The tipoff that Gov. Ronald Reagan had a streak of pragmatism in him came soon after his inaugural speech on Jan. 2, 1967, in which he promised to "squeeze, cut and trim" the cost of state government to close a significant budget gap. Two days later, however, he told aides that all the cutting and trimming in the world might not suffice. A tax increase could be necessary, Reagan said, and, if so, he didn't want to wait "until everyone forgets that we did not cause the problem -- we only inherited it."
Reagan's comment reflected a practical side that would serve him well throughout his political careers in Sacramento and later in Washington. His rhetoric was often unsophisticated -- "There are simple answers, just not easy ones," he often said -- but his governance was more nuanced. This pleasantly surprised future Gov. George Deukmejian, then a freshman state senator whom Reagan chose to carry his tax bill. Deukmejian had campaigned with Reagan and considered him a fire-eater. "A lot of people, including me, thought he would be ideological," Deukmejian recalled years later. "We learned quickly that he was very practical."
The budget shortfall was created in 1966, when Gov. Pat Brown, seeking to dodge an election-year tax increase, changed the state's accounting practices to count expected revenue, which never materialized. The effect was to leave Reagan with nine months of revenue to pay for a year of services and programs. Reagan and his equally inexperienced aides weren't prepared for the magnitude of the deficit, originally estimated at $400 million but which eventually reached almost $800 million. "We were not only amateurs, we were novice amateurs," said Reagan's communications director, the late Lyn Nofziger.
This novice amateurism led to a number of missteps. Reagan was slow to name a director of finance, and his first appointee was inept. Nevertheless, Reagan followed his finance director's lead and submitted a budget that sought across-the-board cuts of 10% in every government agency. As then-Assembly Republican leader Robert Monagan observed, this approach would have punished the best-managed departments. Reagan withdrew his budget.
Meanwhile, the new governor pursued largely symbolic economies, including a hiring freeze and a purchasing freeze on state vehicles. These saved little but helped Reagan make the case to the public that he had done his best to economize and needed to raise taxes to balance the budget.
In March, along with a new budget, Reagan sent the Legislature a wide-ranging menu of proposed tax increases worth $946 million. It was the largest tax increase ever sought by a U.S. governor and four times as large as Brown's previous record in 1959. By the time the bill cleared the state Senate, the total was $1 billion -- more than $6 billion in 2008 dollars.
The Reagan tax proposal put Jesse Unruh, the powerful Democratic speaker of the Assembly, in a quandary. He believed, with Reagan, that local government was too reliant on rising property taxes,which were forcing older people on fixed incomes out of their homes. But he didn't want Reagan to get the credit for giving homeowners property-tax relief, which was part of the tax-increase package.
Eventually, Unruh's better angels prevailed, and he pushed the bill through the Assembly and teamed with Reagan to get it narrowly through the state Senate, which was controlled by conservative Democrats.
The tax bill might have been the work of a New Deal Democrat: It changed California's revenue-raising structure from a regressive system to a progressive one. During Reagan's administration, with most of the changes coming in the 1967 tax bill, taxes on corporations nearly doubled, from 5.5% to 9%. The tax on banks went from 9.5% to 13%. The maximum on personal income taxes increased from 7% to 11%. Both Unruh and Deukmejian said they suspected that a Democratic governor -- and indeed many Republican governors -- would never have been able to get such a thing approved. "It was sort of like [Richard] Nixon going to China," Deukmejian said.
It is an apt comparison. But the Reagan tax bill was also a necessary recognition of reality.
Lou Cannon has written five books about Ronald Reagan, including "President Reagan: The Role of a Lifetime."