Tax Hikes Are on the Ballot

This article appeared on Washington Examiner on October 26, 2020.
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In this election, many voters will not only be choosing politicians for office but also voting on whether to increase or decrease their state and local taxes.

Over the years, people have mainly rejected higher taxes when given a choice at the ballot box. At the same time, they have mainly supported government bond issues, even though these debt increases will result in higher taxes down the road.

Large income tax increases are on the ballot in two states this year. Arizona voters will decide on Proposition 208, which would raise the top individual income tax rate from 4.5% to 8%. Illinois voters will decide whether or not to convert the state’s flat income tax of 4.95% to a multi‐​rate system with a top rate of 7.99%.

Some states will decide on cigarette taxes. Oregon voters will vote on Measure 108 to increase taxes by $2 per pack. Colorado voters will vote on Proposition EE to phase in a tax increase of $1.80 per pack.

California has the largest proposed tax increase. Proposition 13 in 1978 imposed a cap on property taxes based on the purchase price and annual adjustments. This year, voters will decide on Proposition 15 whether or not to lift the cap for commercial and industrial properties, which would raise up to $12 billion a year.

Which side do voters usually take on tax questions?

I tallied election results from Ballotpedia over the past decade on statewide tax votes and found good news and bad news. The good news is that people support the anti‐​tax side on 60% of income tax votes and 76% of sales and excise tax votes. That is, they tend to reject tax hikes and approve tax cuts.

The bad news is that two‐​thirds of sales and income questions on statewide ballots are tax‐​increase questions, not tax cuts. So even when taxpayers repeatedly show a preference for lower taxes, politicians and special‐​interest lobbies continue to throw tax‐​hike questions on ballots hoping to get lucky.

In Arizona, for example, teachers’ unions are behind the drive for Proposition 208, and tax‐​hike supporters are hugely outspending opponents. Similarly, in California, the teachers’ unions are the main funders of the campaign to hike property taxes and are outspending the opposition.

Luckily, the California proposal is an anomaly. Ballotpedia data shows that about 90 percent of statewide property tax measures on ballots are tax cuts, not hikes. Voters took the low‐​tax side on about 80% of these measures over the past decade, although most of them were small cuts aimed at narrow groups.

Aside from explicit tax questions, many ballots contain hidden tax hikes in the form of bond issues. When your state or locality issues general obligation bonds, it means higher taxes later on to pay the principal and interest. Every two years, there are hundreds of state and local bonds on the ballot across the country to raise tens of billions of dollars for schools, transit systems, and other investments.

Many voters are apparently fooled by these hidden and deferred tax hikes because while they mainly reject explicit tax increases, they typically approve more than two‐​thirds of bond issues in elections.

That is unfortunate because it is more costly to pay for investments with debt than with current tax revenues. Debt financing incurs interest costs as well as fees paid to Wall Street middlemen for advisory and issuance services. New Mexico voters will be deciding this year on a $9.7 million bond issue to fund libraries, but the state could have easily fit that expense into its $20 billion annual budget.

There is no long‐​run advantage to government debt because the resulting interest costs consume revenues that could otherwise be used for investment. The California budget a few years ago noted the problem: “The increasing reliance on borrowing to pay for infrastructure has meant that roughly one out of every two dollars spent on infrastructure investments goes to pay interest costs, rather than construction costs.”

Another problem is that debt financing fuels the political impulse to spend. We’ve seen jurisdictions such as Greece, Puerto Rico, and Detroit allow debt‐​financed spending get out of control and cause financial crises and widespread economic damage.

State and local governments don’t need to incur debt for investments such as schools, as some of our more frugal states have shown. Idaho, Nebraska, and Wyoming, for example, have very little debt and generally use current revenues to pay for infrastructure.

Voters should reject tax increases at the ballot box and instead demand governments restrain their budgets as families and businesses are doing this year. Voters should also reject bond issues if they don’t want to pay higher state and local taxes later on.