When the Reagan Revolution Really Began Jude Wanniski June 6, 2003

Spring 2003 SSU Lesson #13: Howard Jarvis & Jeff Bell

To: Students of Supply-Side University
From: Jude Wanniski
Re: 25 Years Ago Today

Thanks to Bruce Bartlett for reminding us that 25 years ago today the voters of California went to the polls and decisively voted for Proposition 13, the citizen initiative of Howard Jarvis to slash property taxes throughout the state. It was easily one of the most important events of my lifetime, as it was also on that day that I resigned from the Wall Street Journal in order to promote supply-side economics as a private citizen. (I founded Polyconomics a month later, and it is still going strong.) In his column about Prop. 13 Bruce does not mention it, but on that same June 6, there was another cataclysmic political event taking place on the East Coast, in my New Jersey backyard. My buddy Jeff Bell, a true believer in supply-side ideas, that day defeated a five-term US Senator, Clifford Case, in the GOP primary. He did so by campaigning on my ideas, and I have to admit that when I resigned from the newspaper that day I had fully expected Jeff to lose, as the polls a few days earlier showed him being crushed. My (then) wife Christine and I drove to Trenton to commiserate with Jeff as the returns came in. Holy Smokes! Just before midnight, Case conceded.

This was the real beginning of the Reagan Revolution! Time’s next issue had both Jarvis and Bell on the cover with a giant headline: TAX REVOLT!.

Jarvis had to collect a million signatures to get on the ballot. Jeff had won with NO MONEY, which is what made that race especially sweet. As Reagan’s 30-year-old director of research in 1976, Jeff had read my “Mundell-Laffer Hypothesis: A New View of the World Economy,” which appeared in the Spring ’75 issue of Irving Kristol’s Public Interest quarterly and it fired him up. He devoted $8,000 in life savings to the campaign and borrowed more from family. I persuaded William Simon, who had been Treasury Secretary in the Nixon administration, to be his finance chairman for a fund-raiser and Jack Kemp into being the featured speaker. Jeff was of course running on the Kemp-Roth tax cuts styled on the JFK tax cuts of 1963-64.

On both coasts, the advocates of high taxation had spent millions of dollars on advertising to scare the voters into thinking their lives would become miserable if they voted for Prop. 13, or Jeff Bell, and they did so anyway! If Jeff had not run and won, Ronald Reagan almost certainly would not have been elected in 1980. Jeff lost the general election to Bill Bradley that November, but the Gipper’s campaign manager, John Sears, took a post-election poll that showed Bell losing on the social issues and winning big on taxes. Sears persuaded Reagan to run his 1980 campaign as a supply-sider, backing the Kemp-Roth tax cuts. The rest is history. Western Civilization had been SAVED!!

Bruce Bartlett, by the way, was Jack Kemp’s chief economist way back then, and at one later point worked at Polyconomics. He’s easily one of the best commentators on political economy in the American press today.

by Bruce Bartlett

This Friday, June 6, marks the 25th anniversary of one of the most important political/economic events in American history: Proposition 13. This initiative, which was approved by the voters of California on this date in 1978, sparked a tax revolt that spread throughout the country and continues to reverberate today.

The impetus for Prop. 13 was the inflation-induced housing price boom of the 1970s. Investors seeking to preserve their capital poured their savings into tangible assets like real estate. With double-digit inflation also pushing up prices, many homeowners suddenly found themselves living in houses worth many times what they paid for them. But with property taxes based on assessed values, this meant that tax bills were also rising sharply. Since incomes were not rising as fast as prices or taxes, some California homeowners found that they couldn’t pay the taxes and were forced to sell their homes.

Howard Jarvis and Paul Gann, leaders of two California taxpayer organizations, joined forces in 1978 to put an amendment to the state constitution on the ballot that would limit property taxes to 1 percent of assessed value in 1975. Valuations were frozen until the property was sold. And just to make sure that other taxes were not increased to compensate, a two-thirds majority in the legislature was required to raise taxes.

At first, California politicians ignored the Jarvis-Gann effort. But when polls showed that the measure would pass, they panicked. Dire effects were predicted if taxes were cut. Police, firefighters and teachers would all be laid off, voters were told. Unemployment would rise and the states economy would be decimated.

Lest you think I exaggerate, consider these quotes from an April 17, 1978 Washington Post story:

Former California Governor Edmund G. (Pat) Brown: If I were a communist, I would vote for Proposition 13.

Los Angeles Mayor Thomas Bradley: Proposition 13 will hit the city like a neutron bomb, leaving some city facilities standing virtually empty and human services devastated.

Howard Allen, president of the Los Angeles Chamber of Commerce: Proposition 13 is a fraud on the taxpayer that will cause fiscal chaos, massive unemployment and disruption of the economy.

Some economists at the University of California at Los Angeles predicted that the states unemployment rate would rise by 4.5 percentage points, from a projected 6.7 percent rate in 1980 if Prop. 13 was defeated to 11.2 percent if it was enacted.

Despite a massive advertising campaign against Prop. 13, financed by the states business community, which almost universally opposed the measure, voters held firm in their support. On June 6, 1978 they backed it by a 2 to 1 margin.

Almost immediately, it became clear that all the predictions of doom and gloom were so much hot air. Within months, the critics even admitted it. A New York Times report on February 11, 1979 was headlined: Little Impact Seen in Coast Tax Slash. On March 7, 1979, another Times report carried this headline: Dire Predictions on Proposition 13 Have Not Materialized. The latter story had this to say: “Fire and police protection have been virtually unaffected by the proposition and schools are spending about as much money as they did last year. Some services, such as libraries and flood control, have been cut. But, for the most part, the eliminated services appear to have gone unnoticed, according to interviews with many residents.”

What about unemployment? According to the U.S. Bureau of Labor Statistics, California’s unemployment rate was 7.1 percent in 1978, well above the national rate of 6 percent. By 1979, the gap had narrowed, with the state unemployment rate at 6.2 percent versus a national rate of 5.8 percent. Although the California unemployment rate rose in 1980, at 6.8 percent it was below the national rate of 7.1 percent for the first time in many years.

There is no record that the UCLA economists ever apologized for their gross error. Within months, 12 other states cut taxes, fueling the idea of a nationwide tax revolt. Congress, with overwhelming Democratic majorities in both houses, quickly abandoned a liberal tax reform plan it was working on and cut the capital gains tax instead - over the strenuous objections of the Carter Administration. President Carter signed it anyway.

Republican tax-cutting initiatives, such as the Kemp-Roth bill, suddenly became viable. GOP congressmen and senators who had withheld their support because it would increase the deficit, now jumped on board. Two years later, Ronald Reagan rode the tax revolt into the White House.

The most lasting effect of Proposition 13 is that it taught Republicans the political power of tax cutting and weaned them from their obsession with budget deficits. In that respect, its impact continues to be felt 25 years later. Passage of the 2003 tax bill is only the latest example.

Bruce Bartlett is a senior fellow with the National Center for Policy Analysis. His syndicated column appears regularly in the Washington Times.