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Are Tax Revolts a Thing of the Past?

January 07, 2009

By Steven Malanga

After I wrote a recent column on the fiscal mess in some states, I got an e-mail from a beleaguered New Jersey resident asking what I thought were the prospects for a tax revolt in the Garden State. It is an interesting and pertinent question because tax uprisings tend to occur during difficult and uncertain economic times, especially in places where the first impulse of state and local governments is to raise taxes to make up for shortfalls in revenues.

The two most notable tax revolts in recent memory, for instance, occurred in the mid-to-late 1970s and again in the early 1990s. Tax increases during those difficult years pushed the state and local government tax burden above 10 percent of income, on average, across the country and even higher in some places, like California, where it topped out at 11.7 percent in 1977. That helped spark perhaps the most notable of all state anti-tax campaigns, the Proposition 13 initiative of 1978, which capped property tax increases in the Golden State and inspired taxpayer uprisings elsewhere, leading to 13 similar tax caps, including Proposition 2½ in Massachusetts. Though expressed entirely in local initiatives, the anti-tax sentiment stirred up in those years was so powerful that it's often credited with helping elect Ronald Reagan president in 1980.

Memories are short in government, however, and a decade later, when the American economy was again slowing, governors, mayors and legislatures began hiking taxes again, sparking the next tax revolt. One of the most visible victims of this uprising was New Jersey Gov. Jim Florio, who faced a $3 billion budget deficit in 1991 and promptly asked for $2.8 billion in new taxes—at the time the largest single-year tax increase ever imposed by a state. Although Jersey had been, as recently as the 1960s, one of the country's most lightly taxed states, Florio's tax increases, the culmination of a series of rises over the years, helped push the state and local tax burden in Jersey to 11.6 percent of total income—one of the highest in the nation. Since the Garden State didn't have (and still doesn't) California-style initiative and referendum, taxpayers displayed their ire by handing control of the state legislature to Republicans in mid-term elections and then dumping Florio two years later—the first sitting governor to be defeated in a reelection bid since Jersey had adopted its modern constitution in 1947.

In other states, meanwhile, the early 1990s tax revolt took the form of ballot initiatives to cap state spending levels, such as Amendment I in Colorado, which required that new tax increases be approved directly by voters.

Today, 44 states are facing budget woes that amount to a projected $90 billion in collective deficits in the coming fiscal year. Again, many governors and legislatures are pondering tax increases even as unemployment rises and people try to work themselves out of debt. New York tops the list with a whopping 88 new taxes and fees proposed by Gov. David Paterson, but he's not alone. After raising taxes by about $1.1 billion in 2006, New Jersey Gov. Jon Corzine is hinting at new tax increases. California, Florida, Kentucky, Maryland, Nevada and Oregon are just some of the states that have either raised taxes or are considering such a move. The stage would seem to be set, in other words, for the next tax revolt in the states.

But the political climate has also changed dramatically since the early 1990s, and the next year or so may show whether state and local tax revolts are even possible anymore. Opponents of tax revolts—especially public sector unions, social service advocacy organizations that rely on government funds, and other groups that consume government resources—have grown much more powerful, and much savvier at fighting back efforts to trim the growth of government. After voters recalled California Gov. Gray Davis in 2003, startled public sector unions mobilized to derail a set of voter initiatives supported by his successor, Arnold Schwarzenegger, including one that would have limited the growth of the state's budget. Public sector unions spent north of $50 million in the 2005 campaign against the initiatives, with the state's teachers' union alone kicking in $41.8 million.

In New Jersey that same year, public unions worked to derail a budding taxpayer revolt when they used their clout in the state legislature to water down a bill that would have created a constitutional convention to enact property tax reform. Under union pressure, legislators approved the convention but barred it from addressing government spending, which rendered a potential gathering useless.

In New York State, unions have been running ominous radio ads warning of sharp declines in services unless Albany raises taxes. Such ads can be devastatingly effective. A similar advertising campaign by health care interests in 1999, which warned of massive hospital closings unless the state increased aid to health care institutions, prompted worried New Yorkers to barrage hospitals with phone calls asking if they were about to shut their doors and provoked the head of one hospital association to accuse other health care groups in the state of employing scare tactics to further their goals.

Meanwhile, state politicians have quietly been working to make the initiative process tougher and thus limit the number of radical proposals like Proposition 13 that ever make it on the ballot. In 2007 alone, according to Governing Magazine, states enacted some 33 bills regulating the initiative process. In Florida, 60 percent of voters must now vote in favor of a ballot initiative in order for it to become law. In other states, those who gather signatures supporting ballot initiatives must now go through state-mandated training. Such rules will make in more difficult for ad hoc taxpayer groups that arise in response to political developments to be effective.

Still, one gets the feeling that most state politicians would not like to test the new, tougher systems that they've put in place. They'd rather have a President Obama come to their aid with direct federal funding for hard-pressed budgets, such as higher reimbursements for Medicaid, increases in federal dollars for local law enforcement, and more aid for K-through-12 education. Obama has, at one time or another in his run for the presidency, promised all of the above, although that was before the federal government committed $700 billion to bail out financial institutions. Recently Obama has offered states stimulus in the form of more infrastructure spending, which will do little to bolster budgets in the coming year.

So the stage may be set for a series of face-offs between beleaguered taxpayers and tax-eaters. If so, we'll learn just how much the landscape has shifted since the last wave of tax revolts.

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