Foreword
 
Executive Summary
 
Preface
 
The Outlook for State Finances
 
Prospects for Funding Higher Education
 
Fiscal Impacts on Higher Education Policy
 
Increasing Spending Outside of Higher Education
 
Cutting Spending Outside of Higher Education
 
Raising Taxes
 
Sensitivity Analyses
 
Participants, Symposium on Emerging State Policy Issues
 
Endnotes
 
About the Author
 
About the National Center

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State Spending for Higher Education
Page 9 of 14

Appendix C: Raising Taxes

INTRODUCTION

This is the third of three appendices designed to support the conclusions in the text that alternatives to putting fiscal pressures on higher education are unlikely to be pursued in most states. In the context of structural deficits suggested by the report, Appendix A suggests that demands for increases (new initiatives) in the current service spending of other functions would put pressure on higher education outlays. Appendix B describes the difficulties of financing higher education by cutting baseline spending in other programs. This appendix covers political, constitutional, and substantive objections to raising taxes to finance either current services or new initiatives in any field, including higher education. Reading it is not necessary for those who already believe that most states are unlikely to increase major taxes for any reason.

POLITICAL COMMITMENTS TO NO TAX INCREASES

Over the three years from 1996 through 1998, state officials made substantial records of reducing tax burdens. In each of those years, at least half of the states enacted significant tax cuts. In each of those years, those reductions, net of increases in a few states, caused tax collections to be at least half a percent below what they would otherwise have been. These tax cuts, which were unaccompanied by cuts in budgets required to maintain current services, put state elected officials in extremely comfortable positions. They were able to deliver what appeared to be a reduction in the demands that government placed on citizens through taxes. Incumbents were able to campaign for re-election on the basis of sponsorship and/or votes for a variety of highly visible tax cuts.

During the 1990s, cutting taxes became viewed as a clear route to possible electoral successes. To campaign consultants and candidates, individual states provided strong lessons showing the potency of the issue. In 1993, Christy Whitman produced a come-from-behind win in her try to unseat the incumbent governor of New Jersey. Her signature issue was a 30% cut in state income taxes. Her victory caused her campaign theme to be copied by many of the gubernatorial candidates in 1994. They campaigned, many of them successfully, on a platform emphasizing cuts in personal income taxes. Often, they too picked 30% as the appropriate reduction. Nationally, most Republican candidates for U.S. Congress ran for office, with considerable success, by referring to a document called the "Contract for America," which also specified substantial tax cuts.

The off-year elections of 1997 in the two states that held elections for governor provided a testing ground for political themes to be used by candidates in 1998. New Jersey again provided lessons. Governor Whitman entered the campaign a heavy favorite. She had delivered on her promise to cut income taxes, had avoided spending cuts that alienated any major interest group, and had a scandal-free administration. All this occurred at a time when the New Jersey economy was doing well. Despite all this she barely won re-election against a little-known challenger with substantially less campaign financing. The keys to his success were two signature issues. Both were more in the nature of criticisms of the status quo rather than precise plans to solve problems. The one-line criticisms were that New Jersey had the highest property taxes and the highest auto insurance rates in the nation. Responding to the obvious public response to these themes, Whitman and many legislative candidates made commitments to seek property tax relief if they were re-elected.

There was no incumbent in the Virginia campaign of 1997 because that state limits its governors to serving a single term. One of the candidates made his signature issue the elimination of the "car tax." The tax is a local personal property tax based on vehicle value that produced annual bills in excess of $500 for many middle-income households. The other candidate initially called the proposal unaffordable and stressed his spending priorities and a modest tax cut plan of his own. As polls indicated the popularity of cutting the car tax, the other candidate reversed ground enough to be able to endorse a large tax cut plan of his own.

The 1998 state campaigns reflected these apparent lessons from 1997; challengers and incumbents alike, legislators and governors alike, included tax cut plans in their platforms. Even governors who were viewed as likely to (and who did) win by huge margins decided to include such promises (e.g., Governor Bush of Texas, Governor Engler of Michigan, and Governor Thompson of Wisconsin). As a result of the 1998 campaigns, there is a widespread environment of state officials who have pledged additional specific tax cuts. Those officials are clearly not going to be attuned to considering tax increases.

Most elected officials, not to mention political consultants, believe that the primary lesson of the 1992 presidential election was this: appearing to make a commitment to avoid tax increases yet later endorsing them was the political kiss of death for President Bush. This conviction fortifies the political wisdom that raising taxes after promising not to do so has much stronger negative effects on voters than raising taxes alone might have.

These lessons mean many state elected officials in the early parts of the next decade will consider their support for tax increases in the context of their own past promises to avoid them. Based on past examples, these officials consider support for tax increase to be political suicide. These career concerns exist over and above substantive reasons for opposition to tax increases -- which are substantial themselves.

CONCERNS ABOUT THE SIZE OF GOVERNMENT

Besides political concerns associated with raising taxes, a substantial percentage of voters and elected officials believe that government is simply too large and intrusive. Their perspective suggests that many things now done by government could be done equally well or better by private enterprise in a competitive environment or by voluntary organizations. Some people believe that certain activities of governments are better not done at all.

For those with this view, the policy problem is to restrict the size of government at all levels. Proponents of this perspective are realistic in recognizing the difficulty in avoiding government spending that can be financed with current revenues. So they consider the revenues themselves as the problem; they seek to cut into the revenue stream, indirectly getting at the objective of curtailing spending and thus government intrusiveness. As some advocates of this view put it, taxes are the root of the spending tree, so killing the growth of spending means chopping into the root system. The policies of choice for those with this perspective are to obtain tax cuts whenever possible and to prevent any growth in tax revenues brought about through tax increases.

These positions are themselves formidable barriers to tax increases at the state and local level. They have also led to creating constitutional barriers to tax increases in many states.

MECHANISMS BARRING TAX INCREASES

In many of the states with the most serious problems of structural deficits, tax systems differ from those of the majority of states because one of the three major tax bases -- sales, income, and property -- is used much less or not at all. Some of the barriers to adopting the "missing tax" and to expanding use of an underutilized revenue source are built into state constitutions. For example, there are barriers to adoption of income taxes in Florida and Texas, two major states without them. Similar barriers exist to adoption of a sales tax in Oregon and some of the other states without them. Restrictions preventing full use of property taxes, such as large homestead exemptions, are part of the constitutions of many states.

In some states, opponents of tax increases have also built procedural hurdles into the process for enacting tax increases. For example, tax increases of any kind in Colorado, whether by local or state government, require voter approval. Some states have requirements that state and/or local legislative bodies must have larger-than-majority votes to increase taxes.

Many states have also adopted tax and spending limits that have the effect of preventing the spending of tax collections that exceed a stipulated amount. The typical limit relies on a base year and bars spending increases in excess of those required to adjust the base-year spending for inflation and a measure of government workload, such as population. The more generous of the limits restrict the spending growth rate to the rate of growth in personal income.

CONCLUSION

Reaching the baseline funding level for higher education implies tax increases, but is it reasonable to expect that state elected officials will enact such tax increases? The simple answer is "maybe." Historically, state officials have produced tax increases at about the level needed to maintain their current service budgets when circumstances, such as recession, have appeared to make such action necessary. On the other hand, to adopt such increases most elected officials will have to do what they are loathe to do on principle and probably at least a third of them will have to renege on campaign commitments.

Thus, whether or not state elected officials ultimately conclude that they must raise taxes, they most certainly will not accept this conclusion easily. Having possible tax increases on the table will set off a cry that all spending should be scrutinized for possible savings, before raising taxes is even considered seriously. This logic is bound to cause much more intensive scrutiny of state spending patterns than was seen anytime in the late 1990s. Higher education cannot avoid at least a share of this scrutiny proportional to its share of funding.

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