Flashback by Ronald Reagan on Proposition #1 on National Review Online

June 08, 2004, 9:27 a.m.
Reflections on the Failure of Proposition #1
On spending and the nature of government.

By Governor Ronald Reagan

EDITOR'S NOTE: This article appeared in the December 7, 1973, issue of National Review.

The November election results demonstrate once again that the people of America are firmly opposed to the philosophy of bigger and bigger government and higher and higher taxes. In Washington state, an unpopular legislative salary increase was overwhelmingly rescinded along with a proposed state income tax. New York rejected a $3.5 billion transportation bond issue by a 3 to 2 margin. Texas and Rhode Island turned down legislative salary issues, and Kentucky rejected a proposal for annual legislative sessions.

The widespread taxpayers' revolt also was evident in California where almost every local school and salary issue was soundly defeated. One county even voted to reduce the salaries of county supervisors by $2,000. These types of fiscal issues provide the only opportunity citizens have directly to influence government's fiscal policy, to protest their staggering tax burden. They made the most of the opportunity.

The only statewide issue on the ballot in California was Proposition #1, an initiative to reduce state income taxes by 7.5 per cent in 1974. It also offered an historic opportunity permanently to reduce taxes at the state level by placing a constitutional limit on the percentage of the people's income the state could take in taxes. Almost two million people voted for Proposition #1. Yet it failed by 54 per cent to 46 per cent in an election in which about 45 per cent of the state's eligible voters participated.

Why?

Why did a majority of those voting turn down a chance to vote themselves lower taxes and how, in view of the result, can I or anyone include California among those states where the people believe the total structure of government has grown too big and too costly?

The answer to this apparent contradiction can be found in the election returns and in the campaign of distortion and falsehood waged against Proposition #1 by a well-financed, well-organized opposition which desperately avoided debating the central issue: whether taxes are too high now and whether the tax burden should be reduced.

The almost two million citizens who voted Yes on Proposition #1 knew they were voting against higher taxes. Ironically a majority of those who voted No also believed they were voting against higher taxes. The last major public opinion survey on Proposition #1 (the Field poll) revealed that a majority was leaning toward a No vote. But it also disclosed that 69 per cent of those inclined to oppose Proposition #1 did so because they thought it would increase their tax burden.

Even though the measure was specifically designed to reduce state and local taxes and hold them down permanently, many voters were confused by the TV blitz and newspaper advertising campaign staged by the opposition.

In a way, the campaign strategy of the opposition paid the sincerest form of compliment to the goal of Proposition #1: lower taxes.

After repeatedly telling the people that the measure would limit government's ability to spend, that it would force government to hold down future budgets, after appealing to the fear of every possible special interest group, opponents finally keyed their campaign to the false claim that it would increase, not reduce, taxes. They dared no campaign against what they knew would be the ultimate impact of Proposition #1: a realistic and workable limit on the growth of government to keep taxes from going up faster than the incomes of the people who pay them.

The defeat of Proposition #1 can't be translated into a victory for advocates of higher taxes and unlimited government growth. It was a victory for political demagoguery, a triumph for the unsubstantiated charge that sounds convincing in a thirty-second television commercial but which does more to confuse than inform.

It is an axiom of politics that when people are confused about an issue, many will vote No. They'll opt for the status quo, or not vote at all. On November 6, a sufficient number of California voters were confused enough about the impact of Proposition #1 to turn back possibly the most significant effort made in this century to bring government under some reasonable degree of financial restraint. Some of them voted No; others simply stayed home.

In California, this kind of cynicism could be justified. Too often in the past, the people have been promised tax relief or more efficient government, but only on condition that a particular measure be adopted or that government be given some new power or authority to change a previous budgetary restriction. Somehow the promises never materialize; the tax relief the people are told will be theirs is an illusion. Somehow, after the election, a great emergency is discovered, an unforeseen "need" that requires more revenue and more government, not less.

Since 1967

When I took office in 1967, we discovered that the promise of "no tax increases" could not be carried out. California was virtually insolvent, the precious administration having changed that state's system of budgetary bookkeeping in a way that allowed the spending of 15 months' revenue in twelve months' time, thus avoiding a major tax increase in election year 1966. The state government was spending $1 million a day more than it was collecting.

California, unlike the Federal Government, cannot print more money or pile up deficits. The governor is required to submit a balanced budget, and if any additional taxes are needed to balance revenues with spending, the constitution requires the governor to propose higher taxes.

So our first major lesson in government was painful: for the taxpayers and for us. We had to increase taxes by some $800 million to balance the unbalanced budget we inherited. At the time, I said we hoped this would be temporary, that when we had had time to institute reforms, to curb excessive spending, we would work to reduce the tax burden.

I believed that government could be run more economically using the same sound rules and principles that apply to the running of a business of even a household budget. The phrase "cut, squeeze, and trim" became the watchword of our administration and the result has confirmed my believed that the cost of government can be brought under control.

A task force of businessmen surveyed the state government and recommended almost two thousand steps to streamline it. Every reform, every challenge to the bureaucratic status quo brought screams of outrage, protests, and demonstrations. But contrary to the claims of the protesting groups, these economies did not curtail the state's ability to finance those programs which are properly government's responsibility. It made possible grater state support along with lower taxes.

In seven years we've managed to increase state support for public schools by 92 per cent, although enrollment this year is less than 6 per cent grater than it was in 1967. The state scholarship fund, which helps eligible young people attend college, totals more that $36 million this year, almost eight times higher than when we started.

California has pioneered the concept of treating the mentally ill with an expanded system of community mental health programs. When we started, the budget for community treatment was $18 million. This year it is more than $140 million and California's shift from the "warehousing of the mentally ill" in large state mental institutions has become a model for the nation.

No one objected to increased state support in these areas. But the economies that made them possible were vehemently opposed. When we sought to rebate budget surpluses, there were hysterical charges that fiscal chaos would result.

Before 1967, California homeowners were protesting an excessive property tax burden. But there could be no relief until economy and efficiency in government made relief possible. In 1968, we adopted a $750 homeowners' property tax exemption and this was raised to $1,750 last year (after a four year struggle), along with a revised school formula that rolled back local school tax rates and gave the schools that greatest single-year increase of state support in history. For most taxpayers, this has meant a saving of between $150 and $200 in their annual property tax bill.

We've tried to spread the benefit of more efficient government to all taxpayers. There have been tax credits for tenants (in lieu of property tax reductions); we've cut the business inventory tax in half and reduced bridge tolls eleven times.

Possibly our greatest success was in welfare reform. When I proposed this in 1971 the Democratic majority wouldn't even let me present the plan to a joint session. We were told there would be a $700 million budget deficit. There were dire predictions of fiscal chaos, charges that the state was simply shifting the burden to local government, and massive protests by welfare-rights groups that claimed the elimination of abuses and fraud in welfare would deprive the truly needy of help they should receive.

Welfare Reform

None of these things happened. When we started, California's welfare rolls were growing by forty thousand a month and costs were increasing three times as fast as the normal growth of state revenues (without increased taxes). At last count, there were 386,835 fewer people on welfare than when we began. We've managed to increase benefits for the truly needy by almost 30 per cent and provide cost of living adjustments for senior citizens and the disabled. Now the cost of welfare is between $1 and $2 billion less than the opponents of reform said it would be. These welfare reforms have since been adopted by a number of other states, and several of those capable and dedicated officials who helped achieve them have been recruited by the Nixon Administration to help reform welfare on a national basis.

There was no tax shift to local government. In the year after welfare reform, 42 of California's 58 counties reduced their basic tax rates. This year, 45 reduced their tax rates, most of them for the second year in a row. Instead of a $700 million budget deficit, we had an $800 million surplus this year. As opposed to 19677, we were collecting $1.5 million a day more than we needed and we wanted to return this to the people.

More than a year ago, while we were pushing property tax reform, I organized a task force to survey the entire structure of government, to discover how, without curtailing essential services, the tax burden could be permanently reduced. This task force included some of the nation's most distinguished economists, men like Milton Friedman of the University of Chicago, Peter Drucker of Claremont College, C. Lowell Harriss of Columbia University and the Tax Foundation, Roger Freeman of the Hoover Institution, and James Buchanan of Virginia Polytechnic Institute. Along with members of my own cabinet and staff, this task force worked for more than seven months. They discovered that taxes are the one exception to Newton's law of gravity. They always go up, in good times and bad, in periods of prosperity or recession.

In 1930, the total cost of government (federal, state, and local) was about 15 per cent of the personal income of the United States. This year, in California, the total cost of 44.7 per cent and a fraction less in the rest of the country. Of this total, the state was taking about 8.75 per cent. Along with a return of the $800 million surplus, we asked the task force to devise a way permanently to reduce this percentage, to provide lasting tax relief to the people of California. The result of their work was the tax initiative we offered November 6.

Because of inflation and population growth, we know government revenues must be permitted to expand to meet essential needs. Yet we were convinced that this could be done while gradually reducing the total tax burden. In the past twenty years in California, the cost of state government has been growing 10 per cent a year but the total income of the people has been going up only 7.7 per cent. The result has been periodic tax increases and a steady upward growth in the percentage of the people's income going for taxes.

Proposition #1 Goals

Proposition #1 was designed to bring government spending into balance with the growth of revenues. The key features were:
An immediate 7.5 per cent state income tax reduction in 1974 income
The total and permanent elimination of the state income tax for all families earning $8,000 a year or less, and, most important,
Adoption of a tax limit by imposing a ceiling on the growth of state revenues, which would slowly reduce the 8.75 per cent of personal income the state takes to a level of around 7 per cent over a period of 15 years.

Unless something is done to check government's unlimited power to tax, California's state budget will grow from this year's $9.3 billion to a staggering $47 billion by 1989.

Still opponents of our proposal charged we sought to impose a fiscal straitjacket on state government that would force massive cuts for education, for mental health, for almost every item in the budget - even though the budget could have doubled in ten years and tripled in 15 under Proposition #1, and funds for education, mental health and all other essential programs could have grown at the same rate.

At the same time, California could have planned tax reduction on an orderly basis as a part of our budgeting process. In five years, we could have cut income taxes another 24 per cent or trimmed a penny from the sales tax; in ten years the income tax reduction could have been 60 per cent, or we could have cut two cents off the sales tax.

The legislature would have retained its full authority to revise the tax structure, to raise of lower specific taxes, to do anything it does now with one important exception: Any future tax increases above the limit would have to be ratified by the people. This provision, more than any other, generated the greatest alarm in the bureaucracy which knew full well that if the people ever get veto power on excessive spending, the days of spendthrift government are over.

One legislator complained to me that returning the $800 million surplus would be "an unnecessary expenditure of public funds." Another said Proposition #1 would restrict government's ability to redistribute the income of the people through taxes. That was one of the few completely accurate statements the opposition made during the campaign, but they didn't make it outside the legislative chambers.

Almost every group which derives states, income, and power from bigger government joined the ranks of the opposition, including the state teachers association, the state employees association, welfare groups. Opponents said our tax reduction plan would favor the rich. The truth is: State income taxes would have been permanently eliminated for every family earning less than $8,000 a year. They said it contained no guaranteed tax reduction. Yet the constitutional amendment specifically said that every year for 15 years, the percentage of the people's income that state government could take in taxes must be reduced wither through a rebate or reduced taxes. They said it would increase local taxes. The trust is: Proposition #1 would have written into the constitution the same tax limits on local government contained in our 1972 property tax reform. This protection would be guaranteed, not simply by a law, but by constitutional language that only the people could change.

One of the most blatant falsehoods of the campaign was a statement that Proposition #1 would have authorized the legislature to permit the levying of local income taxes by any governmental unit "from counties to mosquito abatement districts." The truth is: The legislature has that authority now and can do so by a simple majority vote. Proposition #1 would have made it harder; it would have required a two-thirds vote for any local income tax (something we haven't presently in California).

But truth is a fragile weapon in a heated campaign. It can be ignored or twisted and distorted until the average citizen, unfamiliar with government finance, finds himself totally confused. When we proposed the California revenue control and tax reduction program in February, we offered it along with a plan to return out $800 million surplus through another 20 per cent income tax rebate in 1973 and a six months' suspension of one penny of the state sales tax.

The legislative majority, controlled by those who would later lead the fight against Proposition #1, blocked the plan. It didn't get past the first committee, even though constitutional amendments are routinely offered each year and just as routinely put on the ballot. The legislators who fought Proposition #1 could not find time last spring to hold extensive public hearings on the measure. But in the final weeks of the campaign to put the initiative on the ballot, almost every major legislative committee held special hearings to generate publicity for attacks against it.

Because the legislature refused to vote on it, we were forced to father more than half a million signatures to place it on the ballot. This consumed a great deal of time and part of the financial support we were able to muster in support of the plan.

Yet this part of the campaign made the whole effort worth while. Before the initiative qualified, the Democratic majority had refused to consider returning the $800 million surplus to the taxpayers. But once the people put it on the ballot, our opponents, anxious to make it as financially unattractive as possible, offered a compromise which would return the surplus by a one-time 20 to 35 per cent income tax rebate and suspension of a penny on the sales tax for six months.

Was it politically unwise to accept this? Should we have let the surplus pile up in the treasury and thus enhance the prospects of passing Proposition #1? We considered those arguments and rejected them because our purpose has always been to reduce taxes, not to play political games. The sales tax has gone down one cent for six months, the income tax is eliminated entirely for 1973 for those families earning $8,000 a year or less, and everyone else will receive a 1973 rebate of 20 to 35 per cent.

Qualifying Proposition #1 for the ballot accomplished part o our purpose by forcing the legislature to return the surplus. But the longer-term, permanent tax reduction remains an elusive goal. Naturally, I am disappointed.

It was and is a daring idea and I do not regret the exercise. It served a positive purpose. As a result of the battle waged in California, people all over America have been alerted to the staggering burden which taxes impose on our economy and on every family in this country.

The people did not reject the idea of reducing taxes or limiting the size and cost of government to a reasonable level. They endorsed lower taxes in elections through the country, including the confused vote on Proposition #1.

Perhaps we could and should have done more to draw the basic philosophical issues more clearly, the expose the distracting, irrelevant, and confusing play on human fears that was so effectively exploited by the opponents. We've learned again how powerful an array of forces there is at work in America to expand government, to maintain government's unlimited power to tax the people. These forces have seldom been defeated in the past forty years. Because they have prevailed, taxes now cost the typical family more than it spends for food, shelter, and clothing combined. A free economy cannot survive that kind of tax burden indefinitely.

More than a century ago, the French philosopher Frédéric Bastiat wrote: "The state, too, is subject to the Malthusian Law. It tends to expand in proportion to its means of existence and to live beyond its means, and these are, in the last analysis, nothing but the substance of the people. Woe to the people that cannot limit the sphere of action of the state: Freedom, private enterprise, wealth, happiness, independence, personal dignity, all vanish."

That is what will inevitably happen in America unless we act to curb the excessive spending of government. This cannot be done simply by changing the law. The national debt limit was supposed to check deficit financing. But it has been temporarily or permanently increased by changing the law two dozen times in the past twelve years alone.

Only the people, though a constitutional amendment or some other failsafe method, can limit government's excesses. That's what we tried unsuccessfully to do with Proposition #1 at the state level.

The basic issue remains unchanged. The idea of lower taxes did not fail. There will be other elections, other days. We have suffered a setback. We have lost a battle, but this struggle will go on.

The people will find a way to bring big government under control, to put a reasonable limit on how much of their income government may take in taxes. This idea will become a reality. It must prevail because if it does not, the free society we have known for two hundred years, the ideal of a government by consent of the governed, will simply cease to exist.