The Vote: Democracy or Disease?

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When the California polls closed on Tuesday, the most costly primary race in the state's history—thus far—came to an end. Like many high profile races for Senator and Governor nationwide, the spending attracted national attention.

Of course, this isn't the first time that California politics and political trends have captured the national imagination and spread like a virus. Given the particularly brutal economic meltdown in California, one would not expect the state's notoriously dysfunctional governance system to be a role model for others to follow. Alas, it unfortunately seems that it is. Three examples below from the Midwest show that California-style governance definitely has its fans. Indeed, the rise of using constitutional amendments to make policy, and of big money/ special interest- backed referendum petitions shows that the California governance disease is starting to metastasize, even in the Heartland.

The first example is Missouri, where billionaire Rex Sinquefield launched launched a successful drive to get an initiative on the ballot to eliminate the city earnings tax in Kansas City and St. Louis. Sinquefield is a self-made man who became rich after, among other things, creating the first S&P 500 index fund. Known for his ardent support of free market views, Sinquefield has followed in the footsteps of George Soros and other wealthy financiers in pushing his ideas politically, albeit in a smaller arena. Like Soros, Sinquefield channels plenty of money to candidates, and even has his own think tank, the free market Show Me Institute.

Sinquefield's latest crusade is to change state law to prohibit new cities from having local earnings taxes, and to require those cities where they are already in place to put them to a vote every five years and phase them out if ever voted down, with no mechanism for ever reinstating such a tax, even if the city's voters approve it. While this is a state law change, it targets two specific cities, Kansas City and St. Louis; the latter gets a third of its revenue from the earnings tax. Sinquefield says he wants to replace the earnings tax with a land value tax - an excellent idea - though his actual initiative text doesn't replace it with anything.

Whatever one thinks of the actual policy, the idea of billionaire-backed petition drives is right out of the California special interest playbook. Also, while Sinquefield might reasonably want to eliminate the earnings tax in St. Louis, where he lives and pays taxes, it isn't clear what skin he has in Kansas City's tax. In effect, Kansas City residents are will have their city's fiscal future determined by voters who largely live outside the city limits, in a campaign financed by an out-of-town billionaire who lives 250 miles away on the far side of the state.

And there will be more than 20 other referendum votes on the Missouri ballot this fall. In this governance environment, it shouldn't be surprising that a significant number of Kansas City businesses are migrating across the state line to Overland Park and other Kansas suburbs where they don't have to deal with this type of politically induced uncertainty. The political risk in Missouri is commercially toxic.

The second example is Indiana. Prodded by court rulings, Indiana switched from a property assessment system that undervalued older buildings to one more reflective of market values. This, in combination with the elimination of an inventory tax, led to a spike in property taxes across the state. The spike, along with an income tax increase, led to the mayor of Indianapolis losing his reelection bid to a total political neophyte without any significant financial or establishment backing.

This stunning upset jolted the legislature into action. Indiana sales taxes were raised by one percentage point, the state took over several key municipal expenses, including educational operations costs and juvenile justice, and it bailed out underfunded local pensions. In return, property taxes were capped to prevent a repeat of the tax crisis.

So far, so good. By most accounts the financial restructuring and the tax caps are working reasonably well. But state politicians aren't satisfied. They are in the process of amending the state constitution to write the tax caps into law.

This is a mistake on two levels. First, it assumes a constitutional tax cap is a substitute for political will on fiscal policy. The notion that if property taxes are limited, then legislative spending won't increase has been disproven; the example of Prop 13 in California immediately comes to mind. In fact, writing the tax caps into the constitution might actually cause future legislatures to breathe easy and take their eye off the fiscal ball.

The second is that constitutions should deal with the structure and general powers of government, not with setting tax rates. Writing specified property tax rates into the constitution is simply an attempt by the current legislature to take advantage of high current popularity for a particular policy, and to prevent future legislatures from changing that policy, even if conditions or public opinion change. As a general rule, one legislature or governor should not be able to bind the terms of policy of their successors. If that is established as a valid exercise of legislative power, it seems likely to be used again and again in the future, perhaps for more dubious policies.

The last and most incredible example is Ohio, where a group of developers wanted to open casinos. Led by Rock Ventures, the investment vehicle of Quicken Loans owner Dan Gilbert of Detroit, the group spent $47 million to draft, put on the ballot, and pass a constitutional amendment permitting casino gambling in Ohio. But this initiative did much, much more than that. It only permitted casinos on four specific properties — properties controlled by the referendum backers — and thus granted them exclusive rights to open casinos. It exempted their casinos from zoning or most other types of local control, authorized them to operate 24 hours a day, and specified a very low license fee of only $50 million per casino to the state. It also permitted them not only to run any game currently allowed by any surrounding state, but also any game those states might approve in the future. It's undoubtedly one of the most incredible constitutional amendments in the history of the United States.

Casino companies are far from the only special interest groups to use Ohio's liberal initiative process to their own ends. Other users include the conservative Cincinnati anti-tax group COAST – Citizens Opposed to Additional Spending and Taxes. COAST does endorse candidates, but in general has a poor track record of getting politicians elected. It has, however, used initiatives to defeat or delay a slew of projects locally. On another front, animal rights advocates at the Humane Society are trying to amend the Ohio constitution to implement their preferred standards for treatment of animals in agriculture.

The takeaway on Ohio referendums for any special interest group is very clear: “Why not us, too?”

The legislature is starting to get fed up. Rep. John Domenick wants to amend the constitution to require future changes to obtain a two-thirds supermajority vote, not just a simple majority. He cites the growing ability of deep pocketed, out-of-state interest groups like the Michigan-based casino developers to effectively take over policy making from elected officials.

Domenick is on the right track. Direct democracy can play an important role in many cases. For example, there's nothing wrong with requiring voter approval for large tax increases or bond issues for major civic programs after they are approved by elected officials. This gives the matters in question extra legitimacy. But referendum petitions that are too easy to submit and approve only lead to political gridlock and a special interest takeover of the levers of power. The lessons of California suggest that going too far down the road of reliance on constitutional restrictions can become a substitute for political will.

Flckr photo by SanFranAnnie

Aaron M. Renn is an independent writer on urban affairs based in the Midwest. His writings appear at The Urbanophile.

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great post

Thank you for noticing Ohio's problem

This subject has actually led to fights in my house over the casinos. My wife is for casinos as looking simply at the jobs and taxes they bring in, for me it was the constitutional issue. The deep pockets behind the issues have done a great job prostituting out constitution. My view was that out legislature passed on the issue and allowed the people who will benefit most (not the State of Ohio) write the rules and many of the regulations that they will have to abide by. If in the past Henry Ford or Rockefeller or Carnegie would have tried to buy the constitution to create a monopoly situation, set in stone, for thier sole benefit I think it would have been viewed as a huge abuse of government, but since it is now done in the modern political world the larger abuse of the bedrock of our state has gone unnoticed by the public.

Going by the legislatures biggest piece of legislation of the last decade - the law stipulating that patrons must sit six feet away from strippers, maybe they can legislate people playing slot machines must sit six feet away from them at all times from.

Matt Roberts

Yet, the Swiss

have lots of referenda and seem to do just fine.

Dave Barnes

From what I've read New

From what I've read New Jersey is considering the same thing as Gov. Chris Christie is selling the idea of capping property taxes at 2.5% annually. All I can say when I read things like this is that those who consider such policies obviously don't read their history.

Prop 13 is perhaps the single largest problem with California. It was passed 30 years ago and ever since the state's infrastructure and public services have dwindled to the point where its become common for schools to have non-stop bake sales and parent donations to keep them afloat. The reasons have been discussed many times but it all comes back to the growing disparity in the rising costs of everyday living and the inflexibility of having a tax system that remains pegged to assets now worth in some cases 10-15 times more than their taxed value.

There has been many social consequences from Prop 13 as well. A housing market works best when there is a constant circulation of houses which turn over regularly. In most states when older residents who still live in a large house where their kids moved out long ago and their taxes have risen over time, they usually tend to downgrade to smaller homes or apartments, freeing the home they lived in to the market for younger families with children. In California you'll find the opposite is true. Most of the fine old houses in my East Bay neighborhood are owned by older residents in their 60's and 70's. They bought these homes for $20,000 and now the homes are worth $800,000. Yet they pay taxes on the purchased value. Hence they have zero reason to move and therefor there is a limited supply of housing. This limited supply caused prices to rise to obscene levels. If you look around at what homes even successful young professionals buy, they tend to be smallish unremarkable homes simply because they can't afford anything else. In essence by protecting the least productive residents from paying their fair share in taxes the cost was transferred on down to the most productive residents- the young professionals- who are in turn leaving the state in record numbers. Over 680,000 last year alone.

A better way to have implemented this law would have been to base it on age instead of creating an outright cap on taxes. Most states have such provisions in place already. So yes- you can have a progressive tax system and also protect senior citizens. Putting a cap on property taxes will ultimately lead to local or even state property bubbles thus one way or another the cost will get handed to someone else. In a state like NJ where the cost of housing is already very high I fail to see how such a measure would lead to long-term prosperity.

In California Prop 13 is known as the "Third rail" issue. No politician will ever touch it. Meg Whitman actually ran some ads claiming her opponent Steve Posiner was against it. The reality is that while all of the politicians in California are going on and on about fixing the state's finances and creating jobs, they undoubtedly probably know that deep down inside none of these issues are going to go away anytime soon- not as long as prop 13 is still being enacted.