INTRODUCING THE TAX REVOLT
TAXATION IS one of the most basic political issues. Taxes help to determine who gets what, when, and how. Tax policy also defines what government can do about every other issue, from health care to the environment to national defense — because doing things takes money, and money means taxation.
For Americans in the twenty-first century, however, taxation is not just an important issue. Taxes, and tax cuts in particular, are the central domestic issue of our time. Candidates for Congress and the Presidency regularly campaign on the promise of tax cuts. Big, high-profile tax cuts appear like clockwork at the top of the domestic policy agenda. Since 2001, Congress has voted to abolish the tax on inherited wealth and has passed a major income tax cut almost every year, including two of the three largest income tax cuts in American history. Congress wrote sunset provisions into these laws that will keep tax cuts at the top of the political agenda for the foreseeable future. Influential politicians are openly pushing for even more tax cuts as a way to shrink the government by starving it of resources. Some politicians, including President George W. Bush and several Republican presidential candidates, have floated the idea of repealing the income tax altogether.
It was not always this way. Americans have a tradition of tax protest — every schoolchild has heard of the Boston Tea Party — but our politicians' current obsession with tax cuts is something new. For three decades after World War II, tax revenues rose to levels that were historically unprecedented. Elected officials from both major parties were happy to let taxes rise. They rarely fought over taxes. They rarely even mentioned the word at election time. American voters, for their part, rarely considered tax policy when they were deciding whom to vote for. They mostly paid their taxes without protest. Our national obsession with tax cuts is not a timeless cultural trait. It is a new political development.
How did taxes — and tax cuts in particular — come to be such a central issue in American political life? The answer lies in a short-lived but intense wave of anti-tax fervor that swept over American politics in the 1970s. After decades of supporting the growth of government with their votes and their taxes, Americans rebelled against the local property tax. Hundreds of thousands of homeowners across the United States picketed, petitioned, and even withheld payment. The movement caught politicians by surprise. Officials scrambled to position themselves as champions of the taxpayer. They voted to cut taxes. They voted to limit the future growth of taxes. And they ushered in a new era in American politics.
This wave of tax protest was a defining moment for many politicians who lived through it. Political entrepreneurs — mostly in the Republican Party — seized on tax cuts as a populist issue that they could use to define themselves and their party in the political marketplace. They led the charge for what would become the largest income tax cut in American history, the Economic Recovery Tax Act of 1981 (ERTA). The political scientists Jacob Hacker and Paul Pierson recently described the memory of this campaign and that tax cut as "the guiding light" of President George W. Bush's domestic agenda. And that tax cut was only possible, they wrote, because President Ronald Reagan had "the popular anti-tax tide of the late 1970s at his back."
This is a book about that anti-tax tide: what it was, where it came from, and what it did to our politics.
WHAT THE TAX REVOLT WAS
The anti-tax tide of the 1970s was a tax revolt. The phrase may conjure images of backwoods revolutionaries priming their muskets or peasants parading around with the tax collector's head on a pike. These images are only partly misleading. To be sure, the tax revolt of the 1970s was something less than an armed rebellion. But it was much more than a trend in public opinion. It was what sociologists call a social movement: a sustained, collective, and unconventional challenge to authority.
Social movements are politics by other means. They are unconventional in the sense that they take place outside official channels and depart from the usual norms of political participation. To grasp what makes a social movement different from the political process you learned about in high school civics, picture some scenes from the tax revolt: a dozen senior citizens assemble to burn their assessment notices on the steps of the county courthouse; thousands of people pack into an auditorium and pledge not to pay their property taxes; a mob of homeowners take to the streets and smash the mayor's car; a crowd of protesters interrupt a county board meeting to seize microphones and shout down their elected tax assessor. The tax rebels did all this and more. They also did the ordinary stuff of politics — they wrote letters, signed petitions, and voted — but they did even these familiar actions in ways that broke with business as usual. The letters flowed in a deluge. The petitions expressed radical new demands to abolish old taxes. And the voters rejected establishment politicians in favor of grassroots ballot measures. One of the rebels' most characteristic demands was to take property taxes out of the ordinary political process altogether — to bind the hands of elected officials by establishing a constitutional limit on how much they could tax. Many of the protesters may have secretly wished for muskets and pikes, but they challenged the old order effectively enough without them.
Tax policy is usually made by elites, but the tax rebels came from all walks of life. A composite portrait would show a homeowner who was typically — but by no means always — a middle-aged white man, married, with an income slightly above the median. His occupation might be almost anything. Mike Rubino, one of the movement's first leaders in California and in the country, drove a beer delivery truck. Robert Tisch, one of the movement's most influential leaders in Michigan, was a former tax assessor and a drain commissioner on the Shiawasee County payroll. George Wiley, one of the movement's earliest spokespeople in the national media, was a former professor of chemistry who is best remembered for his welfare rights activism. Public employees and college professors were underrepresented, but, as these examples suggest, even they were present and participating. Real estate professionals were overrepresented, but they were a small minority in a big and diverse movement. Anyone might be a tax rebel. The tax protesters saw themselves as average people, and surveys from that era suggest that they were basically right.
Like any other movement, the tax revolt had a hard core of leaders and organizers who were especially committed to the cause. These organizers had more political experience than the average person, but they came from all walks of life, too, and from all parts of the political spectrum. Some, like the Massachusetts homemaker Barbara Anderson, had cut their teeth campaigning for conservative causes at a time when this was seen as a fringe activity even in the Republican Party. Others, like George Wiley and the California social work professor Timothy Sampson, were leftists who had learned their politics in the movement for welfare rights. Even the most committed tax rebels shared little beyond a conviction that property taxes were intolerable.
Their protest made headlines all around the world. The fact that voters dislike taxes is not in itself newsworthy, and incumbent politicians everywhere expect voters to turn against them when they raise taxes. But the American tax revolt was unusually ferocious, and it looked like an unprovoked assault. Policy makers had not raised taxes. They had not passed new taxes. The tax that aroused the rebels' anger — the local property tax — was the oldest tax levied in the United States. Its legal basis was enshrined in nineteenth-century state constitutions, but in fact and in administrative practice it was older still. It may even have the distinction of being the only colonial-era tax that survived into the 1970s. Americans had put up with this tax for hundreds of years. Why on earth were they suddenly demanding its abolition? Where, in short, did the tax revolt come from?
At the time, political commentators on the right had a favorite answer: taxpayers rebelled because taxes were just too high. The trouble with this explanation is that it does not fit the facts. American taxes were not very high compared to taxes in other countries that did not have tax revolts. The local property tax was not very burdensome compared to the income taxes that Americans paid without protest. And the people who protested the property tax were not taxed very heavily compared to the people who did nothing. It is true that the tax rebels wanted lower property taxes, but high taxes are not the explanation for why they rebelled.
Some observers on the left argued that taxpayers rebelled because the tax system was riddled with loopholes that unjustly favored the rich and powerful. The trouble with this explanation is that people rose up in protest against the property tax after reformers tried to fix the worst injustices. In state after state, the tax revolt followed closely on the heels of reforms that made the property tax less arbitrary and more progressive than ever before. The movement was not a protest against distributive injustice.
This book shows that taxpayers rebelled because the very same reforms that increased the fairness of the property tax also exposed taxpayers to new income shocks. By modernizing and standardizing tax assessment, the reformers did away with traditional and informal tax breaks that dated from the late nineteenth century. Local tax assessors had dispensed these informal tax privileges unevenly and often arbitrarily. But most homeowners received substantial benefit from them. When they were swept away, homeowners fought to restore them in a new and permanent form.
WHERE THE TAX REVOLT CAME FROM: INFORMAL TAX PRIVILEGES AS SOCIAL PROTECTION
The central argument of this book is that state officials caused the tax revolt by doing away with informal tax privileges, and people fought to restore those privileges because they had provided a kind of social protection from the market.
A tax privilege is a specific exception to the normal rules of taxation that is designed to benefit a particular person or group of people. For some readers, the term may call to mind prerevolutionary France, where the king routinely granted special tax exemptions to "clergymen, courtiers, nobles, military officers, magistrates and lesser officers" and many other groups called privilegiés. (On the eve of the French Revolution, one sure way to insult a nobleman was to call him a "taillable," or taxpayer, because only common people paid the tax called the taille.) But tax privileges are common in the modern world as well. A well-known example from the contemporary United States is the income tax deduction for mortgage interest on owner-occupied dwellings — the so-called home mortgage interest deduction. This deduction is a special rule that applies to homeowners: before you calculate the tax you owe on your annual income, you may first reduce your taxable income by the amount of interest that you paid on your mortgage. This deduction is different from the tax privileges of prerevolutionary France in many ways, most importantly in that it favors a middle class instead of a hereditary aristocracy. It is nonetheless a tax privilege. It specifically exempts some people (namely, homeowners) from the normal taxes that they would otherwise owe.
These examples are formal tax privileges. A formal tax privilege is codified in law — whether in a written constitution, in a statute, or in the procedural regulations that define how a statute is implemented. For example, the federal income tax code today enumerates some 160 specific privileges, called "tax expenditures" or "tax preferences," that provide hundreds of billions of dollars in benefits to defined constituencies that range from low-income college students to wealthy oil companies.
An informal tax privilege, by contrast, is one that is not codified in law but that is nevertheless part of the tax system in practice. Many tax systems incorporate informal privileges. Informal tax privileges exist because most countries permit tax officials the leeway to adjust how much they collect from particular taxpayers, and in practice, these officials often go especially easy on certain categories of people. There is anecdotal evidence, for example, that tax collectors in the Internal Revenue Service routinely go soft on delinquent taxpayers who have the right political connections. You will not find this tax break written anywhere in the tax code — but, if the stories are true, it is a real tax privilege with real benefits for the politically well-connected. Even though informal tax privileges like this are not codified, they tend to become institutionalized in custom. The taxpayers who benefit from informal tax privileges come to expect that special rules apply to them. They also tend to react strongly if their special treatment is threatened.
The property tax rebels rebelled because a series of state tax reforms threatened to take away an informal tax privilege called fractional assessment. This tax privilege refers to the custom of taxing people on a fraction of the value of their taxable property. Most local governments in the United States levied property taxes in the twentieth century, and most state constitutions had "uniformity clauses" dictating that all owners of real estate should pay taxes on the full market value of their property. In practice, however, homeowners received special treatment. They were typically taxed on a small fraction of the true value of their homes. When the federal government first began collecting information about the quality of local tax administration, in the late 1950s, it found that fractional assessment was legal in only twenty-two states but nearly universal in practice. Even in states where the constitution permitted taxing homeowners on less than the full value of their homes, the true fraction they were taxed on was almost always less than the law dictated and less than the fraction applied to other property owners.
Officials could dispense this privilege because the American property tax was, and is, levied on something invisible. The property tax is a tax ad valorem, meaning a tax on value, rather than on some other characteristic of real estate, such as its land area, or the number of windows it has, or the number of bushels of grain it yields at harvest time. A tax ad valorem has advantages for the government, one of which is that it is elastic: the tax base grows automatically as the economy grows. But it also has one key disadvantage. Unlike acres of land, windows, or bushels, value is not something you can observe directly, except during the rare and fleeting instant when a property is actually being sold. At all other times — that is, almost always — the value of a property refers to the purely hypothetical price that it would sell for if it were sold. Tax officials have to use various techniques to estimate that value indirectly, for example by calculating what it would cost to replace a structure at current construction prices or by observing the price of comparable land parcels that sold in the recent past. Any such technique of estimation opens room for error and disagreement — or for deliberate manipulation and favoritism. That is one reason why political thinkers as astute as James Madison and Alexander Hamilton thought that real estate values were a "chimerical" basis for taxation.
Since the nineteenth century, the officials in charge of estimating property values had dispensed informal tax privileges because it was in their interest to do so. Assessors were generally local elected officials or political appointees. They typically used their discretion politically, rewarding favored constituencies by assessing their property at a fraction of its true value. In exchange, they received votes, campaign contributions, and sometimes even bribes. Although some big commercial property owners benefited from fractional assessments, the most favored constituency was actually homeowners, who were a big, stable, and potentially loyal voting bloc. Of course, not all homeowners benefited equally. There were gross inconsistencies among communities because local assessors in different places were subject to little standardization or state supervision. There were also inconsistencies within communities because assessors often traded particularly favorable assessments directly for political contributions or bribes. Most assessors also had the habit of copying the assessment rolls from year to year and ignoring changes in the market value of homes — a practice that was good for most homeowners when the market was strong and homes were appreciating in value, but bad for those homeowners, often poor or black, who lived in areas of declining property values. Still, despite all these inequities, most homeowners paid tax on a small fraction of the true market value of their homes.