From the Capitals, Governors Launch a Tax Revolt

A new politics that you might call “reverse pork barrel” took center stage in America last week, with huge implications for local communities, businesses and the economy in general.

Gov. Christine Todd Whitman of New Jersey made tax cuts the theme of the Republican reply to President Clinton’s State of the Union message. “All across America, the voters have chosen smaller government, lower taxes and less spending,” she said.

Whitman boasted that she was cutting New Jersey income taxes by 30% and cited Pete Wilson--who is proposing 15% cuts in California business and personal taxes--and John Engler of Michigan, among others, for similar tax-cutting zeal.

The trend is broad: 33 states are cutting taxes at the moment. And the U.S. House of Representatives last week approved a Constitutional amendment requiring a balanced federal budget by 2002. In working toward that goal, future Congresses will take more funds away from the states and localities.

Pay attention, because the consequences of this trend will be powerful.

* First, prepare for leaner times in the old hometown. Funding cuts at federal and state levels inevitably will reduce government services at the local level. And that means services people value or take for granted, such as police and fire protection, libraries and upkeep of streets and roads.

There will be problems. If a town cuts road maintenance, it will be hit with lawsuits from drivers who blow tires or have accidents over potholes.

There will also be opportunities for business to privatize local services. That’s already happening. Michigan has privatized workers compensation insurance by contracting it out to Blue Cross-Blue Shield. And it’s studying privatization of food distribution to the poor--meaning the state still would buy the food but it would rely on volunteer or nonprofit organizations to distribute it, thus reducing public payrolls.

* The new politics means tax cuts for business owners because of the dawning recognition that small businesses and new companies provide the bulk of job creation.

That’s why the Task Force on California Tax Reform, led by former U.S. Secretary of State and Treasury George Shultz, recommended that Wilson cut taxes. “California’s 1993 per household tax burden was 19% above the national average, a level that can affect business location decisions,” the Task Force said in its report last December. The argument was easily persuasive in a state that has worried about companies moving out.

* The new politics means a move away from government, a reversal of a 60-year tradition of looking to government to build dams and roads, to run the economy and help the less capable and fortunate.

Bill Clinton understands the trend and responds by trying to make government more efficient. Republicans like Whitman, Engler and to some extent Wilson try to force government to be more efficient by taking away its tax money.

Either way, if you’re in business and selling to government agencies you will have to lower prices and become more efficient. Contracts will be fewer; privatized agencies will be tougher.

The profound shift in voter sentiment has been evident since the election of 1992, when Ross Perot’s candidacy came out of nowhere. It was confirmed in last November’s congressional elections when successful politicians stopped promising to “bring home the bacon,” and said to voters instead, “go on a diet” or “buy your own bacon.”

Success can lead to advancement. Wilson and New Jersey’s Whitman are mentioned by Republicans as possible 1996 candidates for the presidency and vice presidency, on the same ticket.

The political shift is based on powerful economic trends.

First there is the new economy in which service businesses, international trade and entrepreneurs, as opposed to giant corporations, are the industrial engines.

In California, “engineering and management services, motion pictures and the many businesses connected with international trade are leading the recovery,” says economist Stephen Levy, of the Center for the Continuing Study of the California Economy in Palo Alto.

Even in Michigan, a big automobile factory state, the opening of thousands of new businesses is credited with creating 450,000 new jobs.

The connection to tax reform is that smaller companies care about lower taxes--especially for their entrepreneur owners--far more than big companies. That’s why taxes have become a weapon in the competition among states to attract and hold business. And why capital gains tax reduction looks like a cinch to pass in the new Congress.

Still, when all is said, the main force behind tax-cut sentiment is voter determination to reduce the federal debt, which is now $4.7 trillion. As Perot found in 1992, voters across all age and income groups really do fear for the world their grandchildren will inherit.

And so they want to reduce the national debt, and they figure one way to start is to balance the budget.

But budget balancing is a long-term process. Meanwhile, the crunch will come in local governments, which are already showing bruises from coping with added responsibilities on skimpier revenues.

City and county taxes across the nation have been rising faster than at other levels of government, reports director Steven Gold of the Center for the Study of the States in Albany, N.Y.

But perhaps not fast enough for fiscal soundness. Moody’s Investors Service last year reduced ratings on more municipal bond debt than it raised ratings on.

In California, where the state has long passed burdens down to local governments, the spread was dramatic: Moody’s upgraded ratings on 14 bond issues worth $502 million, but downgraded ratings on 20 debt issues--including those of Los Angeles County--worth $24.6 billion.

Privatization of services is already suggested as a partial solution to Orange County’s financial troubles. And more than Orange County may have to take a cue.

The California legislature’s non-partisan budget analyst Elizabeth Hill predicts shortfalls in the governor’s $56.3-billion state budget and says cuts in social programs will be needed to pay for them. The governor’s office disagrees, and sees a rising budget surplus, which it will use to pay debt and cut taxes.

Expect ideological arguments to fly in Sacramento, but the new politics is not really about ideology. It’s about economic reality and it’s here to stay for a long time.