Will California Tax Revolt Sweep the Nation?

In 1978, Californians were saddled with the third-highest tax burden in America. In a massive grassroots uprising, California voters passed Proposition 13, placing limits on property taxes and the ability of the legislature to raise taxes. In large measure, Prop. 13 catapulted former Gov. Ronald Reagan into the White House in 1980.  

On May 19, California voters rejected five ballot measures aimed at allowing California to continue its overspending ways. These measures were designed to bring in an additional $6 billion in short-term revenue and $16 billion in additional taxes to close a massive budget deficit. Voters nixed Prop. 1A, the most important proposition, by almost a two-to-one margin. Prop. 1A was a two-headed monster that sought to extend the largest state tax increase in U.S. history for two years while enacting a weak and loophole-ridden budget-leveling tool that proponents touted as a “spending limit,” despite its being nothing of the sort.  Gov. Schwarzenegger and the four legislative leaders, the “Big Five,” put Prop. 1A together with only Sacramento interests in mind, thinking the public sector unions that might be afraid of even a modest budget restraint tool would be bought off by the prospects of higher taxes. It mostly worked, with some unions enthusiastically supporting Prop. 1A and only a few opposed. But the Big Five forgot the most important special interest: the voters.  

In spite of spending $26 million to bully and warn Californians into approving the five propositions, with opponents marshalling only $4 million, every budget-related proposition lost with the strongest showing a pitiful 37.4 % “yes” vote for proposition 1B, a measure heavily backed by the powerful California Teachers Association union.  

Now California lawmakers are struggling to spin the results of the May 19 special election. I was on NPR with Senate President pro Tem Darrell Steinberg (D-Sacramento) the day after the election as he labored to claim that the Tuesday vote was all about frustrated voters, worried about their jobs who simply want the legislature to do its job and not pass the buck to them. He rejected my contention that the vote was an anti-tax vote.

But election-eve polls tell a different story, with California voters seeing themselves as over-taxed and very desirous of cuts in state spending. Polls are nice, but actual votes are better. While Prop. 1A lost by almost 32 points, it lost in fiscally conservative Orange County by almost 53 points while, in the early returns, it was passing in only one of California’s 58 counties: San Francisco. In the end, the most liberal California county, San Francisco, was the kindest to Prop. 1A, turning it down by barely more than six points. A 50-point spread in votes between Orange County and San Francisco County cannot be explained away by Sen. Steinberg’s attempt at damage control spin. Instead, this vote might be the opening shot of the great 2010 tax revolt.  

California now faces a $21.3 billion deficit over 15 months, with general fund revenues projected to be about $86 billion in 2009-10, down from $102.6 billion in 2007. Democrats face an interesting dilemma. They can do one of three things:  

  • Do they reform government, trimming unpopular expenses, such as the state’s bloated welfare rolls with California spending three times the national average on welfare due to our overly loose rules regarding work requirements and aid to illegal immigrant families? 
  • Do they slash and burn popular programs such as education and law enforcement?
  • Do they try another end-run on the state constitution, enacting billions in new taxes with a simple majority vote by simply declaring them to be “fees”?  

Based on my discussions with Democratic lawmakers, I do not expect any attempt at meaningful spending reform. Rather, dramatic reductions in popular programs such as K-12 education and law enforcement seem more likely, with the Democrats in the mood to tell the voters: “These painful cuts are the result of you voters voting against higher taxes.” If the public sector employee unions mobilize against this move, then the final outcome may well be another massive tax hike masquerading under the legal fig leaf of “fees.”  

Either outcome would likely see California voters, recently mobilized under the banner of more than 50 anti-tax tea parties in April (I had the honor addressing the tea parties in Pasadena and Modesto), organizing to make 2010 a repeat of the historic 1978 election by qualifying new tax and spending limitations for the ballot. Were that to occur, it would shake the foundation of the political establishment from the Pacific to the Atlantic.  

Of course, this would be highly problematic for President Obama and the Democrats in Congress. Thus, as much as the rest of the nation would be opposed to bailing out California, Obama may see California as “too big to fail” and come to the Golden State’s rescue with another $20 billion of freshly printed Federal Reserve notes. This may take some of the steam out of the tea party movement in California, but may ignite a larger national effort as a consequence.  

California generates 13% of America’s economy. Its economic success or failure will largely determine the success or failure of the Obama presidency.  

Through Hollywood and politics, California shapes America for better or worse. California’s deep budget crisis present may portend America’s budget crisis future — just as the grassroots reaction to that crisis in California may stop massive government growth in its tracks as Prop. 13 did for California and America 31 years ago.    


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