On Taxes: Isaac Martin's The Permanent Tax Revolt

I think the story of taxes (esp. in California) is key to the story of the defunding of higher education (and esp. the University of California) for two reasons: 1) The inability/unwillingness of state governments to raise taxes + their desire to continue to cut taxes (esp. property taxes) = a powerful condition of possibility for budget crises that "make necessary" (create a felt condition of emergency and necessity that seems to justify) cuts in funding for higher education; and 2) the evolution of fiscal administration and attitudes towards taxation are also bound up with (and in some ways parallel) other social shifts that have made possible higher education's defunding. I'm going to talk primarily about the first of these, referring mostly to Isaac Martin's argument in his 2008 book The Permanent Tax Revolt: How the Property Tax Transformed American Politics.

Martin's basic argument is this:
The tax revolt of the 1970s--which occurred all over the US (not just California, where it was perhaps strongest) and had broad-reaching effects (including becoming the key issue in US domestic politics ever since, guiding several Presidents' fiscal policy, etc.)--arose because a group of (primarily white, primarily working-class and middle-class) homeowners who had been protected by informal taxation enforcement were suddenly made subject to the potential full force of state property taxes. This was not an elite social movement, at least not at first and at least as we usually define elites. This tax policy was not decided in shuddered, cigar-filled rooms by bankers, politicians, and the social and economic elite. At the same time, those who supported the tax revolt were not poor either. Crucially, they were homeowners and they saw themselves as "average people."

What was odd about this tax revolt was that it was not a movement against a new tax or a raised tax or an excessive, excessively regressive or excessively progressive tax. It was against the property tax, the oldest tax in the US, a colonial-era tax. It was not particulary high in most states. Most importantly, the tax revolt came directly after a "good governance" movement, a series of reforms across multiple states to make taxation less arbitrary, more equally applied, more standardized. Martin argues that it was in fact this move to good governance that provoked the tax revolt, that the standarization of taxation actually increased certain taxpayers' vulnerability to market shifts and income shocks.

So what happened? Basically, homeowners before the standardization of taxation benefitted from a form of "social protection" from the market: informal tax privileges applied unevenly, arbitrarily, and usually politically--that is, in return for political support or favors. Tax collectors used to be elected officials, and they were more or less free to control the application of the official tax code in practice as they pleased. The key informal tax privilege applied to homeowners in certain districts consisted of what is called "fractional asssessment"--in which a tax collector would value a taxpayer's home at less than the actual market worth, thus allowing the taxpayer to pay less tax that he/she would if fully "exposed" to the market value of his/her home. The easiest way to do this was to just re-use the tax rolls of previous years, not adjusting the taxable value of a home to changes in the market value. This had the effect of decreasing taxes proportionally over time for those living in areas with increasing property values--usually those whose political support was sought by tax collectors--and increasing the proportional tax share of those living in areas with decreasing property values (i.e., the poor, disenfranchised, etc.).

Fractional assessment was an important social policy, encouraging, in effect, homeownership, which in turn acted as a private alternative to public social provision, especially during tough times, which homes could act as a kind of insurance for the owners. Martin estimates that fractional assessment saved homeowners some $39 billion in 1971, making it the largest "housing subsidy" at the time. As such, it generated, Martin says, an unknowing and informal constituency, creating an informal social entitlement.

When, beginning in the 1960s, states began to "modernize" property taxes by centralizing their levying, professionalizing tax collectors (making them appointed instead of elected officials, for instance), and standardizing property taxes across geographic areas and social classes, all of a sudden homeowners were forced to confront the full market value of their homes in terms of the taxes they had to pay on them. The reforms made the propety tax fairer, but the accumulated savings generated by ignoring steadily increasing property values in during tax collection were erased. And people got angry.

The result: broad-based anti-tax movements and eventually state referenda limiting property taxes, codifying and formalizing the informal tax privileges of the previous era. Prop 13 locked in a net growing tax privilege for anyone who held onto property for a long time, essentially creating large and growing tax break for business owners and the affluent. The more valuable a property became over time, the bigger the tax break would be. The problem was that referenda like Prop 13 in California made it essentially impossible (or at least unconstitutional) to raise property taxes as a way to generate state revenue. And this, I think, is a key part in the story of UC's defunding: Without a progessive property tax, the state has found it increasingly difficult to raise the revenue necessary to keep state public institutions adequately funded. Instead of increasing as the state's overall wealth as grown, tax revenues have stagnated or decreased.

Interestingly, Martin also says that government officials have mistaken the origins of the tax revolt, thinking that it was a response to big government or taxation in general, instead of being really about property tax privileges in particular. He identifies Prop 13 as the turning point, representing (ostensibly) a wide popular mandate to reduce taxes on everything and making it politically impossible to raise them, for any reason.

So I think Martin's book is a really interesting one for our purposes. It would be interesting to think about how the anti-tax movement emerged in opposition to good governance and progressive, democratizing reforms. Martin confirmed this trend in his talk on Tuesday. When it comes to taxation, people tend to act to protect their individual social and economic interests. Maybe not a ground-breaking conclusion, but one that puts Prop 13 and the fate of higher education in California in context.