The Tax and Spend Spectator

Tax Hikes in 2011: The Dog That Didn’t Bark

The Taxpayer Protection Pledge alllowed Republicans to protect themselves and taxpayers alike.

By From the March 2012 issue

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Last year was supposed to be the year of tax increases. The Democrat-controlled Congress had driven spending from $2.7 trillion in 2007—when Democrats wrested Congress from the Republicans' 12-year grip—to $3.5 trillion in 2009 when Obama rode into town willing to sign all their spending bills. Under unified Democrat government, spending hit warp speed.

The long-term plan of the modern Democratic Party is to turn the United States into a European welfare state. Total government spending—federal, state, and local—in the United States was 32.4 percent of GDP in 2008. It jumped to 35 percent in 2011. When Obamacare kicks in it will further increase federal spending. The future can be seen across the Atlantic. Britain's total government spending as a percentage of the economy is 51 percent. France: 55 percent. Italy: 52 percent. Greece: 50 percent. Sweden: 55 percent.

In just two years Obama, Reid, and Pelosi drove federal spending from 21 percent, the average of the past twenty years, to today's 25 percent. Not a bad start. But to sustain this higher level of spending the Democrats need to begin to ratchet up the total tax burden toward European levels. Eventually a Value Added Tax will be required.

To construct and maintain a stable welfare state requires a consensus of all viable political parties. No European state has a serious opposition party dedicated to limited government, rule of law, and property rights. Even a Thatcher-led Conservative Party campaigned boasting of its commitment to government-run health care. Total government spending was 43 percent of the economy when Thatcher won power in 1979. It is 51 percent today.

In the United States, however, the Reagan Republican Party is, in theory, committed to rolling back the welfare state. For the vision of a Europeanized America to win requires neutering the modern Republican Party and making it complicit in the irrevocable jump to permanently higher levels of taxation and government spending. Obama needs the GOP to validate his ratcheting up of Leviathan as Eisenhower did for the New Deal expansion of state power and Richard Nixon did for the Great Society.

So spending jumped in 2009 and 2010, and in 2011 the Obama plan was to have Republicans join Democrats in raising taxes to pay for the new normal of higher spending. The sales pitch was that somehow "we" had accumulated an increase in the national debt of $4 trillion and were running a federal deficit of $1.5 trillion in 2011 with total debt projected to increase by $10 trillion in the next decade. And so, "we" would need to "be reasonable," "compromise," "get things done," "work together." All French words for "raise taxes." The explosion of federal spending after 2009 that was largely a partisan accomplishment (Stimulus, Obamacare, the one trillion hike in domestic discretionary spending) would be accommodated by a "bipartisan" tax increase.

The stage was also set for all 50 states to join Washington in raising taxes in 2011 because the $1.2 trillion package—Stimulus plus TARP bailouts—passed in Obama's first months would run out that year. The goal initially was to force state and local spending upward, to create political constituencies of government workers and contractors, and then have state and local taxes increased to replace the federal stimulus spending when it was withdrawn.

The trap was set. Throughout 2010 Obama had maneuvered to get Republican fingerprints on a commission to create a bipartisan consensus for higher taxes to pay for—and force joint custody of—higher spending. In 2009, Democrats failed to get a single GOP vote in the House for the stimulus. They had learned from the truncated Clinton administration that it was unwise to pass sizable tax hikes with only Democrat votes. And they knew from the 1982 and 1990 bipartisan budget compromises that Republicans could be lured into a room and convinced to trade real permanent tax hikes for promised, but imaginary, spending cuts. In the House, legislation for a bipartisan commission structured to recommend a massive tax hike that would be sent up for a quickie vote was carried by Republican appropriator Frank Wolf (R-VA). It never gained traction, because 236 of 242 Republican members of the House had promised in writing to their taxpayers that they would never vote for a major tax hike. In the Senate Judd Gregg (R-NH) was the Judas goat, but Republican leader Mitch McConnell stopped any legislation creating a fast track to a tax hike vote, and Obama had to create his own "bipartisan" commission with no legal standing. Obama appointed former Senator Al Simpson (R-WY) and former Clinton chief of staff Erskine Bowles as co-chairs.

The Simpson-Bowles commission failed to make any formal recommendations because all the House Republicans on the panel, led by Wisconsin Paul Ryan, opposed the outline of a plan—written by Simpson and Bowles alone—that included a tax hike of at least two trillion dollars and committed Congress to bringing taxation up to 21 percent of the economy from its historical average of 18 percent over the last 50 years-lagging, but chasing, the new 25 percent federal spending levels. (The Heritage Foundation calculated it was actually a three trillion dollar tax hike over a decade.)

Then the newly minted Republican majority in the House insisted on the Boehner rule: that if Obama wanted an increase in the debt ceiling limit of $2.5 trillion, he would have to agree to a spending reduction of at least $2.5 trillion over the next decade. Democrats wanted most/some/all of that $2.5 trillion to be tax increases, with marbling of pretend spending cuts. But the GOP held. There was no "compromise" with a tax hike. There was an anti-spending win as Obama agreed on August 2 to reduce his projected spending by $917 billion over the next decade, and then a "Supercommittee" of 12 members of the House and Senate was set up to propose $1.2 trillion in "deficit reduction," which could be tax hikes or spending restraint. Should the commission not agree or Congress vote down its recommendation, there would be a $1.2 trillion reduction in spending through sequestration. While some Republicans channeling Reagan in 1982 and Bush in 1990 thought a "deal" was possible, congressional Democrats demanded at least a trillion in higher taxes and Obama wanted another $400 billion in stimulus and taxes to match on top of the trillion. No deal. So the default position was sequestration of $1.2 trillion in spending over the next decade. No tax hike. All spending cuts.

The screaming you heard in the newsrooms of MSNBC and Senator Harry Reid's and Nancy Pelosi's chambers was like the sound of "ultimate suffering" from The Princess Bride.

Their plan had failed.

They failed to get an increase in taxes to permanently support the higher spending they had worked so hard to win. Granted, the $2.5 trillion in lower spending was less than half as large as the $6 trillion in spending reduction in the "Ryan budget" passed by the Republican House. So for the Kumbaya crowd there was a compromise. Washington promised to reduce its spending spree by $2.5 trillion over the next ten years—not the $6 trillion the Republican House originally demanded. Happy?

By taking tax increases off the table—courtesy of the Taxpayer Protection Pledge—real spending cuts became possible. In 1982 and 1990, real tax increases were passed and the promised spending reductions never happened: Spending rose more rapidly than before the "compromises." We now know what works. Tax hikes displace spending cuts. Reform only occurs when the tax hike door is nailed shut.

BEYOND THE GAZE AND KEN of Washington journalists, the same struggle occupied 2011 in the 50 or 57 state capitals.

Despite the "Stimulus" spending spree coming to an end, the hoped-for "demand" for continuing that spending failed to create the political clout to increase taxes in most states.

The 2010 election brought a net gain of 711 Republican state legislators and six Republican governors, and by 2011 Republicans controlled the house, senate, and governorship in 24 states, and the GOP controlled both houses of the legislature, but not the governorship, in five other states: Minnesota, Missouri, Montana, New Hampshire, and North Carolina. Only one of those states allowed taxes to be raised in 2011.

Texas reduced its spending by $15 billion over the next two years. Florida cut $900 million. Wisconsin, led by Gov. Scott Walker, eliminated a $3.6 billion overspending problem without raising taxes. Walker's reforms of government unions and ending of tenure will reduce state and local spending for decades. Pennsylvania's Gov. Tom Corbett held the line and his first budget spends $2 billion less than the previous one, the first time in four decades that the Pennsylvania government has seen a year-over-year spending reduction. New Jersey Gov. Chris Christie cut $1.5 billion in his first budget after his election, a 5 percent reduction from his predecessor Jon Corzine's last budget. Christie also passed public employee pension reform, which will save New Jersey taxpayers $130 billion over 30 years, and signed a FY 2012 budget that spends $900 million less than what the Democrat legislature was calling for. Michigan Gov. Rick Snyder brought projected spending down $1.8 billion and actually passed tax reductions of more than $700 million over the next three years.

The importance of the Taxpayer Protection Pledge can be seen in Nevada where a Republican governor Sandoval was elected promising never to raise taxes. But he wouldn't put it in writing by signing the Taxpayer Protection Pledge. He said his word was good enough. He lasted less than six months before he signed a $620 million "temporary" tax increase over the next two years. "That $620 million hike is scheduled to expire in 2014," notes conservative activist Chuck Muth of Citizen Outreach. "Considering how he reneged on his verbal promise to the voters last year, we'd feel a whole lot better this time around if Gov. Sandoval would sign the Tax Pledge this year. Fool us once…"

New York's Democrat governor Andrew Cuomo refused to sign the pledge but repeatedly said he would not allow a tax hike in his first year. A verbal promise. Worth the paper it was written on. He actually lasted until December 7, when he signed a $1.9 billion tax increase on high income earners soon to escape to Florida. A state-run lottery is a tax on stupidity. A state-level millionaires tax is a tax on the inability to find the phone number for U-Haul.

Politicians who say in speeches that they will not raise taxes but refuse to put it in writing through the pledge have plans. To raise taxes. One wonders about the judgment of Virginia voters who elected two Democrat governors in a row, each verbally promising never to raise taxes—Mark Warner and Tim Kaine. Each refused to put in writing the campaign promise they made so easily. Each raised taxes dramatically.

After the 2010 elections there were 11 states with Democrat governors and Democrat legislatures. Those states all had targets on their backs.

Illinois Democrats increased the income tax 67 percent, the corporate income tax 46 percent, for a $7 billion whack over two years. John Tillman, CEO of the Illinois Policy Institute, points out that unemployment in Illinois is now 10 percent and neighboring states average 8.1 percent. The Yankee Institute in Connecticut sadly reports that the Democrat governor and legislature increased 77 different taxes and fees, and while these include the usual suspects—the income tax, death tax, sales taxes—they also target smoking cessation products, yarn, valet parking at airports, non-prescription drugs, pet grooming and boarding, not to mention a 20 percent hike on alcohol taxes. And if you wanted to come visit this train wreck, the hotel tax jumps to 15 percent. Deep Blue Maryland increased taxes on liquor in 2011, with massive tax hikes threatened for 2012. The Arkansas legislature passed the buck to voters by putting two tax hikes on the November 2012 ballot.

Two states, Oklahoma and Vermont, passed taxes on hospitals that were then matched by federal matching funds through Medicaid and the hospitals were kicked back their taxes. The states netted the federal matching funds. Free money. Forty-seven states have pulled this stunt to raise money from federal taxpayers. Someday Congress should outlaw this scam.

California re-elected Jerry Brown for a return engagement as governor, and some hoped an older and balder Brown would have learned something since he led the opposition to property tax-cutting Proposition 13 in June 1978. An unchanged Brown has pushed hard for a $58 billion tax hike, which would have been the largest state tax increase in U.S. history. But courtesy of that Proposition 13 initiative, a two-thirds vote of both the assembly and senate is required to raise taxes. Every California Republican legislator save two has signed the Taxpayer Protection Pledge and as a result the Republicans have stopped every tax hike since Brown's return. Governor Brown is now trying to put his tax increases on the November 2012 ballot through the initiative process.

THE 2011 LESSON from the states is the same as the one from Washington. Only by taking tax hikes off the table will politicians begin to focus on reforming government to reduce spending. Verbal promises to avoid tax hikes are worse than meaningless. Written, public commitments like the Taxpayer Protection Pledge are increasingly self-enforcing and this past year alone they've saved American taxpayers trillions in avoided tax hikes and in actual spending restraint.

Because 2012 is an election year, the correlation of forces remains with taxpayers against tax hikes and for spending reform and reduction. Obama's effort to raise taxes to make his spending increases permanent has failed…so far. The 2012 elections could bring to power a House, Senate, and president committed not simply to a strategy of containment, but a real rollback of government spending.

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About the Author

Grover G. Norquist is the president of Americans for Tax Reform.