Tax Revolt Could Haunt Texans

People love tax cuts. They see them on the ballot and they will gleefully vote for them, often without thinking twice about their consequences. Recently, the voters of Texas had the opportunity to vote on tax cutting amendment to the Texas state constitution and it won overwhelmingly, without regard to potential economic consequences.

The Texas Legislative Council described "Amendment 1" as: "The constitutional amendment increasing the amount of the residence homestead exemption from ad valorem taxation for public school purposes from $15,000 to $25,000, providing for a reduction of the limitation on the total amount of ad valorem taxes that may be imposed for those purposes on the homestead of an elderly or disabled person to reflect the increased exemption amount, authorizing the legislature to prohibit a political subdivision that has adopted an optional residence homestead exemption from ad valorem taxation from reducing the amount of or repealing the exemption, and prohibiting the enactment of a law that imposes a transfer tax on a transaction that conveys fee simple title to real property." Bottom line, this measure greatly restricts state and local entities in its ability to tax property. Coming from the now conservative dominated Texas Legislative Council, it is the epitome of Republican red meat.

This amendment has California's Proposition 13 written all over it, the very popular tax initiative and referendum in the 1970s that many believe paved the way for the "Reagan Revolution." Many also argue that it laid the foundation for the state to become one of the most hostile tax environments of any state in the union.

Howard Jarvis, who spent most of his life as a California businessman and perennial (and unsuccessful) candidate for office, grew tired of the high tax rates in his state. He started a grassroots effort that led to among the toughest restrictions on property tax rates in the country by 1978. The good news is that California has among the lowest property tax rates in the country, the bad news is that it has one of the worst tax environments in the United States when it comes to income taxes. The shift in lost revenue from property simply moved to income, which has harmed businesses (particularly small and medium ones) and has led to a shell game when it comes to revenue, as businesses collect their income tax revenues through higher prices to consumers (making it a more regressive tax). This is the case because businesses don't pay taxes, but are merely tax collectors (since consumers pay every cost of business through their purchases).

Tax cutting activists were forewarned that the proposition could harm the business environment that any fiscal conservative would find important. An article in the April 14th, 1978 New York Times, reported that the same activists that would want to cut property tax would be weary of the harm it could have on business as the pursuit of revenue would turn to companies. It went so far to say that support for the initiative was actually fairly weak and that it was opposed by the business community, which was concerned about higher business taxes. In the end though, it became law.

Although some conservative and free market activists (such as Jack Kemp, Milton Friedman, and others) favored the cuts since they were fans of any opportunity to restrict the ability of government to tax, those who were concerned about what the proposition would do to the business environment proved to be right. According to the conservative Tax Foundation: While California's property taxes are lower than New Jersey, New York, and even Texas, it remains a high tax state. It has the third worst business climate in the country, the highest top marginal income tax rate in the country at 13.3 percent, a corporate income tax of 8.84 percent, and the highest statewide sales tax in the country at 7.5 percent. But in 1978, California had the fourth highest overall tax burden, and today the state still has the fourth highest burden.

Conservatives hate taxes, but some are less dangerous than others. Property taxes are generally better than others, according to the Tax Foundation, because "property taxes fit many of the characteristics of a good tax: they are relatively simple, transparent, neutral, stable, and have a broad base. So while there are some good elements of Prop 13 (especially the prohibition of split roll), we'd rather see caps on other taxes." Instead of learning a lesson from Californians that is over 3 decades old, conservatives in Texas were able to get a similar, far reaching measure, passed into law.

A friend of mine told me to "not worry, this GOP legislature would never pass an income tax to cover this potential revenue loss. You don't make a constitutional amendment with this legislature in mind, but every future one as well. It would be ironic if one of the most pro-business tax environments in the country, became among the least favorable, because of a simple, conservative driven, tax revolt.