Streetcar Line

Not Our Cup of Tea

The real story behind the Alabama governor's race.

By 2.15.10

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My friend Robert Stacy McCain is a great reporter, but he really needs to stick with topics he has a longer history covering, rather than just parachuting in to a state (that he was not directly covering at the time and where he has not lived for decades) and buying a pig in a poke.

Our frequent commenter Oldefarte is absolutely right that lots of people have questioned how McCain's favorite, Tim James, made his money. But that's the least of the problems with McCain's account. The way he describes the Riley tax plan in 2003 is unfair. I offer myself as a direct witness, as an editorial writer and columnist for the Mobile Register at the time. I bow to NOBODY as a Kemp-Reagan, supply-side tax cutter. I was writing letters to the editor in support of Kemp-Roth back while I was in high school, and have never once supported a federal income-tax hike and have written repeatedly and publicly for decades in favor of broad-based tax cuts. Yet I supported the Riley tax plan. Why? Because in local context, it made a lot of sense. Of course honest conservatives could disagree, but it was anything but a typical "tax increase," despite how McCain described it.

Here was the deal: Alabama faced huge deficits and has a balanced-budget requirement. Riley already had cut, largely through administrative measures, about a whopping $350 million from the budget in half a year, with more cuts proposed legislatively. But he desperately needed a short-term bridge to balance the budget.

This was PRECISELY the same situation Ronald Reagan faced in his first year as governor of California, in 1967, and Reagan acted in almost exactly the same way Riley did, with a short-term revenue enhancement. Reagan later rebated a whole lot of taxes to the people, after the initial crisis was over.

Back to Riley: Anyway, overall, Riley's tax plan raised far more money IN THE SHORT TERM than it would have "cost." But it did so in the context of one of the smallest combined state-and-local government spending records in the country. Tim James' father had cut the state budget to the bone, and then Democrat Don Siegelman's spending hikes were largely taken back through a process called "proration" when the economy temporarily went bad. Meanwhile, among states that have property taxes, Alabama's property taxes were something like the second-smallest in the nation. Its sales tax rates, though, were absurdly high, and its exemption threshold for paying income taxes started at an absurdly low $5,000 (well below the national average of about $16,000). Plus, huge swaths of land were effectively off the books because of what amounted to a huge exemption on taxes for lands used for timber -- even if the timberland wasn't actually being used in commerce, but just allowed to sit there as a nice big, untaxed private preserve.

What all this meant was that Alabama's tax system was literally regressive -- not regressive in the modern liberal sense of not being "progressive" enough for liberal tastes, but actually more burdensome on the poor than on the rich. Now I'm no big advocate of progressive taxation. But I AM against, as should be all conservatives, a situation in which the poor actually pay a LARGER percentage of their income in taxes than the rich do. Yet that was the case in Alabama. The low income tax threshold, the low property taxes, the timberland tax exemptions, and the high sales taxes (in Mobile, the sales tax was 9%, and 10% for restaurant food), meant that the tax burden was upside down. Several different independent groups did analyses, and while they all differed slightly in how they crunched the numbers, their basic conclusion was the same: The tax system was badly regressive. At one end of the estimates, the lowest-income Alabamians paid something like 9.5% of their income in state and local taxes while high-income Alabamians paid only 7% or so; the far end of the estimates looked even worse: low-income earners paid as much as 11% while high-income earners paid just 4.5%. Clearly, this wasn't fair. Reform was desperately needed.

Finally, something like 90% of all Alabama tax revenues were "dedicated," by the Constitution, for one purpose or another. And the super-powerful Alabama Education Association owned more than half the state Senate, lock, stock and barrel, which meant that the revenue source dedicated for "education" spending amounted to the AEA's own little bailiwick, with legislators deliberately mislabeling non-classroom, or even non-school-related items such as country music museums, as "educational" so that they could hide all their pork and slush funds in that account and use it also to pay off the AEA for whatever the AEA wanted. Early this decade, even when the taxes used for "general fund" revenues were incredibly tight, the education fund sometimes was rather flush -- but lawmakers could not switch money between accounts, meaning the AEA kept its slush funds and power base even as state law enforcement was cut to the bone. As it was, the state police force at one point had only one trooper to patrol every 180 miles or so of state highways. The state crime labs were backlogged by as much as TWO FULL YEARS. The court system was thus badly bottlenecked. Highway deaths were rising rapidly. And all sorts of other basic governmental functions were barely on life support. Riley desperately needed to be able to move money from one account to the other depending on how the economy affected each revenue source. In this case, the general fund was starved even by all objective conservative estimates. Even Gary Palmer of the very conservative Alabama Policy Institute agreed with this basic fact of that the general fund was in dire straits. (Gary thought at least some more revenues were needed for the short term for the general fund, although not as much more as Riley ended up proposing.)

So what Riley did was come up with a reform plan that cut taxes for vastly more people than it raised them for -- by something like a 5-3 margin if I remember right. (i.e., it cut taxes for something like 50%, kept them level overall for about 20%, and hiked them for about 30% of the populace). Even so, the tax code would not have become progressive overall, but almost exactly flat -- exactly what conservatives have always said is the ideal!

But overall, in the short term, the Riley Plan raised more than a net $1 billion overall, mostly by raising the incredibly low property tax rates, which is what financed the general fund -- and it made the NEW taxes "un-dedicated," meaning their proceeds could, for the first time, be moved among different accounts. Even so, Alabama property taxes would have gone from something like second lowest in the nation to something like fifth lowest -- hardly a terrible burden. And its overall spending levels would have done likewise, still sitting among the bottom six states in per capita spending in the nation.

And this was exactly when the second round, i.e., the larger and more supply-side round, of the Bush tax cuts were going into effect, so that EVEN FOR THOSE WHOSE STATE/LOCAL TAXES WOULD GO UP OVERALL UNDER THE RILEY PLAN, THEIR COMBINED LOCAL/STATE AND FEDERAL TAX LOAD WOULD BE SMALLER THAN IT HAD BEEN JUST TWO YEARS BEFORE. In short, even for the 30% who would have been moderately "hurt" by the Riley plan, their overall financial situation, in terms of taxes, would be better than it had been in 2001. No better time could be imagined to do tax reform in Alabama than a time when a windfall was coming to the very taxpayers, the minority of taxpayers, who would be hurt by the reforms -- especially when the windfall was bigger than the new load. In sum, they wouldn't even feel the pinch.

Finally -- and here is the kicker -- the Riley plan overall had two more wonderfully clever assumptions underlying it. Riley could not say it in public, but his idea was to do exactly what Reagan did: Once the immediate budget crisis passed, he wanted to give some of the money back to the public in a different form. In year three or four, if the budget were balanced and especially if the "rainy day fund" were replenished, Riley planned to bring to the people a proposal to cut the state sales tax by 1/2 cent (or perhaps more). After adding to the amount of money available for use in whichever fund is needed, rather than being dedicated to just one narrow use, he could afford to cut the "education" fund by a small amount so it wouldn't provide quite such a power base/slush fund in the effective control of AEA. (How bad is AEA? It even opposed criminal background checks for teachers!) Help the taxpayers, while de-funding the AEA! What a great idea.

The second assumption behind the entire effort was to position himself politically in two ways more helpful to the state as a whole than to himself. First, if the plan did NOT pass -- as it didn't -- it would show once and for all that fiscal rectitude was the only option left. "Hey, guys," he could and did say (I'm paraphrasing here), with a big smile on his face, "I hear you loud and clear. You want government to live within its means, not by grabbing more of your means. I tried the big reform package, and you didn't like it, and I'll listen. I'll do what I can in the future in piecemeal fashion, and let you weigh in on it each time, but meanwhile we are going to have the leanest government you have ever seen -- and that's a good thing." In short, Riley took ALL tax hikes off the table for years by letting the voters themselves send even a carefully crafted reform plan to a crashing defeat. So by bringing the reform package to the people as a constitutional amendment, rather than trying to pass a tax hike through mere statutory means, Riley ensured that now ALL state politicians would be loathe to raise taxes in ANY fashion without getting clear popular approval for it. (Later, he actually did raise the income-tax exemption threshold, thus cutting taxes slightly for every single Alabama taxpayer.) Second, by putting himself on the line so much for the "reformist" or "goo-goo" ("good government") crowd, he earned the undying support of the goo-goos, even many of those who were ordinarily center-left. He therefore made sure that their suspicions of the motives of a conservative Republican governor were almost entirely dissipated, meaning he could push conservative reforms for the rest of his term, on all sorts of fronts, without taking flak from basically high-minded goo-goos who might otherwise have assumed that the "reform" part of "conservative reform" was a mere mask for "radical conservative." In other words, they would actually consider his reforms on the merits rather than fighting against them from the start. Since goo-goos tend also to be fairly high-finance folks (chablis-and-bris center-left, at least some of them), it meant Riley could pursue reforms without having a bunch of money spent fighting him out of mistaken assumptions about his motives.

In all, the Riley Tax Reform attempt was a great thing for the state. Even in failure, it served good purposes. And if it had passed, it would have served other good purposes. It was a win-win.

The acid test, in the end, was how voters responded. In conservative Alabama, if what Riley had tried was so obnoxious, the voters could refuse to re-elect him. Instead, even in the overwhelmingly Democratic year of 2006, Alabama voters re-elected Riley by giving him 59% of the vote -- an immense landslide.

As for Tim James, I have found him singularly unimpressive, a guy who tries to act tough and throw his weight around because his daddy was governor.

The front-runner for governor this year, Bradley Byrne, is a solidly reformist conservative -- with a proven record of accomplishment, integrity, fiscal conservatism, traditional values, and tough and successful stands against entrenched, corrupt interests on multiple fronts. Yeah, he was for Riley's tax plan -- and he was right. He also fought repeatedly against government waste, for lower taxes overall, against the AEA, and in favor of governmental transparency. Neither he nor Riley deserve the back-of-the-hand treatment that McCain gives them. As a 30-year veteran of the conservative movement, I vouch for Byrne entirely.

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About the Author
Quin Hillyer is a senior editor of The American Spectator and a senior fellow at the Center for Individual Freedom. Follow him on Twitter @QuinHillyer.