Editorials and Opinion Pieces

The Tax Revolt Turns 25

BY: Michael New, Adjunct Scholar at the Cato Institute and Post-Doctoral Fellow at the Harvard-MIT Data Center
DATE: June 5, 2003
WORD COUNT: 714

June 6th will mark the 25th anniversary of California’s Proposition 13, the
landmark victory of the 1970s tax revolt. Proposition 13 enjoyed immediate
success, slashing property taxes and imposing some much needed discipline on
state and local spending. Twenty-five years later, however, California’s
fiscal situation has changed dramatically. State expenditures have soared and
the legislature is considering large tax increases to compensate for
California’s $35 billion shortfall. Indeed, California’s changing fiscal
fortunes provide valuable insights for those seeking to limit government in
California and elsewhere.

Proposition 13 should be analyzed in two separate ways, first as a tax cut,
secondly as a tax limit. As a tax cut Proposition 13 was a tremendous short
term success, reducing taxes by a staggering $6 billion. The impact of this tax
reduction, however, went far beyond providing relief to beleaguered California
taxpayers. The economic boom that followed Proposition 13 gave credence to the
idea that tax cuts were economically beneficial. Furthermore, Proposition 13
generated nationwide momentum for tax reductions. In the following months, a
number of states either enacted tax cuts or tax limits. Even President Carter
and the Democrat controlled Congress were motivated to reduce capital gains
taxes in the wake of Proposition 13.

However, as a long term tax limit, Proposition 13 has had a legacy that is
decidedly mixed. Though it reduced property taxes, Proposition 13 did not
place limits on other forms of taxation. Indeed, after California’s expenditure
limit was raised in the early 1990s, spending soared, nearly doubling between
1990 and 2001. As a result, California has had to raise the income tax, the
sales tax, and taxes on beer, wine, gasoline, and cigarettes to keep pace with
these rising expenditures. In fact, during the early 1990s, Governor Pete
Wilson even proposed hiking taxes on snack foods. This cycle of spending and
taxing is the root cause of California’s current fiscal problems.

Indeed, California’s recent fiscal history clearly demonstrates that low
taxes can only be preserved when spending is restrained. In fact, during the
past 25 years fiscal conservatives in California and elsewhere have attempted
to enforce fiscal discipline by enacting Tax and Expenditure Limitations
(TELs), which establish limits on expenditure growth. Many studies find TELs
to be ineffective. However, in the early 1990s two states, Colorado and
Washington, were able to restrain spending by enacting TELs with especially low
limits.

The success of Colorado’s TEL, the Taxpayer Bill of Rights (TABOR), is
probably the most dramatic. TABOR was unique because in addition to setting a
low expenditure limit, it mandated immediate taxpayer refunds of surplus
revenues. Shortly after TABOR was enacted, revenue began to exceed the limit.
As a result, Colorado taxpayers received a tax rebate every year between 1997
and 2002. During this time, Colorado reduced taxes more than any other state,
issuing tax rebates that have totaled more than $3.2 billion.

Additionally, TABOR has also forced Colorado residents to see the costs
inherent in government programs. In other states, residents often support
higher spending because they can see the benefits of a particular program, but
remain blissfully unaware of the costs that they and other taxpayers will be
forced to bear.

However, in Colorado the annual tax rebates brings these tradeoffs clearly
into focus. In every year from 1993 to 1999 there was a proposal on the ballot
to either raise taxes or increase spending in excess of the TABOR limit.
Knowing these initiatives would markedly reduce the size of their annual tax
rebate, voters soundly defeated each of these measures. Now, in 2001, an
initiative to increase spending for Colorado schools did pass. However,
Colorado taxpayers still received tax rebates totaling more than $900 million
from fiscal 2001 revenues.

Overall, Proposition 13 enjoyed a great deal of success at lowering taxes,
both in California and across the country. However, it has been less successful
at keeping taxes low. Indeed, soaring expenditures over the last 25 years have
resulted in sharp tax increases in the Golden State. Still, one important
lesson from the 1990s is that well designed expenditure limits can both
effectively restrain spending and provide tax relief. Indeed, spending limits
modeled after Colorado’s Taxpayer Bill of Rights may well be the best strategy
for those seeking to reduce the size of government during the next 25 years.

Michael New is an Adjunct Scholar at the Cato Institute and Post-Doctoral Fellow at the Harvard-MIT Data Center.