Commentary

Tax Hikes Are Still Ballot Losers

Oregon voters were the latest to reject a tax hike when state legislators offered them one in a Jan. 28 referendum. In a near-record turnout, voters defeated a proposal to hike the state’s corporate and individual income tax rates. A 10-point statewide margin reflected a “No” vote in 32 of 36 counties. That rejection of a government-proposed tax hike should not surprise most Americans. They know that government already takes too much and spends too much.

Oregon’s political establishment, however, apparently was surprised by the vote in favor of budget constraint. After all, the tax increase was supported by a broad coalition of interest groups, labor unions, business associations, environmentalists, and university presidents. But Oregonians didn’t listen to those government-dependent groups. Instead, they repeated their historic reluctance to approve new taxes. Oregon voters haven’t approved an income tax increase since at least 1930.

Oregon’s Ballot Measure 28 proposed a “temporary” three-year income tax increase in an attempt to close the state’s budget gap. Instead, higher taxes would probably just have fueled higher spending. In addition, higher tax rates would have driven mobile businesses out of the state and scared away the well-paid engineers and scientists that are crucial to the high-tech industries that every state wants today. With so many good alternative locations for business development, states can no longer afford to have uncompetitive tax systems.

Most voters recognized that pitfall, as well as the need to protect their own pocketbooks. They clearly demanded that the state budget be balanced by spending cuts — not tax increases. The Oregon legislature had tried to scare voters by listing specific cuts that would go into effect if Measure 28 lost, including cuts to highly visible education, social services, and law enforcement programs.

That’s the well-worn “Washington Monument” strategy — proposing the most unpopular possible spending cuts if a tax increase isn’t supported. In Oregon, alarmist media stories suggested that, without the tax increase, the elderly, the disabled, and mentally ill would be abandoned and that prisoners would be released from overcrowded prisons.

Voters were right not to buy that story. In turns out that the alleged spending cuts were not really cuts at all. As in other states, what are often called “cuts” are just reductions in large projected spending increases. If an overly optimistic budget assumed 8 percent spending growth that later gets trimmed to 4 percent, state budget parlance refers to that increase as a cut. In Oregon, spending will be 5.5 percent higher after the failure of Measure 28, in contrast to the 8.5 percent increase that would have occurred with the tax increase. Clearly, that’s not a real cut.

This year’s spending increase comes after a decade of rapid budget growth. Oregon’s per-capita, inflation-adjusted spending rose 45 percent between 1990 and 2001. Based on our new survey of state budget trends, that is the fourth highest increase in the nation during the period. The upshot is that Oregon should treat its budget woes as an opportunity to pare back the excess spending built-up during the past decade.

One budget-balancing option would be for Oregon legislators to offer voters a new referendum with a menu of spending cuts to choose from. But politicians try to avoid such open-ended democratic votes, as the ballot box is too unpredictable. Instead, they like one-sided tax-hike votes that they try to control with a big campaign war chest. Oregon’s Yes campaign, which focused on radio advertising and an extensive grassroots campaign, outspent the No side by more than 16-to-1 and still lost.

The Yes campaign’s war chest was almost exclusively funded by public sector unions, particularly the American Federation of State, County and Municipal Employees and the National Education Association. By contrast, the No campaign was largely invisible and didn’t produce paid advertising until the campaign’s final days.

A similar tax-hike rejection occurred in Virginia last November. The state Republican and Democratic parties joined with business lobbies to push for sales tax increases to build more highways. The pro-tax state establishment outspent sales tax opponents 10-to-1, yet the sales tax referendum was soundly defeated.

These crushing defeats on both East and West Coasts confirm that the much-touted birth of a new state-tax increase movement has been stillborn. If state politicians want to have such budget referenda, they should listen to the message taxpayers are sending them, rather than trying to use referenda simply to avoid the heavy lifting of serious budget reforms.

Patrick Basham is senior fellow in the Center for Representative Government at the Cato Institute, and Chris Edwards is Cato’s director of fiscal policy.