Public Prudence
Secrets of the Tax Revolt.
by James Ring Adams.
Harcourt Brace Jovanovich. 348 pp. $16.95.
Despite its title, this book is not about the tax revolt, since there are no real secrets about the mobilization of tax-weary citizens to cut back the spending of state and local governments. It is, rather, about the still undiscovered secret of how to develop public prudence.
Public prudence requires striking a fair balance between the comforts of the present and the prospects of the future. It is not properly measured by a low level of tax collections, but by the ultimate productivity of an economy helped by public expenditures on basic facilities. Prudence does not mean that government should not invest in roads or dams or bridges or in maintaining natural resources or saving human life. It does mean that the political process has to find ways to make choices between bad and good investments, and between good and better ones.
James Ring Adams, who is on the staff of the Wall Street Journal editorial page, is surely the best narrator we have had of the defacto bankruptcy of New York City in 1975 and subsequent years. In the pages of the Journal he has explained, as no one else has done, how the city was able to keep from sliding into de-jure bankruptcy—an experience that might have served as an enlightening example to the rest of the world, but would have been extremely hazardous for those people of New York who depend on local government for their food, drink, health, and shelter. Now, perhaps stimulated by the question of how the electorate permitted New York’s rulers to mismanage its affairs badly enough to stumble into their 1975 disaster, Adams has surveyed the entire nation, and found that the struggle against collective imprudence is not a New York phenomenon alone. It is the more regrettable, then, that he purports to define the issue as an argument over the level of taxes. For as he surely recognizes, taxes in the abstract are neither good nor bad; it is the investment made with them that counts.
Adams, indeed, praises an investment like the Erie Canal, which joined the Hudson River, about 150 miles upstream from New York City, with the Great Lakes. The Canal opened a water route from the Atlantic to the heartland, and contributed mightily to the growth of New York City and the whole of the Midwest. Only a political genius like DeWitt Clinton could have distinguished the Erie Canal’s prospects from those of dozens of other visionary canal schemes, most of them crackbrained, that circulated in some fairly impressive heads, including George Washington’s, in the early days of the Republic. Yet the very success of the Erie Canal subsequently posed great political dangers to New York State. For, as Adams points out, it made credible a host of other proposals to tax the people to dig new ditches. Only after New Yorkers had made up, through still further taxation, the shortfall in revenues on illusory projects, did they learn that what makes a canal successful is not the water flowing in it, but the freight traveling on it.
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The central problem of public policy may be formulated as one of keeping politicians from promising more canals than they can fill with freight. There are two generally sanctioned methods, which Adams identifies as, respectively, phase one and phase two of the tax revolt. The first is to limit the amount of taxes that a legislature can impose on the people it represents. The second is to limit the amount of borrowing that a legislature will be allowed to undertake, because borrowing inevitably commits the legislature to raising whatever funds may be needed to retire the obligations undertaken.
Without effective control over the government’s power to incur debt, the people are in the position of a silent partner in a business who, with a grand gesture, has been given authority to sign checks. The partnership cannot alienate any of its money without his signature. Right? Wrong! Unless the silent partner is prepared to push his own enterprise into a lawsuit by refusing to sign a check, the power to sign checks is only the power to place one’s imprimatur on whatever mistakes have already been made; no more than that.
In New York, the measures developed in the 19th century to control debt differed as between the state and the city. The state, under the constitution adopted in 1846, was prohibited from borrowing long-term unless the voters at a general election specifically approved the new debt by referendum. (In those days, the upstaters, afraid that their incomes would be crushed to pay debts incurred for their city cousins, believed that New York State would always have a rural majority.) The city’s debt limit, on the other hand, was established by a mathematical formula that left nothing to chance. The city was allowed to borrow no more than 10 percent of the assessed valuation of its taxable real property.
Yet whenever New York State felt pinched in realizing its grandiose plans for expansion, clever lawyers found a way around the requirement of a constitutional referendum. As Adams tells us, they ultimately invented something called “moral obligation” borrowing: they construed the constitution as permitting the establishment of a state-owned corporation, or authority, that had the right to go to the money market and borrow up to its statutory limit. Although the state bore no responsibility for repaying these debts, each year the authority’s fiscal officer had to report to the legislature the size of the gap between its earnings and the interest and principal payments due within the next year. The legislature would then have the power—though not the obligation—to hand the authority enough money to cover its debt for the year to come.
As bond buyers recognized, the legislature understood all too well that if it did not help out the unhappy authority, it would, like the silent partner with the right to sign checks, plunge it into bankruptcy. That would imperil not only all other New York State authorities but the state treasury itself. To make matters even more difficult for the taxpayers, the waiving of the referendum requirement was taken by bond underwriters as an argument for making the state pay a higher interest rate on authority bonds than on its own, voter-approved bonds. Needless to say, the same buyers simultaneously expected the state to stand as fully behind its “moral obligations” as it did behind its “full faith and credit” bonds approved by the voters.
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As for the city, it evaded the 10-percent debt formula with even greater facility. It incurred short-term debt which it kept rolling over, year after year, securing it by a rising mountain of uncollected taxes. Somehow, bond buyers liked these short-term, safe-looking notes and kept buying them without much attention to the value of the taxes that were supposed to make them secure. The city also issued bond-anticipation notes to finance housing projects for middle-class families. Once again, instead of replacing the notes with long-term bonds that would carry higher interest rates and require periodic amortization, the city kept the projects in short-term financing. That prevented rents from rising. The State Comptroller muddied the situation further by decreeing that if a housing project had a surplus—which it might well have because its temporary financing required no amortization payments—that surplus could be applied to the arrearages of another project. Since both were then construed to be self-supporting, the housing debt would grow by that degree greater; and so on and on. Eventually the money-market crowd got wise. The billion-dollar baby became a grown-up crisis.
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California, Adams shows us with a wealth of detail, was the first state to reach yet a third phase of the tax revolt. From early gold-rush days, Californians had been suspicious of government. They wrote a constitution that made referenda and citizen initiatives easy. Out of a tumultuous history, recounted by Adams in an unfortunately confusing and overlong way, came a constitutional amendment—Proposition 13—that limited the power of the state to collect taxes on real property, the principal source of California’s government revenues.
With California, Adams’s story becomes too complicated for non-specialists in state history to follow with engrossed interest. But the basic lesson is clear: no system of tax- or debt-limitation can provide the strength-in-depth and the flexibility to set reasonable limits on government spending. (I stress the word “reasonable” since one would certainly not want so rigid a legislative ban on borrowing or on tax increases as to prevent the state from undertaking worthwhile development projects.) What such a process requires is an alert electorate, one whose political make-up reflects a balance between the cautionary interests of citizens with property and the expansionary interests of citizens who think the only property they will ever own is a share of what the government has taken away from their tax-paying neighbors.
Actually, the best system yet devised for transforming young spendthrifts into taxpayers with conservative impulses has been the purchase of a home by people who have always lived as tenants. The gradual gentrification of derelict neighborhoods proves this. As “before-and-after” interviews with those who have resuscitated brown-stone houses in welfare-crammed neighborhoods reveal, nothing serves the cause of political prudence quite so well as the income-tax benefits deriving from interest payments on mortgages and local taxation, especially when combined with the experience of sending one’s children to school down some mean neighboring streets.
The rise of prudence is abetted by property ownership more readily than it is by stock ownership: that is one lesson of James Adams’s book, and it may even have been a secret.
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