That Alabama Tax Vote

Last Week, voters in Alabama resoundingly rejected Gov. Bob Riley’s tax plan by a margin of more than 2 to 1. The plan would have resulted in the largest tax increase in state history.  ”[The referendum’s results were] pretty resounding. There’s no mistaking the voters’ message,” David Lanoue, chairman of the political science department at the University of Alabama, told the Birmingham News. ”I think the top reason is voters simply don’t trust their politicians in Alabama.”

And voters elsewhere owe voters in the Heart of Dixie a debt of gratitude.  Said Grover Norquist of Americans for Tax Reform: “[E]very Republican governor who thinks of raising taxes next year will walk past Traitor’s Gate and see Bob Riley’s head on a pike.  The voters in Alabama have saved taxpayers from California to Maine billions of dollars.”

So you have to hand it to Alabama’s electorate. When given the chance, it makes its opinion known loud and clear, even in the face of a massive and global campaign by elite opinion. On the question of new taxes, Alabama voters respond no differently than voters anywhere else in the world when given the chance. Their answer is now (and has always been): No. This is why political elites try to keep tax increases off ballots.

The results of the vote should not have surprised anyone. In fact, they reflect a growing anti-tax movement that public officials and the mainstream press are trying hard to ignore.  Last November, voters in Massachusetts almost passed a referendum that would have eliminated that state’s income tax. In 2001, anti-tax protests at the state capitol in Tennessee grew violent, causing shaken state legislators to reconsider new tax proposals. Given these sentiments, even the most Herculean efforts to increase the government’s claim on private wealth were doomed to fail.

As a result, Riley sacrificed much political capital. Alabama voters are simply not going to support such an expansion of state taxing authority during a recession, not when the Feds are already taking 30 percent of their income. Not with the legislature’s Mike Tyson-like reputation for fiscal responsibility. And certainly not on the basis of the University of Alabama law professor Susan Pace Hamill’s agenda-tinged scholarship supporting the belief that low taxes are sinful.

Not now. And in the Heart of Dixie, probably not ever.

Why did voters reject this plan?  First, Alabama voters are astute enough to realize that states cannot tax themselves into prosperity. Georgia doesn’t attract more capital and have a higher per capita income because its taxes are higher. That state is wealthier because, over decades, it made capital relatively more secure than other states. States that attract capital prove that capital will flow to wherever property rights are most protected.

Instead of addressing this difference, the Riley plan would have aggravated it by raising taxes, thus making capital even less secure relative to other states. Little wonder that Suffolk University economist David Tuerck predicted that implementing the plan in 2004 would cost Alabama 24,000 jobs and $331 million in business investment.

Second, as a former businessman, Riley should have remembered that capital is used more efficiently when it is controlled by the private sector. The reason is simple: Private owners of capital have a greater incentive to maximize the long-term value of resources because their waste directly impacts pocketbooks. Public owners of capital, on the other hand, are simply concerned about spending this year’s budget to justify an increase in next year’s budget. Increasing the public sector’s claim on capital would exacerbate this waste of resources.

Third, voters didn’t believe that an extra billion dollars a year would be used with the public interest in mind.   Alabamans have long held a jaded but honest view of politicians. They understand that politicians of both parties tend to direct funds toward interest groups whose support is crucial to maintain majorities in the next election. In this regard, the moral sense of the Rilely administration is not relevant. Administrations come and go. Mencken’s maxim—every election is a sort of advanced auction of stolen goods—rings true for good reason.

So what’s next?  Alabamans are reasonable. They are more than willing to consider a Plan B that reflects the character and history of this state. Such a plan should abolish the state income tax in exchange for immediately discontinuing funding for all state services that are not expressly required by the state constitution, thus allowing the private sector to provide such services if a demand for them actually exists. The absence of state income taxation has much increased the relative flow of capital to two states that border Alabama. Proposing the same for Alabama might even spearhead an anti-tax revolution in other states.

Plan B should also downsize the public school bureaucracy to account for the mass exodus from its classrooms. According to the U.S. Department of Education, the number of students enrolled in Alabama public schools has declined an incredible 14 percent over the last 30 years. This reflects that some of the most effective innovations in education are occurring outside that system, especially in the form of home and charter schools.

[In 2002, home-schooled students averaged 1,092 on the SAT, compared with the national average of 1,020, according to data from the Home School Legal Defense Association. A 2001 study by the U.S. Department of Education found that minority children educated at home fared better on reading and math scores than their counterparts in public schools. A 1998 study by the Education Policy Analysis Archives found that achievement levels of homeschoolers “are exceptional.” The peer-reviewed scholarly electronic journal reported that by the time “home school students are in eighth grade, they are four years ahead of their public/private school counterparts.” ]

Why not enact policies that encourage these exciting developments, rather than prop up a bloated system that so many flee when given the chance?

Finally, Plan B should eliminate the hated food tax while imposing strict zero-based budgeting requirements on state legislators. The former already causes firms to invest in other states. The latter is crucial for bringing about true accountability by reigning in a legislature that has avoided the painful steps necessary to balance the state’s books.

The stakes surrounding the September 9th referendum were much higher than anyone recognized. The global economy is changing in ways that do not bode well for the western corporatist state. Labor and capital are moving overseas at faster rates than ever in response to a relatively less onerous regulatory and tax burden, causing factories all over the country, and especially in Alabama, to close their doors for good. Technology makes this movement more possible today than at any point in the past, and it will only become cheaper over time.

This new development has lately caught the attention of policymakers in Washington who blame it for recent reductions in manufacturing jobs. Their stale response is to call for new levels of protectionism. While quick to criticize supposedly inherent problems with free markets for this development, these interventionists ignore the obvious effect of their own actions in bringing it about.

In the next century, the states that relieve the dangerous regulatory and tax discrepancy by reducing taxes and regulations will be the ones that maintain their current levels of capital investment and attract new stores of it.   Low taxes are no longer an ideal from which to gauge relative policy prescriptions. Rather, they are an imperative.

This Plan B, or some version of it, is a step in that direction.

It is not too late to come up with such a plan and bring it to the voters in March 2004. I suspect that these are the types of reforms that voters expected when they voted for Riely last November. It would be a mistake to assume that those who voted no on Tuesday are pleased with the status quo. Redemption is always possible in Dixie.