The first murmurings seemed to appear in the middle 1970’s. In 1978, California voters passed Proposition 13, the “People’s Initiative to Limit Property Taxation.” Prop 13 rolled back property assessments to their 1975 values, and it restricted annual increases in assessed value to 2% per year – far below the rate of inflation. It also prohibited reassessment for changes in market value except upon new construction or change in ownership.
Prop 13 also required a 2/3 legislative majority to increase tax rates or state revenue, and even required a 2/3 majority vote for all local tax increases.
But the great national “tax revolt” came to fruition during the first presidential term of former California governor Ronald Reagan. His promotion of “supply-side economics” was based on the controversial (and unproven) theory that lower marginal tax rates, especially those for the highest incomes, spur economic growth and actually increase government revenue. In 1981, during Reagan’s first year in office, marginal individual income tax rates were cut from 70% to 50%, They were cut further to 28% in 1988. From 70% to 28% in just seven years.
Faced with huge and growing deficits, President George H. W. Bush famously had to break his promise of “read my lips – no… new… taxes!” He signed into law tax increases that raised that “supply-side” marginal tax rate back to an astronomical 31%. Deficits continued to expand.
But the arch-enemy of supply-siders turned out to be Bill Clinton. The direction changed in 1993, Clinton’s first year in office. After a tie-breaking vote in the Senate by VP Al Gore, Clinton signed a tax increase that raised that all-important marginal tax rate to a breathtaking 39.6%. Tax-cut advocates predicted gloom and doom because of these ruinously high tax rates – the economy would collapse and grass would grow through the cracks in every Main Street in America.
The deficit began to come down during the Clinton years, while the American economy boomed and the “dot-com” revolution flourished. But in 1994 Newt Gingrich’s “Republican Revolution” had seized control of Congress from the Democrats for the first time in decades. Republicans would hold on to unbroken control of Congress for the next twelve years. They still haven’t forgotten what had brought them to power, and it wasn’t the winning personality of Newt Gingrich or his Contract With America. It was the backlash against taxes and the promise of a “free lunch” of tax cuts.
Have you checked out California’s state financial picture recently?
But here is the irony. Republicans still position themselves as the fiscally responsible party, contrasting themselves with the “tax and spend” Democrats. But after decades of evidence that cuts in the top marginal tax rate produce huge budget deficits, many of the Repubican faithful still believe that “tax cuts pay for themselves,” and that a low top marginal tax rate is a necessary condition of a healthy economy.
Why do they believe this? Stay tuned for the next installment.
(Watch for my followup to this post in the next few days – to be called “A Tax Cut for All Seasons.”)