Taxpayers in Revolt: A Look Back to See the Future

0:00I have a very uplifting speech for you about taxpayer revolts, and what I want to talk about today is a guy named Jimmy John Leotard, and maybe you don't know Jimmy John, but he started the Jimmy Johns sub-chain, maybe you've seen him around, and he's moving from Illinois to Florida. He's going to be a fellow Floridian and his company's headquarters may soon follow. And what he said was about the Illinois government was that all they do is stick it to us, he says. They are increasing the personal income tax in Illinois from 3% to 5% and the corporate Income Tax from 7.3% to 9.5%.

0:57He said, I could absorb this and adapt. He told his local paper that. But it doesn't feel good in my soul to make that happen. So where his sub-business eventually finds its home is kind of up in the air. But Jimmy John's kids have already started school here in the great state of Florida. He says my family and I are out of here. So while Jimmy John seeks friendlier tax climates, there's talk of municipal and state government defaults. And of course, this was all the rage since Meredith Whitney went on 60 Minutes, where she said there would be 50 to 100 municipal defaults this year.

1:46she said it will be as big a meltdown as the real estate crash and it's hard to know what kind of financial shape that many muni debt issuers are in because muni bond issuers don't give financial statements they're not very quick to update the financial information that you need to know to gauge the value of of your investments in these muni bonds And there's plenty of concerned sons who probably forwarded the story from The Wall Street Journal to their muni-bond-holding mothers, I know at least one, that mentioned Helen Kirkpatrick. She was a retired journalist who was stunned when her broker called her to offer her fifty $0.50 on the dollar for her Maryland health and higher education bonds, $0.50 on the dollar.

2:46This came out completely out of the blue. Kirkpatrick had constantly sought out information about the bonds that she had bought a decade ago, but she could find nothing to miss. You could get no information. So these bond issuers don't disclose financial information very very readily. In fact, specialists in municipal disclosure did an extensive study. They studied 17,000 of these bond issues, and they found that 56% filed financial statements. Only 56% or more than 56% did not file financial statements in any one year.

3:32Now, no private company could get away with this, right? Municipal bondholders or bond issuers are able to do this. More than a third of the borrowers skipped three or more years of giving financial information and that number grew to 40% in 2009 when credit was mounted obviously. And another 30% filed extraordinarily late in 2009. So what this means in total is that two to three trillion dollars worth of muni debt obligations are from entities that have given out insignificant or insufficient ongoing disclosure information.

4:28Now, California State Treasurer Bill Locklear says the idea of states going bankrupt is nonsense. He says it's a cynical proposal intended to incite a panic in response to a phony crisis. He says killer bees, space aliens, now it's the invasion of the bankrupt states, he says. Well, I'm a little surprised if you followed the events in California that Mr. Locklear would be so cocky because it wasn't just 2009 when the state of California had to issue IOUs because they ran out of money, so they issued IOUs to pay taxpayers, vendors and local governments.

5:15Now, Mr. Locklear has a big plan for this year to write the ship in California. They're going to refrain from issuing any general obligation debt in the first half of the year, and that's going to bring down their borrowing costs and make everything all better. Well, that doesn't sound like a great trick, except California hasn't been able to do that since 1988. So if that doesn't work out and it probably won't work out, then Mr. Locklear admits that issuing IOUs is what he'll have to do. He says it's a possibility, it's not something he wants to do, it's at the bottom of the list, but it is on the list.

6:02Now Nicole Gelinas at the Manhattan Institute also thinks the idea of states going bankrupt is nonsense because she says states pile up debt indirectly, issuing bonds through thousands of separate legal entities. She writes that New York State, for instance, doesn't owe $78.4 billion worth of debt. It only owes $3.5 billion worth of general obligation debt. Who Loves the Rest, she writes, the MTA, the Dormitory Authority, the Tribunal Bridge and Tunnel Authority, and so on.

6:48She says, legally each is not a government, but a public benefit corporation. Each has its own board, its own rules, its own contractual agreements with creditors from bondholders to unions. Each of these agreements offer creditors different protections, she writes. So if you're a New Yorker and there may be some New Yorkers in this crowd, in this case you're supposed to sleep better at night, secure in the knowledge that dozens of government entities owe this debt instead of just one. Should make you feel a lot better. Meanwhile, any one of these public benefit corporations could go default out of the blue Because, let's face it, nobody's going to get a heads up if the dormitory authority runs out of money someday and can't pay their bondholders.

7:41But the main argument against states not being able to file bankruptcy is that they're sovereign entities and they can tax any time they want to, and they can cut their budgets whenever it's needed and to make everything all better. They can balance their budgets anytime they want to. And some governors are trying to do that. That means they're having to cut state worker pay, trying to renegotiate union contracts. You may have read about a bit of a dust-up in Wisconsin about this with Governor Scott Scott Walker wanting state workers to contribute a little bit of their own money toward their own retirements.

8:31He also wants to undo their collective bargaining rights and of course these collective bargaining rights have led to the cost of the benefits being adding 74 cents to each dollar of salary in the state of Wisconsin. Of course, Badger State teachers will have none of this. They abandoned their classrooms and they descended on the Capitol and they linked, they sat down body against body, filling a corridor chanting, freedom, democracy, unions. I don't think that's exactly what Thomas Jefferson had in mind, but that's the way it is in Wisconsin.

9:17So when the senators were convening, that's what was going on. Now in Nevada, the University of Nevada at Las Vegas, where I attended and Murray Rothbard used to teach and Hans Hoppe used to teach, they may have to file what's known as financial exgency, the equivalent of bankruptcy. The university president said, our state is nearing a state of financial collapse, and when he told the faculty this, they were moved to tears. The education leadership professor, and I don't know what an education leadership professor would actually teach day-to-day, but I leave that to you.

10:06On Cecilia Maldonado, she read a list of grievances that the faculty had when the bad budget news was announced and each one of these grievances started with, I'm sick. She said, I'm sick, we are destroying much of what we've built. She said she is sick of politicians describing professors as enjoying fat salaries and easy Living, and she said she is sick of the public, that the public doesn't seem to understand the importance of higher education. Of course, this past week, public employees protested in Ohio State House in Columbus, they protested in Tennessee, they protested in Nevada State House up in Carson City, all in the show of solidarity for their union brothers and sisters in Wisconsin.

11:01The point of all this is state legislatures are going to have a hard time cutting budgets. You might say that government employees feel entitled and they are not going to give up their pay and benefits easily. Now when it comes to raising taxes, in the case of Jimmy John, when the government pushes who moves you down on the sidewalk and decides to steal your wallet, claiming that some other person is more worthy of your money than you are, well, you fight back, right? And if you're Jimmy John, you have the resources and you have the options, you might just move. So you move down here to sunny Florida.

11:49But if you're an average working stiff, you're underwater on your house, your job prospects Tax are local, and maybe you have family tying down when the taxman comes wanting more. Well, let's just say a fight breaks out, right? So what's the cause of state and local fiscal woes? Was it just the recession that did all this? I mean, this seems to be fairly new, right? The Wall Street Journal's David Wessel points out that at the worst point in early 2009, State and local tax revenue combined were down 11% from year earlier levels. Local governments took a hit from the housing bust.

12:37State governments got hammered when the income, spending and capital gains, the tax declined. And despite an improving U.S. economy, he writes, tax receipts at the state level remain 12% below pre-recession peaks. But almost in Austrian economics fashion, Wessel then goes on to recognize really what the problem was, and the problem was the boom. He writes, in the good times, governments enjoyed and spent a tax windfall. State and local tax revenue rose 36% in the five years before the bust. In the mid-2000s, overall receipts, taxes and federal grants rose rapidly.

13:22In the insuring years, spending rose rapidly too. Flush with money, governments did more, often encouraged by voters who wanted more spending on education and the like. Now everybody wants to point their finger at Wall Street. They want to point their finger at the bank for ramping up on real estate during the boom. But what about City Hall? They did the same thing. They hired on plan checkers, inspectors, city planners, they built fancy new buildings to house all these people, and they strapped themselves essentially to the same real estate rocket that the banks and Wall Street did.

14:07And as ever-increasing tax levies from these real estate appreciation, which they knew, you know, we all know that real estate goes up in value each and every year, that was is the common view. City Hall was waiting to just assess more and more and receive more and more in tax benefits. And what they could do with this money is fund everything from education to the homeless or child care or anything that they wanted to fund, all on the backs of real estate appreciation. That's the same way in the state houses around the country. I mean, who cares about what onerous union contracts you sign when the money's flooding in, who cares?

14:55You just go ahead and sign and move on to whatever people's business you have to do. It's like that old Merle Haggard song, we'll all be drinking free bubble up eating that rainbow stew. Well, this came apart when the financial markets melted down three years ago, and it turns out though that America's done this before. Three years after the 1929 crash, Herbert Hoover urged Congress to pass the Revenue Act of 1932. Murray Rothbard wrote that the range of tax increases were enormous. A number of wartime excess taxes were reinstated.

15:42Sales taxes were imposed on a number of everyday goods, necessities and luxuries alike. Income taxes were raised dramatically. Now these numbers will seem quaint, but the nominal rate, income tax rates, were ranged from a range of 1.5 percent, wouldn't you like to pay 1.5 percent in federal income Income Tax, to a top rate of 5%. But they changed that from a 4% bottom rate to an 8% upper rate. We'd love those rates today, but that was a huge percentage increase back in the day. Personal exemptions were reduced, earned income credit was eliminated, surtaxes were jacked Act from 25% to 63% on the highest incomes.

16:37Corporate incomes taxes were raised and the gift tax was restored. And all of these tax increases came on the heels of huge tax increases at the state and local levels during the 1920s because the 20s were just like what we've lived through. Huge increase in real estate appreciation. So in 1920, state taxes were 0.83% of the national income, but by 1929, that had more than doubled to 1.9% of the national income. By the end of the Roaring Twenties, property taxes accounted for 90% of the taxes levied at cities over 30,000 people. Real estate owners were filling coffers at city hall and state government all over the of the Country.

17:30And David Bado writes in a book, Taxpayers in Result, Revolt, Tax Resistance During the Great Depression, which we have a few copies out there, and you should really take a look at this book. It's a wonderful book about tax resistance during the depression. It's something a lot of people haven't read about, and it's a wonderful complete history of this. He writes that the only real estate tax, the real estate tax seemed almost destined to incite rebellion. Only vaguely did it meet the definition of a tax based on the ability to pay. In the 20s, as in the case of the early 2000s, real estate ownership was a poor barometer of the Wealth of Individuals.

18:23Just because the Fed policies flood money into real estate assets doesn't mean that the owners of those real estate assets are being able to afford the tax bill that they get from City Hall, that City Hall is so eager to assess these higher and higher rates. I mean, after all, these aren't rental properties. People live there. You can't pass the increase in taxes on to your renters. Now, local and state governments, they love property taxes, right? I mean, the administration costs are tiny. I mean, it's hard to hide a house. So, no detectives are needed to find your house for collections.

19:14And what happens if you don't pay your real estate taxes? I bet there's plenty in here that know what happens. Well, you get your name in the local paper. All your friends and neighbors get to see that you haven't RSVP'd the tax man on time. And what if you don't pay? Local authorities just slap a lien on your property and wait. Property isn't going anywhere, and the tax liens are superior to any home mortgage you you have, or any other liens. You see that's the way private property works in the good old U.S. of A. The property taxes actually predated the American Revolution and Beto explains in his book that property taxes possess the cardinal administrative virtue.

20:06The old tax is the good tax. And during the 20s, land wasn't the only thing that was taxed. Personal property was taxed as well. The assessment of land and the tax burden, unfortunately, it was arbitrary, it was ripe with corruption. But even with the prosperity of the 20s, the roaring 20s, taxpayers buckled under this pressure of these increasing tax burdens. Detroit, for instance, the rate of tax delinquency increased from 4.5% in 1921 to 12% in 1929. And this was a trend that was happening nationwide, it wasn't just Detroit.

20:54According to the report by the President's Conference in Home Building in 1932, the growth of delinquency is apparently not due to the present business depression, but has been going on since 1920 at the latest, the report said. The report concluded that people weren't paying their property taxes apparently due to the increase of the property tax more than any other one caused. Now as you can imagine in the 30s, the farmers were hit very hard by these taxes. While the price of their goods was plummeting, their taxes were increasing and that led the The Department of Agriculture to issue a report that concluded in 32 that the real weight of a farmer's tax burden has been doubled by falling prices since 1929.

21:49And it takes more than four times as many units of farm produce to pay the tax bill now as it took in 1914. Farmers didn't take this lying down. In January of 1933, farmers in Doylestown, Pennsylvania overran a tax sale. They purchased the farmer's title for $1.18 and then they turned around and gave it back to the over. Farmers across the country started employing the dollar sale strategy and in some cases farmers just quit paying and the local authorities decided to leave them alone. Tax protesters in Freeborn County, Minnesota demanded the abolition of the county agent, the county nurse, the weed inspector, home demonstration agents, and a 20% cut in all other county employees.

22:51Neighboring county 2,000 protesters turned out to demand the same thing. So the rural protest had a distinctly spontaneous flavor to it according to Beto. Taxpayers' organizations would appear, they'd reappear, they'd go away. So organizing farmers wasn't like organizing a herd of cows, but more like organizing a herd of cats, I suppose. But they still had, their protests were heard and their protests were effective. Farmer J.M. Sentin issued a warning to Governor Henry Horner.

23:37He wrote to him and said, in some states at tax sales, the people bought their property with 50 cents with shotguns. Politicians only understand the language of bombs and bullets. And James Babcock who wrote 1934, he wrote about farmers that were complaining that schools cost too much, teachers are paid too much money, we are going broke supporting our schools. I say abolish the county agent, he says he was wished upon us by the state college. Now urban protesters did a little better in coalescing than their rural brethren in most Cases. Individual taxpayer leagues popped up on a city and county basis all over the country. There were not less than 3,000 and probably about 4,000 of these taxpayer organizations in action. And in 1933, the number was rising rapidly. In fact, 700 were formed just in in the Spring of 1933 alone, according to the Committee on County Government.

24:58Now that's a far cry from 1927 when there were only 43 of these organizations that existed. Now as you might expect, the socialist mayor of Milwaukee, Daniel Horne, he hated these tax protesting groups. He claimed that they were doing more to undermine faith in government than all the communists in the World, and that they were mere fronts for greedy capitalists and real estate swindlers, is what he said. In Atlanta, a brand new taxpayer league attracted 1,000 members in its first week. It quickly rose to 5,000 members, and despite the protests, Atlanta politicians went ahead and raised taxes.

25:46And they were shocked when counseled that the tax increase would cause a rebellion, finding it difficult to imagine, quote, our staunch leading citizens taking part in any sort of tax strike. Why that thing simply isn't done. Tax protesters wondered why the cost to government hadn't gone down like the economy had. William Monroe wrote that, I buy less food, less tobacco, less recreation, says the man who holds his job, I would like to buy less government. But the real flashpoint for these tax protests was Chicago. Corruption was pervasive in Cook County.

26:33I think it still is, but I'm sure the Rahm Emanuel administration will take care of all But anyway, its assessment system was an embarrassing mark of local distinction. Tax-fixing in the Windy City involved juggling assessments, rewarding those who cooperated with the local political machine and punishing those who didn't. Now there was reform reassessments and there was a two-year tax holiday between 1928, 1930, But the Silas-Strawn Plan assessed taxes during that same period, even though there was a tax holiday in terms of payment, the assessment taxes jumped 24%.

27:24It's significant because at the same time, real estate values were plunging. The value of new construction was falling 86%.

28:04Payers, known as the A-R-E-T, formed 161 branch offices throughout the area, and that offered taxpayers the opportunity to join and engage in the tax strike. It was common knowledge that city government was helpless about this. In fact, a municipal court judge said at the time that his neighbors and friends made fun Now, City Hall tried to shame people into paying their taxes. You'll probably start seeing more and more of this. While the ARET was not allowed to buy advertising in local papers, the papers wouldn't sell it to them, the same papers donated full-page pay-your-taxes ads.

28:56Posts were printed up with, take your trade where the taxes are paid. Tax paying property owners were given, this property is now paying taxes posters to proudly display in their windows. But despite being called anarchist and worse, ARET membership reached 30,000 people. And in 1931 and 32, the tax delinquency rate in Chicago exceeded 53 percent. But it wasn't the rich fat cats that were stiffing the tax man. Maybe the socialist mayor thought that would be the case, but Beto's research reveals that it was actually skilled blue collar workers who made up the single biggest part of ARET.

29:50And in fact 26% of the members were women. Now Beto writes that the strike's demise actually came from division within its ranks. And if you're wondering if the tax strikes were successful, they were, but as Beto says only with some qualifications. But there is a history out there to draw from that I believe is instructive for all of us. Of course, all of these protests around the country flew in the face of municipal reformers who had spent a generation trying to professionalize government in an attempt to improve the image of government workers.

30:38It was predicted that if these tax protesters persisted, the reform edifice that they had constructed would be irreparably damaged. Charles Merriam at the time warned that these recurrent criticism of government employees threatened to poison permanently the springs of government interest, enthusiasm and service. Glenn Frank worried that the spreading anti-government ideology would divert men of capacity and self-respect from the public service for a generation. Well I guess maybe he's right. Maybe it has. As H.L. Mencken wrote, the average American legislator is not only an ass, but an oblique, sinister, depraved, and naivish fellow.

31:35Well the last time a U.S. state defaulted on its debt was 1933. And that was the state of Arkansas, they stiffed $146 million worth of bondholders. But that time has come again, because taxpayers will either flee as Jimmy John has, or they're going to stay and they're going to fight and they're going to strike. Because like that Farmer Jam's sentence said, politicians only understand the language of two things, bombs and bullets.