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Taxing Time for Ballot Questions

October 22, 2008

By Steven Malanga

If you want to vote your pocketbook in the presidential election, you can do so by pulling the lever for the candidate whose tax plan most reflects your interests.

On the other hand, in dozens of states you can vote your pocketbook this fall by voting directly for tax and/or spending measures. In perhaps a reflection of the extent to which concerns about the economy are dominating the political discussion right now, 106 propositions focused on taxes and spending (or, in many cases, on spending restraint) are on the ballot in 34 states, according to an analysis by the Tax Foundation. Those ballot measures range from the surprisingly popular Massachusetts proposition to end the state's income tax—a sort of fiscal weapon of mass destruction—to efforts by taxpayers in other states to proscribe future tax increases and/or enact spending caps to avoid becoming like, well, like the popular perception of Massachusetts as Taxachusetts.

The exercise of direct democracy, as these ballot initiatives are often called, tends to get more intense during periods of economic stress, especially when citizens feel that politicians aren't heeding voters' interests. Indeed, direct democracy arose in the late 19th Century when Progressive reformers pushed ballot initiatives as a way to thwart the power of the political machines that had come to dominate many state legislatures and city councils. What is often called the modern era of direct democracy began in 1978 with, appropriately enough, Proposition 13 in California, which capped local property taxes. Since then, tax and fiscal matters have come to define much of the direct democracy movement, although propositions aimed at social issues like those banning gay marriage or ending affirmative action programs have also become enormously influential and controversial.

Direct democracy of this sort gives voters a chance to work out their frustrations with politicians who do their best to resist the will of the people. That's partially behind the controversial Question 1 in Massachusetts, known as the Small Government Act to End the Income Tax. In 2000, the voters of the Bay State, resolutely refusing to go along with their reputation as among the country's most liberal electorate, passed a ballot measure to reduce the state's income tax rate to 5 percent from 5.75 percent. The state legislature responded with a fiscal maneuver which froze the rate at 5.3 percent, figuring this would assuage voters. It didn't. In 2002, a local advocate decided to send a message by placing on the ballot an initiative to abolish the income tax, which produces 40 percent of state revenues. Government officials and public employee groups ignored the measure, which they considered too improbable to pass, and were shocked when it garnered 45 percent of the vote.

Now the initiative is back and the public sector is taking it seriously, warning that it would blow an enormous hole in the state budget. Groups opposing it have collected some $1.2 million to fight the ballot proposition, including about $1 million from the 800-pound gorilla of state and local policy fights—teachers unions. Right now, the proposition is supported by 45 percent of voters, compared to 47 percent who oppose it—just a tight enough race to give state politicians a serious headache. As one Massachusetts pol aptly summed up the public mood, "If people are finally fed up and people want to express it, Question 1 is the only game in town."

Another reason why many are supporting it, despite talk of a fiscal meltdown if Question 1 passes, is because voters have heard the doomsday scenario before. In 1982, Massachusetts politicians warned of dire consequences when an initiative to limit property tax increases appeared on the ballot. The initiative passed anyway, forcing some local governments to tighten their belts but otherwise not producing nearly the dislocation that some predicted.

Another message to politicians that's embedded in these ballot propositions is this: It's not your money, but ours. In North Dakota, for instance, an expanding economy has produced some $1.3 billion in government surpluses. Some state politicians have argued for using the money to vastly expand the state’s spending on areas like K-12 education, college tuition aid for students, and loans and economic development incentives for businesses looking to expand in the state. But taxpayer groups argue that much of the surplus should be handed back to those who pay the bills in the form of cuts in personal and corporate taxes embodied by ballot initiative known as Measure 2. Right now, despite opposition from many politicians and government groups, voters are evenly split over the ballot question.

Advocates in some states see ballot initiatives are a way to avoid the fate of taxpayers elsewhere. Arizona voters, for instance, will vote on a ballot initiative to prohibit the state from enacting a transfer tax on realty—something that all but 13 states now have. As the proponents of Proposition 100 argue, a tax on selling your house isn't exactly the best idea at a time when home prices are falling and are likely to be below the market peak for some time. In addition, proponents point out that the added revenues of a realty tax haven't exactly cushioned other states from fiscal distress. New York, which has among the highest realty taxes in the country, used the unanticipated revenues generated by the levy during the housing boom to raise state spending sharply and now faces $12 billion in budget gaps over the next two years.

It wouldn't be an election season without some discussion about the 'fairness' of our tax system. That's what's behind the battle in Oregon over Measure 59, which would abolish the $5,600 cap on federal income taxes that can be deducted when Oregon residents calculate their taxable state income. Supporters argue that Measure 59 is necessary because Oregon is double-taxing earnings. Advocates point out that those in the state earning more than $50,000 a year would see benefits from the proposition. But because the windfall from full deductibility rises as a household's income rises, the initiative has also garnered opposition as a 'gift' to the rich. Noting that it would reduce Oregon’s income tax collections by an estimated $1.3 billion, public sector groups heavily oppose Measure 59. The Oregon Education Association, for instance, has earmarked some $4.1 million to defeat the initiative.

Even in a difficult economic environment, however, not all ballot measures are about cutting taxes or prohibiting tax increases. A number would raise taxes for dedicated purposes, including an increase in Minnesota's sales tax to fund the arts and natural conservation, and an increase in Colorado's sales tax to pay for more services for the developmentally disabled. Supporters argue that the tax increases are small and won't be noticed by most consumers, but opponents disagree with tax increases dedicated to funding specific causes, which they argue should be allocated by the state legislature instead.

Ballot initiatives of this sort have become so popular in the past few years, in fact, that another trend in this year’s election is a series of measures seeking to limit the impact of ballot propositions—efforts in many cases funded by public employee unions, government associations and 'grass roots' groups set up by local politicians who would rather not deal with the sometimes messy consequences of direct democracy. The template is Florida's 2006 ballot initiative to raise the threshold for future changes to the state's constitution by requiring 60 percent approval from voters on amendments, as opposed to the more common simple majority vote in favor of a ballot initiative. The ballot question passed, though as opponents point out, with less than 60 percent of the vote, which means that it did not even garner as much support as the new standard for initiatives that its passage put in place. This year, three states—Colorado, Ohio and Wyoming—have initiatives on the ballot which would make future initiatives more difficult to pass.

Somehow, however, I doubt that the voices of direct democracy will be quieted anytime soon.

Original Source: http://www.realclearmarkets.com/articles/2008/10/taxing_time_for_ballot_questio.html

 

 
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