one set of rascals for another or by mandating spending limits or tax limits that can be easily evaded. The current tax revolt is occurring in the underground economy; in other words, individuals are underreporting their income or refusing to file tax forms in order to reduce or eliminate entirely the taxes they pay. Tax evasion and avoidance are becoming so widespread that the notion of "voluntary compliance" is rapidly becoming a myth. Current estimates are that individuals are keeping nearly $100 billion of what the federal government would take; figures for state and local levels would add billions more. Government cannot waste funds that it does not receive, and the public is rapidly learning to distinguish political reality from political rhetoric; as disenchantment with government continues to grow, the practices of the underground economy will expand and the social stigma of tax avoidance and evasion will decline.

The American taxpayer has not meekly surrendered to rapacious government. Nor has the tax revolt by any means fizzled. It has merely changed its form.

James Bennett is a professor of economics at George Mason University.