25 years later, Calif. tax revolt lessons never more timely
by Arthur B. Laffer
Jul. 6, 2003 12:00 AM
current budget disaster. California's projected deficit is more than 50 percent of its projected general fund expenditures. Ouch!
Tax protests, from the Boston Tea Party at their most dramatic to the Bush tax cut, all represent attempts to redress the overbearing effects of government taxation. In my 63 years on this planet, however, nothing has quite caught the imagination of the people as did California's Proposition 13, which passed overwhelmingly in a statewide referendum in June 1978.
Drafted by Paul Gann and Howard Jarvis, Proposition 13 radically cut California's property tax rates from 3.5 percent on assessed property values before passage to a constitutionally mandated maximum rate of 1 percent of market value. Proposition 13 also placed a 2 percent per year ceiling on how fast property taxes could increase due to increases in housing prices. All in all, California's homes, real estate, land and commercial structures were forcibly snatched from the ever-increasing tax grasp of our local politicians.
The third and final feature of Proposition 13 required that all other tax increases be passed by a two-thirds majority of both the state Assembly and the state Senate or, in the case of local tax increases, by a two-thirds majority of the voters.
This provision of Proposition 13 was intended to prevent politicians from raising other taxes to offset the cut in property taxes, and has been the only protection we Californians have had in preventing our governor from:
California Gov. Gray Davis originally proposed all of these tax increases in his January budget. It's really scary.
Arizona's economy up until 1991 was a lot like California's economy before Proposition 13. Under Governors Bruce Babbitt, Evan Mecham and Rose Mofford, your tax rates placed you in the rarified select group of the highest-taxed states in the nation.
While the rest of the nation prospered during the 1980s, Arizona stagnated. Real estate values and personal incomes were low, and unemployment rates along with taxes were high. The state budgets were constantly in crisis. You were replaying the California record of the 1970s note for note.
Influenced as much by Proposition 13 as anything, Arizona participated in a tax-cutting revolution of its own in the 1990s under Gov. Fife Symington. Between 1990 and 1997 (the year Symington left office), the top marginal personal income tax rate fell from 8 percent to 5.17 percent (it's at 5.04 percent today), and the corporate income tax rate fell from 10.5 percent to 9 percent (it's 6.96 percent today); not to mention a host of other tax cuts. And wow, what a change there was in Arizona!
Measured as total state and local taxes per $1,000 of personal income, Arizona's tax burden fell from a high of $113.64 in fiscal 1991 to $100.53 in fiscal 1997. This drop took Arizona's tax burden from $9.93 higher than the U.S. tax burden as a whole to $4.59 less than the U.S. total.
The growth rate of total output in Arizona trailed that of the United States each year between 1988 and 1990, yet this trend reversed itself sharply in 1991. Between 1991 and 1997, growth in total output in Arizona averaged 8.6 percent per year, far beyond the average growth of the United States as a whole of 5.4 percent for this same period.
Arizona's spectacular economic success was also a replay of events that occurred in California in the 1980s after Proposition 13 passed. Proposition 13 dropped California's tax burden from $125 per $1,000 of personal income to $95 just one year later.
We went from the third-highest tax state in the nation to the 26th-highest. Not bad, eh? Housing prices soared both absolutely and relative to the rest of the nation. The unemployment rate went from an average of 2 percentage points above the national average in the 1970s to at or below the national average throughout the entire 1980s. For California, Proposition 13 was the beginning of an economic renaissance.
A lot of other states chose to join California and Arizona in tax reform. Some states, however, never really needed tax reform in the same way California and Arizona did because they somehow avoided the huge tax increases that were necessary precursors of tax reform. To this day, there are nine states that don't even have a state income tax. These same nine states - Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire and Tennessee - are doing a lot better than the rest of the nation when it comes to basic economics. (The latter two states tax dividend and interest income only.)
They don't have anything like the fiscal crises of their high-tax counterparts. Their citizens have lower unemployment rates and are experiencing faster income growth. In sum, the lowest-taxed states way outperform the highest-taxed states.
You don't have to be a rocket scientist to understand that if your government taxes people who work and pays people who don't work, you'll get a lot of people not working. As my kids would say, "Duh!" And yet, California in the 1970s and Arizona in the 1980s were figuratively raising taxes on the last three people working. It just didn't make sense.
Businesses don't locate their plant facilities as a matter of social conscience. Businesses locate their plant facilities to make an after-tax rate of return for their shareholders. And taxes do matter. They matter a lot. California and Arizona both prove that point.
Maybe we should all go back to common sense and the simpler time when Paul Gann and Howard Jarvis wrote Proposition 13 and Fife Symington cut Arizona's income tax rates.
It's a thought.
From 1972 to 1977, Arthur B. Laffer was a consultant to Secretary of the Treasury William Simon, Secretary of Defense Donald Rumsfeld and Secretary of the Treasury George Shultz. He was noted in a 1999 Time magazine cover story, "The Century's Greatest Minds," for inventing the Laffer Curve. He is founder and chairman of Laffer Associates, an economic research and consulting firm based in San Diego.
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