The Great Tax Revolt of 1994

Will anti-tax initiatives sweep the states this fall?

Two years ago, when businessman-turned-political-activist Douglas Bruce launched Amendment I in Colorado, a ballot initiative requiring that all new and increased state and local taxes and debt be approved by popular vote, his political opponents waged a holy war against him. Bruce was characterized as a "terrorist" who would "lob a hand grenade into a schoolyard full of children." Defeating the proposal was said to be the moral equivalent of "fighting the Nazis at the Battle of the Bulge."

And these, mind you, were just the comments of the governor, Democrat Roy Romer.

The public-employee unions, education lobby, and bond traders were far less civil. One bond trader, fearful that the voter-approval requirement for new debt would put him out of business, even suggested that if Amendment I were adopted, the pope might be assassinated when he came to Denver, for lack of police. Despite the hyperbole, hysteria, and nearly $1 million spent to defeat the initiative (versus less than $300,000 spent by taxpayer groups in support), Amendment I was approved by 54 percent of the voters in November 1992.

It has had an immediate policy impact. Tax increases have been stopped dead in their tracks. In November 1993, one year after Amendment I's passage, Colorado voters were asked to reinstate a relatively trivial 0.2 percent tourism tax that had expired. They rejected the $11-million tax hike by a margin of 55 to 45. Last year Colorado property taxes rose by less than 1 percent—the smallest increase in 20 years. Without new revenue sources to tap easily, state government in Denver is changing the way it does business. "These days, when agencies want more funds, they are forced to cannibalize each other," says Bruce.

But the real impact of Amendment I, and the great untold political story of the year, is how rapidly this initiative is invading other states. Oklahoma and Washington voters have already joined Colorado in passing it. Similar initiatives have qualified for the November ballots in Nevada and Oregon and will likely also appear on the ballot in Florida, Missouri, Montana, and North Dakota. Grover Norquist, president of Americans for Tax Reform, which advises state taxpayer groups across the country, predicts that "the way things are going, by 1996 every state with initiative and referendum will have passed a version of the Colorado law." So far, the measure seems to command the same kind of broad-based populist appeal as term limits.

Welcome to the great tax revolt of 1994. Not since Howard Jarvis successfully spearheaded California's Proposition 13 property tax-cut initiative in 1978—and unleashed a taxpayer protest that eventually swept through more than half the states and catapulted Ronald Reagan to the White House—have there been more citizen-driven efforts to roll back taxes. Consider the wide array of anti-tax actions on tap across the country:

• This year taxpayers in 11 states, with a total population of nearly 50 million people, may be voting on some form of anti-tax or spending-restraint ballot initiative.

• In addition to voter-approval requirements for taxes, a parallel anti-tax measure gaining momentum is the idea of requiring a two-thirds vote in the legislature to raise taxes. In November 1992, 72 percent of Arizona voters approved this supermajority requirement. Similar initiatives may appear on the ballot in Montana and Nevada this year. (Significantly, Congress has this requirement reversed for Washington, D.C.: A three-fifths supermajority vote is required to cut taxes, but only a majority is necessary to raise them.)

• In June, for the first time ever, California voters rejected every bond initiative on the ballot, $6 billion worth. Those included proposals to pay for everything from schools to parks to earthquake relief to crime prevention. Reported The Wall Street Journal: "State legislators are reeling in disbelief."

• Meanwhile, almost half the states have enacted tax cuts this year. New Jersey's newly elected Gov. Christine Whitman delivered on half her promised 30 percent income tax-rate reduction; Michigan's John Engler chopped the property tax in half; and Mississippi's Kirk Fordice eliminated the state capital gains tax. Arizona's Fife Symington has cut the state income tax three years in a row and has now pledged to completely abolish the state income tax if reelected. Art Laffer's supply-side movement—a subject of widespread ridicule among the Washington intelligentsia—has never had more dedicated practitioners.

• Even prominent Democrat lawmakers have caught the tax-cutting fever. In Georgia, Gov. Zell Miller won approval of a $100-million family-income tax cut that over two years will increase exemptions for elderly residents by $2,000 and dependent children by $1,000. Meanwhile in California, Willie Brown, speaker of the assembly for more years than anyone cares to remember and perhaps the sponsor of more expensive tax hikes than any politician in American history, has suddenly discovered supply-side religion. Brown proposes a 6-percent investment tax credit as the surest way "to keep and expand jobs in California." He predicts that the tax credit will "generate additional income, property, and sales tax revenue for the state"--and no, that's not Jack Kemp talking.

• All told, 1994 will be the first year in more than a decade that state tax burdens will actually fall.

There are several explanations for this sudden and intense taxpayer discontent. One is simply pent-up frustration with gigantic expansions of state budgets in recent years. "In the 1980s, tax dollars rolled into state treasuries in wheelbarrows, and were quickly spent," Connecticut Gov. Lowell Weicker, hardly a fiscal tightwad himself, has observed.

He's right. In the Reagan era of "greed and over-consumption," few Wall Street fat cats could match the spending binge of many state governments. Though some state spending increases were the result of federal mandates in areas such as welfare and Medicaid, frugality did not otherwise reign among the states. In Florida, the budget was $7 billion in 1980; today it's $30 billion. In 1980 Arizona had a $3-billion budget; today, it's $10 billion. Connecticut's expenditures have roughly quadrupled since 1980. Even adjusting for inflation, most states have budgets roughly twice as large as they did 15 years ago with virtually no corresponding improvement in services—indeed, public-opinion polls suggest a deterioration in schools, crime prevention, and the like. This is natural grist for a storm-the-Bastille taxpayer revolt.

Also driving the tax rebellion is an increasing recognition that the soak-the-rich tax strategy employed by many states during the past recession is shrinking state economies. A 1993 Joint Economic Committee study reports that since 1990 alone, the top 10 tax-hiking states have created zero net new jobs; the top 10 tax-cutting states gained 650,000.

Nearly two-thirds of the jobs lost during the 1991-92 recession disappeared from just two states: California and New York. There are many factors behind these states' decline, but certainly it's no coincidence that both have among the highest tax burdens in the country. Boise, Idaho; Reno, Nevada; and Salt Lake City, Utah are three of the fastest growing cities in America. With the lure of very low taxes and a business-friendly regulatory climate, they are successfully cherry picking off of California's industrial base. California Gov. Pete Wilson's tax policies have done more for the prosperity of those cities than 1,000 economic development offices.

Then there is the economic revival in Michigan. Inheriting a $1.8 billion budget deficit four years ago, Engler spurned the Florio-Weicker-Wilson putting-taxes-first fiscal solution and took a chainsaw to the budget, carving out savings in every state program from welfare to arts subsidies. He also cut taxes—11 times in fact, including his recent controversial $1.1-billion property-tax cut. (See "Engler's Angle," August/September.) Those policies now appear to be paying off. Once derided as the epicenter of the rust belt, today Michigan has a lower unemployment rate (5.5 percent) than the national average for the first time since Ford introduced the Mustang convertible—in 1966. And the state is now debating what to do about this year's $300-million budget surplus.

Perhaps the single largest impetus for the sudden wave of tax-cutting frenzy for politicians is pure political survival. Since 1990, voters have ousted eight tax-raising governors at the polls. The election that sent political shock waves throughout state capitals nationwide was, of course, Christine Whitman's triumph over Jim Florio in New Jersey last November. Florio came to power in 1990 as the self-proclaimed anti-Reagan, pledging to replace supply-side doctrine with a new-age progressive populism. His agenda of combining soak-the-rich tax hikes with Robin Hood wealth-redistributing education and social welfare spending programs was greeted with worshipful applause in Washington and in the media. A month after his record $2.8-billion tax package passed, New York Gov. Mario Cuomo praised Florio as a "bold and instant national hero." He even received the annual JFK Profile in Courage award.

Christine Whitman's victory shattered the Florio delusion. Exit polls from that election revealed just how thoroughly voters had trounced Florio's progressive liberal vision: 60 percent of the electorate said they preferred "fewer government services with lower taxes," while only 33 percent said they wanted "more of both." But what is really discombobulating to the left is that as Whitman has made good on her ambitious tax-cutting agenda, her approval rating has soared to over 70 percent—even as her "right-wing, supply-side agenda" is reviled with almost daily regularity in The New York Times and New Jersey newspapers. So popular is her tax-cutting program that now Whitmanomics is being copy-catted in GOP gubernatorial campaigns in Connecticut, New York, and a handful of other states. Whitman, a housewife by trade, is even seriously discussed as a vice-presidential candidate.

The accomplishments of Whitman, Engler, and other tax-cutting governors are impressive. But the real revolutionaries transforming state politics in America today are ordinary, unelected citizens like Douglas Bruce. They are relying on grass-roots direct democracy to permanently change the way states do business. While a popular politician's legacy can be quickly dismantled once he's gone, the latest wave of populist anti-tax ballot initiatives could foil the tax-raising efforts of teachers, unions, Naderites, and other pro-spending lobbies for many years to come.

Consider Montana, which is well on its way to ensuring that the taxman is held at bay for the foreseeable future. This November, there are three tax-related initiatives on the ballot. It all started when a first-ever state sales tax plan was put up for public vote in a special election in June 1993. The legislature sneakily passed a $73-million income tax hike that would go into effect if the sales tax were defeated—a virtual certainty according to the polls.

Not only was the sales tax defeated 75-25, but 20 percent of Montana's voters signed petitions to suspend the $73-million "blackmail tax" and put it, too, to a public vote this November. Public sentiment is running high in favor of repeal, though Rob Natelson, the law professor leading the petition drive, has been labeled a "tax dodger" by the Montana Education Association, and one Republican legislator has threatened to introduce legislation to eliminate the law school where Natelson teaches.

Two other tax-limitation measures are on Montana's ballot. CI-66 would require voter approval for any new or increased state tax; CI-67 would require a two-thirds supermajority of the relevant lawmakers to pass any new or increased state or local taxes and fees or to exceed the previous budget's level of spending. While there is some disagreement among anti-tax activists as to whether it is wiser to rely on voters' discipline (as CI-66 would) or politicians' discipline (as CI-67 would), both measures enjoy wide public support. Thus, both are likely to pass, giving double protection against the expansion of state government in Montana.

Passing such ballot initiatives tilts the political playing field in the taxpayers' direction. Before enacting the "It's Time" supermajority initiative in 1992, the Arizona legislature had raised taxes eight times in nine years. "But these days," boasts taxpayer advocate Sydney Hoff Hay, one of the principal sponsors of It's Time, "the legislators don't even bother to propose new taxes." Arizona Gov. Symington agrees. "The little secret [of the supermajority requirement] is that my income tax cuts are pretty much irreversible," he says. Government in Arizona will be ratcheted downward, not upward.

The supermajority requirement makes it difficult for state lawmakers to tax even the most demonized industries: tobacco companies, big oil, utilities, and the like. Says ATR's Grover Norquist: "Any industry that's large enough to be worth looting probably has the political clout to muster the necessary one-third-plus-one votes of the legislature to inoculate themselves from tax hikes."

Supermajority vote requirements aren't a fail-safe protection against higher taxes, of course. Pete Wilson was able, after all, to wrangle the two-thirds votes he needed out of the California legislature to secure his $7-billion 1990 tax hike.

Still, the political establishment views anti-tax ballot initiatives with a combination of fear and loathing. Public-employee unions, school boards, lobbyists, and even local chambers of commerce are mobilizing to defeat these measures. Their defense strategy is one of containment: Spare no expense to defeat the tax initiatives wherever and whenever they appear on the ballot.

In Florida, the Tax Cap Committee is sponsoring four amendments, probably the most ambitious anti-tax effort in any state this year. The two most controversial would require taxpayer approval for new and increased taxes passed by the legislature and would require a two-thirds popular vote for any constitutional amendments that impose a new tax. Opponents are attacking the messenger rather than the message. Nearly 90 percent of the Tax Cap Committee's finances are alleged to have come from U.S. Sugar Corporation, a firm that was the target of a proposed amendment—since struck down by the state Supreme Court—seeking to impose a tax on sugar to fund pollution abatement in the Everglades. Thus, The Miami Herald suggested that the hidden motivation behind the two-thirds vote requirement to impose new taxes by constitutional amendment is to "derail efforts to clean-up the Everglades."

Tax Cap chairman Dave Biddulph objects that this charge is "blatantly false," noting an Everglades cleanup bill has already been passed by the legislature and signed by the governor this year. He further explains that government regulations make it very difficult and expensive for citizens to get initiatives on the ballot. "We knew from all the experience that if you don't end up with some money some place along the line, it never is going to happen," Biddulph says. (The proposed amendment to tax big sugar also received most of its money from an out-of-state multimillionaire commodities trader.)

Despite the large amount of funding from U.S. Sugar, this is, in many ways, a genuine grass-roots political movement. Tax Cap chairman Dave Biddulph emphasizes that his organization existed before U.S. Sugar Corporation realized that it could be a strategic ally. Tax Cap has 9,000 individual financial contributors, and nearly a million Floridians have signed the Tax Cap ballot petition. One such taxpayer asked petitioners, "Is there anything I can sign to keep from paying taxes at all?" He later said, "I'm just fed up with taxes eating up more than half of everything I make. I can either get in a boat and sail away or I can do something to protest."

Florida's legislature itself is attempting to scuttle the Tax Cap initiatives. They placed their own spending cap—a much weaker one, excluding several key areas of state spending—on the November ballot. The legislators even tried to install a "poison pill" provision into their initiative that would allow it to supersede any other tax limit approved by the voters. But thanks in part to a Tax Cap Committee-organized phone blitz on Tallahassee, that provision was dropped.

A more imminent threat to the Tax Cap Amendments is State Attorney General Bob Butterworth, who is challenging the legality of the measures before the Florida Supreme Court. He argues that the wording of the ballots is confusing and that they effectively deal with more than one subject. (One of the four amendments sponsored by Tax Cap is specifically designed to allow a citizen-sponsored ballot amendment to deal with more than one subject when the state's taxing power is concerned.) The court appears to be a huge hurdle: Judges have struck down three of the last four Florida ballot initiatives on technical grounds.

Another common tactic employed by opponents of anti-tax measures is to frighten the public about the alleged dire fiscal consequences of passing them. The Missouri Education Association has organized and funded a front group called "Citizens to Protect Missouri's Future" to defeat the state's tax and spending limitation initiative known as the Hancock II Amendment. The group complains that if the amendment passes, University of Missouri tuitions will double, thousands of government employees will be laid off, prisons will shut down, hardened criminals will be turned loose on the streets to prey on the public, and—horror of horrors—$4.5 billion of free federal highway aid will have to be sent back to Washington.

To bolster their point about the devastating impact that tax-limitation measures can have on state governments, opponents often point to California's Proposition 13. Prop. 13—the granddaddy of citizen tax-limitation initiatives—rolled back local property taxes to 1 percent of assessed value, limited assessment increases to the lower of 2 percent or the annual inflation rate, and required two-thirds voter approval for new local taxes and a two-thirds legislative majority for new or increased state taxes. A Sacramento Bee editorial captured the essence of the attacks on Prop. 13: "There is almost nothing in the state that hasn't been affected by Prop. 13 for the worse," the newspaper stated.

Similar stories have appeared nationally in The New York Times Magazine and Money magazine. The Money article, titled "The Tax Revolt that Wrecked California," was crammed with sorrowful tales of a tax revolt run amok. Wrote Richard Reeves: "Fifteen years later, the lessons of Prop. 13 read like cliches: There's no free lunch; you get what you pay for. Inevitably, as revenues fell, spending and critical public services were cut. In California, those cuts have led to crises in education, medical care, and public safety. They have triggered a civil war pitting the old against the young, longtime residents against new, whites against blacks and browns, haves against have-nots." For some reason Reeves was unable to find a connection between Proposition 13 and the recent earthquakes.

California taxpayers no doubt only wish that Prop. 13 had been half as effective in rolling back government as Reeves suggests. Joel Fox, president of the Howard Jarvis Taxpayer Foundation, notes that property tax revenue has been climbing by about 10 percent a year for a decade and the California budget has tripled from $15 billion to $54 billion a year since 1978, when Prop. 13 rocked the nation. State and local governments in California have many problems these days, but being starved for revenue is surely not one of them. (See "Pushing the Limit," November 1993.) And perhaps the citizens are the best judges of whether their state has been ruined by Prop. 13: Opinion polls still show that if it were voted on today, Prop. 13 would pass with the same two-thirds majority it did 15 years ago.

Oddly enough, considering the avalanche of criticism in the media about the allegedly draconian effects of Prop. 13, some skeptics oppose these tax limits for the opposite reason: that they have little fiscal impact one way or the other. These critics point to the multitude of methods politicians have invented to evade tax and spending limits. For example, most of these measures cap only the "general fund" budget, typically about 40 percent of the state budget. That provides a major loophole for politicians wanting to increase spending and revenue.

Perhaps the most blatant end run around a tax and spending limit occurred recently in Connecticut. In 1992 nearly 80 percent of Connecticut voters approved an initiative limiting spending growth to the growth rate of personal income. But the state attorney general has ruled the measure inoperative until the legislature defines what "growth of personal income" and other such terms mean—which it conveniently refuses to do. While the Hartford politicians dragged their heels, Connecticut's budget expanded by 7.2 percent last year instead of the 3 percent the limitation would have allowed. Faced with a legislature that stubbornly refuses to enact a constitutional amendment approved by a huge majority of the voters, a freshman Republican state legislator and a group of taxpayers have sued the legislature for defying the state constitution. The state filed motions to dismiss the suit on the grounds that it infringed on the state's sovereign immunity and that the issue was a political matter outside the purview of the court. The court has already ruled against the state on the first motion; at press time, a decision on the second one was expected shortly.

Given opposing complaints that they have done too much and too little, what is one to conclude about the performance of tax and spending limits? Somewhere between the claim that their impact has been apocalyptic and the claim that their impact has been trivial lies the truth. Our just-released Cato Institute study compares the growth of per-capita spending and taxes in the 18 states that adopted binding tax and expenditure limits in the last tax revolt versus those that did not. We found that spending continued to grow in the tax-limit states, but at a slower pace than in other states. We also found that real per-capita taxes in states with tax limitations grew by 11.9 percent over the five years before enactment but fell by 2.8 percent over the first five years after enactment. As a result, the state tax burden per family of four in tax-expenditure limit states was $650 lower (five years after the limit was enacted) than it would have been if state tax growth had not been reversed. Admittedly, that's a far cry from the revolutionary change in state government that had been sought and promised by the promoters of measures like Prop. 13, but it is progress.

Nonetheless, taxpayer frustration with the relative inability of Prop. 13-era limits to more effectively deter the expansion of state government over the past 15 years has sparked the current anti-tax ballot strategies. And today's taxpayer groups have learned from the experiences of their predecessors. They recognize that the main cause of the ineffectiveness of Prop. 13-era limits is that they left the ultimate authority for slowing the growth of Leviathan with Leviathan itself. To address that problem, the current movement is toward measures that leave the ultimate authority with the voters. These new measures have the potential to become the most effective ironclad restraints on government expansion ever.

The latest polls suggest that most of these initiatives stand a good chance of passing. The Oregon anti-tax measure has 66 percent support; Missouri's Hancock II amendment has 82 percent support; and the Nevada and Florida voter-approval requirements both command near 90 percent support. But they are hardly done deals. The history of initiatives is that approval levels often fall off sharply as election day approaches.

Remarkably, while this citizen-driven anti-tax uprising sweeps through state capitals from Tallahassee to Carson City, Washington, D.C.'s attitude has been one of oblivious unconcern. In fact, CNN political guru William Schneider recently stated that "I see no great tax revolt out there." And he gets paid a lot of money for such opinions.

But stay tuned. This November, even Washington may be feeling the effects of the tax revolt of 1994.

Stephen Moore is director of fiscal policy studies and Dean Stansel is a fiscal policy analyst at the Cato Institute.