Goldman, George E.

Radovic, Ellen Z.

English

Research Papers in Economics

THE  EFFECT OF TAX  AND  SPENDING
INITIATIVES
ON  THE LEVEL OF PUBLIC SERVICES
George Goldman and Ellen Z. Radovic
University of California-Berkeley
The  tax revolt which  started in  1978  is a  very interesting area.  It
involves our values as a society, our political system,  our social struc-
ture, and how we institutionalize our responsibilities and relationships
within our  society. This is  also a very  good  area for public  policy  ed-
ucation,  because the press does a very  poor job of looking  at develop-
ments around the country  in local  and  state finance.  The  press  will
occasionally  report on initiatives  on the ballot or about tax structure
within one's own state, but generally they neglect to look at the issue
nationwide.
One of the first things I'd like to do  is look  for criteria upon which
to judge the behavior of local or state government. Let me read to you
these criteria  which  I have found.
Two hundred  and eight years  ago,  George  Mason  put into the  Vir-
ginia Bill of Rights,
Government is, or ought, to be instituted for the common benefit
of the people, nation or community;  of all the various modes and
forms of government,  that is best which  is capable  of producing
the  greatest  degree  of happiness  and  safety,  and  is  most  effec-
tually  secured against the danger of maladministration.
Eight years before, Voltaire  said,
In general,  the  art  of government  consists  of taking  as  much
money as possible from one class  of citizens  to give to the other.
As  you can  see,  criteria  used  even  200 years  ago  varied  a lot  and
provided no  clear guidance  on  how to judge the  performance  of gov-
ernment.
Today,  I would  like to discuss what has been happening  to govern-
ment,  and especially  to state and local  government's revenues,  taxes,
and services over the last six years - since the passage of Proposition
13  in  California  in June  1978.  My  purpose  today  is  not  so much  to
judge, but to  describe and explain the events of the last six years.
30The first tax revolt probably occurred  in 1632 in Massachusetts.  In
that year, the settlers in Watertown were asked to contribute taxes to
build fortifications for the city of Cambridge. As you might guess, they
were  quite upset about this, but Governor Winthrop of the Massachu-
setts Bay Colony  convinced  them that since  they had just  instituted
taxation with representation in the Massachusetts  Bay Colony, it was
in fact their obligation to contribute these taxes.  In  1630, the Massa-
chusetts Bay Company had been changed from a commercial company
into an elected assembly,  and elective rights were extended to all free
men who were  members of the colony's Puritan churches.
Many  of us  may remember  reading  about  the tax rebellion  called
Shay's  Rebellion that took  place  in 1786  when  our country was  only
a few years old.  It consisted literally of an armed uprising against the
collection  of taxes and debts.  Luckily,  the rebellion  ended  with very
little bloodshed  and our country  survived, though certainly it was one
of the most serious tax revolts in the history of the United States. Over
the past  200 years,  there have been waves  of tax revolt.  Past revolts
have  been started  over income taxes,  property  taxes, over just about
all kinds of taxation issues.  It sometimes helps to remember that the
recent,  and perhaps ongoing,  tax revolt is really  one in  a continuing
series of revolts in the history of the country.
It is  also important to remember that each of our states has a sep-
arate  social,  political,  and  economic  history,  and the statistics which
I'll be giving you later are averages over the whole country.  It would,
of course, be much better to look at the tax revolt  in every applicable
state,  but this would take several  days and  not the hour that I  have
now.  First,  I'd like to set up  a little context  for the tax revolt which
started with the Jarvis-Gann  Proposition  13.
From World  War II to the late  1970's, all developed noncommunist
countries  increased  their public  sectors'  share  of total  GNP or GDP.
Right now it ranges from 25 percent to 30 percent of the total economy
in Japan  and the  United States  all the  way  up  to  45  percent  to  50
percent of the economy in Sweden, Belgium,  Norway, and Holland.  In
addition, it seems generally true that the richer the country  is in per
capita income, the larger is its public sector. There is not much in the
literature that explains  why this is so.  What,  in fact, determines  the
optimal  size  or  level  of the public  sector  in any  given  country?  One
hypothesis that I have formulated is that advanced developed societies
need  growing public  sectors just to  maintain acceptable  income  dis-
tribution levels.  In the United States in the past few years, the public
sector share of GNP has remained constant and the Gini coefficient  (a
measure of income equality)  has indicated  a decline in  income equal-
ity. The evidence for any relationship between the two trends is slight,
however,  and merits further  study.
Nationally, the  last two administrations  have  campaigned  with anti-
public  sector, anti-bureaucracy  rhetoric, and  it looks like a third na-
31tional administration  will win office this year with precisely  the same
rhetoric. We've seen these same tendencies in developed countries around
the  world.  The  recent  election in Canada  illustrates  the rise  of anti-
public  sector philosophy. Many European countries  as well are trying
to  cut taxes  and  decrease  spending  in  order to  at least  bring  down
growth of their public sectors.
Since World  War II, state and  local government  expenditures have
gone up  three times as  fast as  the economy  as a whole.  Clearly, this
trend  had to eventually  come  to a halt, and  in the late  1970's it did.
The two forces probably most responsible  for the tax revolt were very
rapid  inflation  that  started  in  the  late  1960's  and  the  decline  and
levelling  off in real household  income  that began in the early 1970's.
These  were  probably the two  forces  which,  when  combined  with  in-
creasing  local and state sector  expenditures,  provoked  the tax revolt
of the late  1970's.
What did happen in the late 1970's? What things really did change?
During the period  1978-1982:
28 states reduced or restricted their property taxes,
15 states reduced income  taxes,
10 states indexed income  taxes,
7  states eliminated gift taxes,  and
6 states repealed  inheritance  taxes.
In 1978, federal transfers to state and local governments  were $231
per capita.  By  1982,  this had fallen  to  $174  per  capita,  and,  in four
years, state and local taxes per capita went down  14 percent.  In some
states, the decline was even greater. State and local taxation per capita
went down 29 percent  in California.  Between  1978 and  1980 property
taxes as  a proportion  of total revenue  for state and local  government
fell from 43  percent  to 35 percent  of tax collections.  And in the same
two year period,  fees  and charges rose  from  18  percent  to 20  percent
of tax collections  [1].
The tax revolt did not hit all states with equal force. In three states
especially,  California, Idaho, and Massachusetts,  quite severe property
tax limitations were passed. In the four year period from 1978 to 1982,
twelve initiatives  designed  to drastically cut property  taxes were in-
troduced  onto  state  ballots.  They all  were  quite  severe  property  tax
limitations.  In only three states  did these initiatives pass, and  in all
three  states  special  circumstances  existed.  The  first  state  to  pass  a
property tax initiative was California  where property  taxes had been
rising quite rapidly in recent years due to inflation in property values.
As with  other  states,  real  household  income  was  not  going  up,  but
remained  about constant over the few years preceding Proposition  13.
In addition,  the state had a very, very large surplus which continued
to  increase  and which  the pro-tax  revolt forces  could  claim  could  be
used to relieve the property  tax burden.
32In Idaho, which passed a strong property tax initiative a few months
after California  did,  tax rules had just been  changed that  would in-
crease homeowner's property taxes. These recent changes in tax rules,
which greatly increased property taxes, were enough to cause the prop-
erty tax revolt to be successful.
In Massachusetts,  property  taxes had  also  gone  up  quite  a bit  in
recent  years.  In  addition,  Massachusetts  was  a  relatively  high  tax
burden state, relying heavily  on the property tax. In fact, the average
property tax in the state at that time was 174 percent of the property
tax in the rest of the country. Just the year before the initiative Prop-
osition 2/2 passed, property taxes had gone up by about 12 percent [7].
The political  science  literature is not absolutely  certain as to what
the forces  were that  caused property  tax revolts  to  succeed  in some
states and not in others. It seems that some combination of the follow-
ing three factors was responsible  for the success of various tax revolts:
(1)  the overall tax load,  (2)  highly  visible taxes,  like property  taxes,
and  (3)  recent increases  in visible  taxes.
Tax  revolts,  like  any  political  change,  were  not  necessarily  only
about  the  economic  level  of taxation.  Barbara  Anderson,  one  of the
leaders of the 1980 tax revolt in Massachusetts, said, "Our fight is not
about money.  It's about control.  They have to learn, once and  for all,
that it's our government"  [7].  You  can see that there was  a little bit
of populist sentiment  involved in this tax revolt  as well.
What  was  the  effect  on  service  levels  in  local  communities?  Pro-
grams that had strong constituencies and strong political support were
not hurt at all. Public  safety,  police  and fire,  for instance, stayed rel-
atively the  same in numbers  of employees  per thousand  population.
Generally,  across  the states,  it was  not police  and  fire  services  that
were  hurt as  a  result of the tax revolt,  but  rather  services  such  as
education,  welfare, and health.  The areas that truly suffered the larg-
est cuts were park and recreation services, public works, overhead and
general administration, capital projects of all kinds, maintenance,  and
analytic  staff support of local and state government.  The decrease  in
maintenance  expenditures  led  to the writing  of America in Ruins in
1981,  a book that urged Congress  and the various  states to  do some-
thing about our deteriorating  infrastructure  [2].
There  has been  a lot of talk about using volunteers  to help replace
lost personnel in local government  services.  There has also been a lot
written about the privatization of public services, but most of the evi-
dence  is  merely  anecdotal.  No  hard  numbers  are  available  on  how
important these two tendencies have become since 1978. I suspect they
have not been really all that important as replacements  for lost public
services around the country. Fees and charges have increased tremen-
dously in many places  around the country.  In California in the three
years from  1978 to  1981, the amount collected  from fees and charges
of all kinds went up 40 percent.
33Income  distribution,  of course,  has been  affected  as  well.  As the
Urban Institute's new book,  The Reagan Record, points out, the work-
ing  poor  especially  have  been  hurt  by  the  combined  decreases  and
leveling off in public expenditures  in the federal  government  as well
as  in state and  local government  [5].  There  are also  all kinds of un-
known  impacts  on  social  and  economic  mobility  resulting  from  the
decreases  in public  sector programs.
The  good  news  is that state  and  local  government  have  survived,
and that  they  have  adjusted  to the  relatively  severe  cuts  in public
funding.  They  have survived by locating new  sources  of money,  such
as  new  taxes  and  new  fees.  In addition,  special  services  and  fringe
programs  had been  cut - programs  like summer  school,  adult  edu-
cation, and park maintenance.  The political principle has been to min-
imize disruption and to maintain the status quo as much as possible,
and  to keep  mainline  programs  in place.  It has been  an effort to try
to utilize attrition and hiring freezes, as well as bookkeeping  devices,
to keep local government going. In addition, new taxes passed in 1981,
1982,  1983, and the  economic recovery,  which started then, have  also
been responsible  for keeping  local government  going.
There has certainly  been an effect  on efficiency  in government.  There
are a lot of stories and reports of government  agencies becoming much
more productive because  of enforced  cuts. We also found that in many
communities  we  could  get  along without  some  of the marginal  pro-
grams that previously  existed.  It's also true that,  in some  cases,  our
overall  efficiency  did drop.  The  cost of repairing  cars was  not really
integrated  into road maintenance  procedures  in order  to arrive at an
optimal  road  maintenance  level.  Cuts  in  lighting  may  have  caused
more  crime.  Cuts  in  social  welfare  may  have  caused more  drug  ad-
diction and more  crime.  And our educational  cuts may have  reduced
long-run  productivity  in ways that we  can no  longer measure at this
time.  To determine  the lasting  effects  of the tax revolt,  there was  a
state poll in  1983 that indicated  that:
41 states  had limitations  on hiring,
37 states  had engaged in program cuts,
32 states  had restrictions  on state employees' travel,
22 states still had plans to lay off workers,
14 states delayed employee payments,  and
7 states put workers  on unpaid leave.
Because of the economic recession around  1980 several states found
themselves in deep economic trouble and, because of this, many passed
new taxes. In  1981 and 1982, thirty-four states passed new taxes. And
in  1983,  thirty-eight  states  passed  new  taxes.  These  taxes  consisted
of:
16 states passed new or increased  income taxes,
11 states increased their sales taxes,
13  states  increased their business  taxes,
3413 states increased their cigarette  taxes,
13 states increased  alcohol and beverage taxes,
19 states increased  motor fuel taxes,  and
17 states increased  or opposed miscellaneous taxes  [3, p. 16-17].
State  and  local  government  did  learn  some  lessons  from the  tax
revolt. These  were:  (1)  if there is a state or local  government surplus,
then most of this surplus  should be shared  with the taxpayers,  (2)  if
new taxes are needed, first employ the sin taxes on alcohol,  cigarettes,
and gasoline;  then  impose  business  taxes;  and,  as a  last resort,  use
taxes on the general  voters,  and  (3) there is  a tax revolt  community
out there that is quite well organized, that has interstate connections,
and that knows how to use the mechanisms  of government  [3].
There  are  several  state  tax initiatives  on the ballot  this year.  In
November,  1984,  Michigan  will  have an  initiative  to appeal  all tax
increases  since  1981  and to provide  for voter  approval  of any future
tax increases.  The state of Oregon has an initiative to restrict property
taxes to  11/2  percent  of market value.  Oregon has had similar  initia-
tives  on the ballot  three  times before  and  in close  elections  has  de-
feated all three.  California has another Jarvis initiative  on the ballot
which would "close  the loopholes  in Proposition  13."  It would provide
for  a $1.6  billion property tax refund  and would  also  require  a  two-
thirds vote of the electorate for any new tax or fee increase in any tax
district or special district.  Massachusetts has an initiative  which would
eliminate the 712 percent income tax surcharge its legislature recently
passed.
What kinds of things can you put into a public policy program about
issues such as tax initiatives? The most important element in a public
policy program  should be information  on how the initiative  will work
and what the impacts will be  on the various  segments  of the popula-
tion.  Then,  a policy  program  could include  taxation alternatives  and
the impacts they would have in the state. I think it is also relevant to
include  how  your  state  compares  with  other states  in the  union  in
terms  of tax collections  and tax programs.  I think it is also  relevant
to  include  information  about  how  the United  States  compares  with
other developed  noncommunist  countries  around the world.
So, where do we find ourselves now? Are we in a new era? Well, the
answer  is  partially yes and partially  no.  Some things have  changed
and we are definitely no longer in the pre-1978 era - the golden  age
of state and local government. Probably due to the introduction of new,
or increases  in already  existing,  fees and charges, most  of our public
sector  programs  still exist.  Senator Moynihan  has said that June  6,
1978,  when  Proposition  13  passed, marked the end of the  New Deal.
I don't think things have changed  that much, but it is  true that the
date did mark a break  in state and local government  tax philosophy
that had existed since World War II. Because  of the new taxes of 1983
and the economic  upturn, state  and local  government  in 1983  had a
35$7 billion surplus across the United States. Of course, this was not an
even surplus. Some states had much larger surpluses than others. But,
in  general,  the  financial  status  in  state  and  local  government  has
improved  since the period  1978-1982.
I think the future very much depends  upon whether we continue to
make  economic  progress  and  see  increases  in real  personal  income,
and  on whether  our public  legislators  have  learned  not to make the
mistakes of the past.
REFERENCES
[11  Advisory Commission on Intergovernmental  Relations. Significant Features  of Fiscal  Federalism,
1982-83 Edition.  Washington DC: January  1984.
[2]  Choate, Pat,  and Susan Walter. America in Ruins. Washington  DC:  The Council  of State Plan-
ning Agencies,  1981.
[31  Gold,  Steven  D.  "State  Tax Increases  of 1983:  Prelude  to Another  Tax  Revolt?"  National Tax
Journal 37 (1984):9-22.
[4]  Organisation  for Economic  Co-operation  and Development.  Revenue Statistics of OECD Member
Countries 1965-1983. Paris:  1984.
[51  Palmer,  John  L.,  and  Isabel  V.  Sawhill,  eds.  The Reagan Record.  Cambridge  MA:  Ballinger
Publishing Co.,  1984.
[6]  Sears,  David 0., and Jack Citrin.  Tax Revolt: Something for Nothing in California. Cambridge
MA:  Harvard  University Press,  1982.
[71  Susskind,  Lawrence  E.,  ed. Proposition  21,2: Its Impact on Massachusetts. Cambridge  MA:  Oel-
egschlager,  Gunn and  Hain, Publishers,  Inc.,  1983.
36

THE EFFECT OF TAX AND SPENDING INITIATIVES ON THE LEVEL OF PUBLIC SERVICES

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