Tunnel Vision Do voters finally see a need for new taxes?

By Richard Lacayo

Moscow is not the only cradle of revolution where people are having second thoughts these days. Now there's California too. The state that gave birth to the taxpayer revolt in the 1970s took a step back last week from the antitax orthodoxy that has kept American government in a fiscal straitjacket ever since. California voters, who have tended to feel about taxes the way Lenin felt about capital gains, agreed to ballot Proposition 111, which doubles the state gasoline levy to fund improvements for gridlocked highways. The outcome of that vote reverberated not just on the West Coast but all the way to Washington.

It was through another ballot initiative, Proposition 13, that Californians slashed property taxes 57% in 1978; one year later, they approved a no less important cap on state spending. In the decade that followed, nearly 20 other states adopted similar measures, and Ronald Reagan and George Bush rode the antitax sentiment into the White House.

There were those who were ready to see the Proposition 111 vote as a sign that after more than a decade of sharply reduced services, Americans have at least grudgingly acknowledged the need to pay for badly needed improvements in their roads, schools and environment. "They are ready to put their money where their mouths are," says former San Francisco mayor Dianne Feinstein, winner of the state's Democratic gubernatorial primary. "I think it signals a new day." Even Arthur Laffer, the supply-side economist who was instrumental in enacting Proposition 13, declared the end of the revolution he helped usher in. "If the state where the tax revolt was invented rejects it," he glumly asks, "can Washington be far behind?"

Yes, possibly. The fact is, Californians approached Proposition 111 with trepidation, even though the state's 9 cents-per-gal. gas tax, last increased in 1983, is one of the lowest in the country. (The national average is 15.8 cents.) No wonder then that California ranks 48th among the 50 states in per capita spending for highways -- with predictable results. In a motor-happy state, the highways are crumbling and inadequate.

Given all that, the gas-tax referendum might have been more significant if it had been rejected -- a sign that voters would rather suffer any discomfort than reach into their pockets. In fact, the increase was approved by just 52% in an election in which less than 40% of registered voters took part. "The message to government is 'Give us a discrete program, a finite cost, convince us that you're going to spend the money wisely, and we will write you a limited check,' " says Sherry Bebitch Jeffe, a political analyst at Claremont College's graduate center for politics and policy.

Not quite grounds for declaring a counterrevolution. Yet there are other signs that the constraints imposed by Proposition 13 have begun to chafe. A position paper compiled by assemblyman Tom Hayden points out that California, once a leader of progressive government, has dropped to near last place among the 50 states and the District of Columbia in measures of living quality, including per capita spending on schools, classroom size and housing affordability.

Though Californians have approved small tax increases on a local level in recent years, the state faces a $3.6 billion budget shortfall. With state funds shrinking, many spending burdens have been passed down to localities, which in turn pass them along to new-home buyers. To offset the cost of sewage and street building, parks and schools, local governments began imposing "impact fees" of as much as $25,000 for a newly built home. So it was no less important that California voters also agreed last week to loosen the state spending cap and exclude certain expenditures from the limits.

Evidence of antitax sentiment is still widespread, and not just in California. In Illinois a group of irate taxpayers is promoting a ballot initiative that would require tax increases to be approved by three-fifths of the state legislature instead of a simple majority. Earlier this year more than 1,000 property-tax protesters stormed the office of Kansas Governor Mike Hayden. Connecticut's Governor William O'Neill decided against running for a third term this fall partly because his poll numbers dropped sharply after he threw his support behind higher taxes.

Whatever the political perils, taxes have become a subject that many state lawmakers cannot avoid. Slower economies, especially in the Northeast, have left more than 25 states facing deficits. Since every one of them but Vermont is required by law to have a balanced budget, deficits mean tax increases, spending cuts or both. Moreover, many states have been hiking taxes to make up for declining federal funds for clean water, job training, low-income housing and sewage treatment. Increased state and local taxes, as well as a larger Social Security bite, explain why, for all the ballyhoo over the Reagan-era tax cuts, Americans today pay roughly 22% of their income in taxes, just as they did in 1980.

In Washington the sense of urgency is less impressive. Last week the bipartisan budget summit involving congressional negotiators and White House aides resumed just two days after the California vote. But the summiteers are far from reaching an agreement on a mix of spending cuts and new revenues that will hold the 1991 deficit to the $64 billion mandated by the Gramm-Rudman- Hollings law. They are even talking of putting off a budget agreement -- and the announcement of new "revenue enhancements" that it might entail -- until a lame-duck session of Congress begins, conveniently, after the November elections. "The tough choices have been avoided for ten years," laments California Democrat Leon Panetta, chairman of the House Budget Committee. "There's never a good time to do it."

Eventually the time will come. When it does, how should lawmakers inflict the pain on their constituents without hurting themselves in the bargain? California's experience, and that of other states, suggest the following tactics:

-- Target the tax to a purpose the voters understand. California's gas tax was presented as a "user fee" that would translate into relief for overcrowded highways. A $5 million campaign for Proposition 111 and its companion Proposition 108 spelled out the spending goals to the last detail. "Our strategy was to explain that this 5 cents a gallon is $5 a month to the average family of four," says assemblyman Richard Katz. "If you live in the San Fernando Valley, that gets you two lanes on the Simi Valley Freeway and an additional lane in each direction on the Ventura Freeway."

That direct quid pro quo is an advantage Washington does not yet enjoy. Polls show that even on a federal level, voters accept the idea of taxes to address specific problems; reducing the deficit is not one of them.

-- Tie the tax to behavior. "If you don't drink, smoke or drive a car, you're a tax evader," quips Tom Foley, Speaker of the House of Representatives. Taxes on gasoline, cigarettes and liquor, as well as license fees and telephone surcharges, have proved to be the easiest way to get money from voters. Although they are more regressive than income taxes, they give people a feeling that they can control the amount of tax they pay by limiting the amount of goods or services they consume. Levies on alcohol and cigarettes can be portrayed as appropriately discouraging bad habits -- Florida Governor Bob Martinez vetoed a gas-tax increase last month, but he and the legislature are considering raising the tax on cigarettes to 43 cents a pack.

-- Join hands and jump off the cliff together. So goes Wyoming Senator Alan Simpson's scenario for a bipartisan federal deficit reduction. The tactic . proved its worth in California. Proposition 111 had the support of the gubernatorial candidates of both parties and more than 250 business, labor and social-service groups that spanned the political spectrum. Bipartisan support reduces a politician's vulnerability to attack by opponents as a tax-happy spender. In Washington Democrats insist they need that cover from Republicans -- but Republicans fear they would be exposed to primary challenges from even more conservative candidates back home.

-- Make the courts force you to do it. "I was between a rock and a hard place," said Texas Governor William Clements last week. After two vetoes, he had finally accepted a $520 million sales-tax increase to comply with a state supreme court order to remedy disparities in school spending. "There was no other way. It was not a pleasant circumstance, and it's not one that I am happy with," he said. Clements may have been protesting too much. Texas politicians are practiced at shifting the blame onto judges: last year the state approved a $400 million bond issue for new prisons after the state supreme court ruled that crowded conditions violated inmates' rights. In March, after Kentucky's Supreme Court invalidated the school finance system, legislators there ponied up a $1.3 billion education package by adding 1% to the sales tax and broadening the income tax.

-- If all else fails, try leadership. New Jersey's Democratic Governor Jim Florio, facing a $592 million budget deficit, kicked off his new administration with a plan to raise more than $2.6 billion in new taxes. Florio proposed doubling income taxes for taxpayers earning more than $150,000, as well as cutting $1 billion from popular programs. Not all the money would be used to balance the budget. Some of it -- shades of the Great Society! -- would go to New Jersey's poorest neighborhoods and school districts.

Florio had some political cover. He blamed the state's deficit on his Republican predecessor, and he got a boost last week when the New Jersey Supreme Court ordered a statewide funding scheme for schools. Moreover, Florio's plan would shift some of the burden for education away from property- tax increases, which were rejected in nearly half of New Jersey's school districts last April. Most important, Florio's bold decision to trigger a tax fight during his first year in office is based on the political calculation that voters may forgive and forget by the time he is up for re-election in ; 1993. That tactic worked in the past for one of the savviest Governors ever to approach the problem, who enacted his state's biggest tax increase during his first year in office -- California's former Governor Ronald Reagan.

With reporting by Hays Gorey/Washington and Jeanne McDowell/Los Angeles