"Newman and O’Brien have done a solid job of bringing long-overdue sociological attention to the issue of subnational taxation and its consequences for poverty."
"Impressive . . . straightforward, compelling, and well-documented. . . . This is an important book--for lots of reasons."--American Jrnl of Sociology
Impressive . . . straightforward, compelling, and well-documented. . . . This is an important bookfor lots of reasons.
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Taxing the Poor
Doing Damage to the Truly Disadvantaged
By Katherine S. Newman, Rourke L. O'Brien
UNIVERSITY OF CALIFORNIA PRESSCopyright © 2011 The Regents of the University of California
All rights reserved.
The Evolution of Southern Tax Structures
In the state of Alabama today, one of the most important sources of revenue for state and local governments is a tax that can be as high as 12 percent on food for home consumption. Those who can least afford it face a heavy burden for the very staff of life. Food taxes push poor people in exactly the direction they should avoid at all costs: low quality but inexpensive diets that increase obesity and imperil their health. How did Alabama come to rely on such a regressive tax policy? Why do the other states of the old Confederacy look so much like Alabama?
In their important article comparing the development of the French and American systems of federal taxation, Morgan and Prasad argue that the United States relied on relatively progressive systems of income tax and rejected the use of regressive sales taxes, while the French moved in the opposite direction. At the federal level this is true. But when we look one notch below, we find that many states, particularly those in the South, took the opposite tack and ended up looking far more like the French than we might have expected.
To the rich historical literature on the fiscal dilemmas of the nineteenth century and the Jim Crow era we add an original analysis of trends in state tax revenues over time. Together, these accounts paint a picture of a punishing regime affecting the poor of the South but never imposed on their counterparts in the northern and midwestern states. This historical legacy forms the backdrop for contemporary patterns of southern poverty, which are deeper and significantly more persistent than in other regions of the country.
TAX POLICY BEFORE THE CIVIL WAR
Although the most relevant periods for our purpose are the Civil War era, the Radical Reconstruction that followed, and the Redemption period that overturned the progressive achievements of Reconstruction, we must actually turn the historical dial back further to understand why the Civil War provoked the changes in tax policy that are so important today. Indeed, we must back up to the colonial era and the pathbreaking scholarship of historian Robin Einhorn, who has given us the most comprehensive understanding of fiscal policy in the early years of our nation. In her book American Taxation, American Slavery, Einhorn explains that northern states came into the nineteenth century with fairly mature property tax schemes, established during the colonial and Revolutionary War periods. Southern states, by contrast, had exemptions in place that put most land out of the reach of colonial taxation, and they had slaves—the most valuable property in the South—who were labeled and taxed as "persons" through poll taxes. The systems of property taxation in the South were therefore more underdeveloped and did not take shape in many ways until the antebellum period of 1830–1850.
By that time, class conflicts that set slaveholders and non-slaveholders apart intensified debates over appropriate systems of taxation. As Einhorn outlines in detail, the reapportionment of state legislatures throughout the nineteenth century threatened the influence of slaveholding elites as power shifted to burgeoning inland districts populated largely by non-slaveholding small landowners. As these small farmers "called for legislative reapportionment so that their majority number could be translated to majority power, they had to persuade slaveholding minorities that they would not impose heavy or prohibitive slave taxes."
The result was a spate of "uniformity clauses" that made it illegal to tax chattel more than other kinds of assets. With Maryland, a slave state, having included a uniformity clause in its state constitution in 1776, other slave states followed: Missouri in 1820, Tennessee in 1834, Arkansas in 1836, Florida in 1838, and Louisiana and Texas in 1845. Uniformity clauses had two important consequences. First, with most taxable wealth in the hands of slave owners, uniformity clauses acted as a pressure to hold down tax revenue altogether and set a pattern of low levels of financial support for the common costs of public administration in southern states. Second, the protection of slave owners set in motion efforts to tax others—particularly business owners and professionals—more, uniformity clauses or no. Louisiana added license fees and other kinds of taxes on businesses and particular professions in order to protect landed elites and slave owners. Differentiated rates and underassessment had the same impact. For example, the state of New York had a general property tax: one rule for taxation of all property. Elsewhere this was not the tradition: Mississippi favored landholders with the lowest ad valorem rate and slaveholders with a fl at rate that was even lower.
All in all, as figure 1 suggests, these differences in tax regimes meant that general property tax revenue was very low in most of the southern states, while it made up a considerable proportion of the public resources in the North. Low levels of taxation meant that the resources available to support the development of public institutions (schools, roads, ports, etc.) were far lower in the vast majority of southern states than in their northern counter parts. With the exception of Louisiana, which was a trade center and hence blessed with industry and other forms of property beyond land and slaves, the South entered the Civil War era with a much weaker tax structure for generating revenue and a far less generous tradition of providing for the poor than the rest of the country.
TAX REGIMES DURING THE CIVIL WAR
Financing a war of such huge scope was not an easy matter for either the Union or the Confederacy. Indeed, the genesis of the income tax was to raise federal revenue in the northern states for the pursuit of the Civil War. The Union made use of other devices as well, but as Yale political scientist Rose Razaghian has shown, it was able to fully finance 20 percent of its war costs through taxation, while tax revenue covered only 4 percent of the Confederacy's considerable military expenditures. With continued opposition to the taxation of slaves as property by southern elites, the Confederate States of America (CSA) turned to non-interest-bearing treasury notes and loans to finance the war efforts: a strategy that predictably resulted in hyperinflation. They indulged in "in kind" taxes by confiscating produce and other goods to fuel the army, a particularly harsh burden for poorer white farmers. Nonetheless, these means of raising revenue fell short.
By 1863, Confederate leaders were forced to consider new avenues to finance the war effort. Accordingly, Richmond mimicked the northern strategy by enacting a progressive income tax, a suite of excise and license fees, an 8 percent sales tax on selected goods, and a 10 percent tax on wholesale profits and agricultural products. Here again, though, wealthy slave-owning elites, who controlled the largest landholdings, had the power to ensure favorable treatment—slaves and many valuable forms of property were spared from assessment. These new taxes therefore generated little revenue and failed to ameliorate the worsening financial—and strategic—position of the CSA.
As the momentum of the war shifted in favor of the Union, prominent Confederate policy makers—notably those from states that stood to face the most "economic, social and political upheaval" from emancipation—began to reconsider their dogmatic aversion to taxation. Faced with the reality of an empty treasury and the unsettling prospect that defeat would result in emancipation, the CSA levied a suite of taxes that cut into the pocketbooks of the wealthy. Taxes on property, including slaves (taxed at 5 percent), gold and jewels (taxed at 10 percent), and interest or shares in banks and companies (taxed at 5 percent), were assessed in 1864. The tax on corporate profits was increased to 10 percent, and the CSA even created a windfall tax of 25 percent on all companies that made more than a 25 percent profit. Almost immediately after these new taxes were implemented, they were increased unilaterally by 20 percent, with corporate profits being taxed an additional 30 percent. A $118 million windfall, more than ten times what was in the public coffers for the war under the previous tax structure, followed.
The Civil War created almost unimaginable havoc for civilian populations caught in its maw. For those who were left behind the lines, the spread of poverty and hunger was devastating, nowhere more than in the southern states, where so many of the great battles took place. Even when the campaign favored the southern states in the East, as it did prior to Gettysburg, the mere fact that the battlegrounds were largely on southern territory meant that victory was almost as costly as defeat for civilians. The stuff of daily life—from food to equipment—was requisitioned by the home army.
Ironically, the Civil War spurred progressive efforts to provide for indigent southerners. Direct public aid on a grand scale became available for the first time, reversing a long (and rather miserly) tradition of private charity. According to historian Elna Green, at least one-fourth of the white population of Alabama was receiving state or county assistance in the last few years of the war. Benefits were meager compared to what was available to civilians in the North, but the Confederate government began to provide direct relief, distributing food to the poor for the first time.
The Civil War marked the first time southern states were willing to increase taxes on property for badly needed revenue. This epiphany, however, came too late to change the course of the war. The defeat of the South led to the quick dissolution of property taxes adopted to fund the war.
THE COST OF RECONSTRUCTION
Eric Foner's classic work on the Reconstruction era transformed our understanding of the period, from the popular conception of carpetbagger incompetence to that of progressive intervention that threw the energies of the state into reversing long-standing inequalities. Initially, however, under the guise of Andrew Johnson's policy of Presidential Reconstruction, state governments in the South were allowed to pursue their own policies without northern interference, and predictably, they leaned heavily toward protecting the interests of white elites. White veterans enjoyed pension programs and homes for veterans and widows, and the war wounded among them received money for artificial limbs.
Once Congress took the lead during Radical Reconstruction, federal agencies, particularly the Freedmen's Bureau, began to tend to the needs of the civilian poor—including the white poor—and the black population newly released from bondage. As Elna Green explains, the Freedmen's Bureau and the U.S. Army launched massive relief programs to prevent starvation in the region. In some of the larger cities they opened soup kitchens, and in other places they experimented with work relief projects of the kind the country would not see again until the New Deal era. These efforts were met with disdain by white landowners, who complained that freedmen would not work so long as free rations were available to them. And local government agencies did what they could to fob off the obligations for one group of paupers onto other jurisdictions. Poor relief was not a popular cause.
Yet the needs of the poor were almost endless. Slavery's demise saw a vast increase in the indigent population, and the cost of addressing their needs mounted quickly. During Radical Reconstruction, the newly formed state legislatures increased drastically the tax bill paid by white property owners to pay for the education of all children, black and white, a practice that outraged small landholders who had traditionally paid very low taxes. The expansion of services went to a population on both sides of the color line that had never been provided for in the slavery period, and the costs were imposed on defeated white elites. But where were the funds to come from? Radical Reconstruction legislators turned to land taxes to increase revenues, and property taxes increased four- to eightfold in the Reconstruction period.
The tax fell upon property holders, but this included very few blacks or poor whites, as they rarely owned much in the way of property. The number of taxpayers stayed roughly constant, while the population they were supposed to support doubled instantly. Inflation in the postwar period also took its toll, requiring an increase in tax rates just to stay even with the revenue demands.
While the southern states remain at the bottom in figure 2, the amount of revenue generated per capita nearly doubled during the Reconstruction period. In 1860, Georgia generated less than $1.00 per capita; by 1870, the rate had doubled in current dollars. Mississippi was at $1.20 per capita in 1860, but ten years later, after the new regime had come to power, the state was up to $4.00 per capita. Similar increases developed in the northern states, but the transformation was more profound in the South, with its long tradition of ignoring the welfare needs of its poor, black and white. The increased revenue is even more striking when we consider the sharp decline in the value of property in southern states due to both the ravages of war and the emancipation of slaves, the source of much taxable wealth in the South.
REVERSING COURSE IN THE REDEMPTION ERA
Eric Foner and others have pointed out that if Radical Reconstruction had lasted for fifty years, instead of twelve, we might have seen an entirely different racial history in the United States. Instead, the federal government pulled out of the South and abandoned African Americans to a terrible fate at the hands of oppressive Jim Crow regimes. Histories of the "Redemption" period record the lamentations of black citizens as federal troops disappeared from the region and the old power structure of the white South reasserted control.
Whatever else this reversal implied for those at the bottom of the social structure, it spelled the end of the progressive tax policies that had fueled educational expansion, land reform, and public works investments. White politicians retook southern legislatures in the late 1870s and proceeded to slash state budgets and cut taxes. We can glimpse the up-and-down trajectory of property tax by looking at how the typical tax burden on a 160-acre farm in Mississippi changed over the period from 1848 to 1880, provided by historian J. Mills Thornton III. Before the outbreak of the war, the typical state land tax rate on a farm of this size was only 1.6 mills per acre (table 1). Radical Reconstruction saw that rate jump to 9 mills and climb another 3.5 mills over the succeeding two years. But when the backlash took hold in 1877, the rate dropped back to 5, and later down to 3 mills. What's more, the assessed value of the property was artificially lowered, further reducing the tax burden on landowners. All over the southern states, the same pattern took hold, inflation notwithstanding.
State investment in social welfare services of all kinds dropped precipitously. The tax codes of most southern states reverted to preferential treatment of property, which protected white elites from bearing much of a burden for public sector expenditures. According to historian C. Vann Woodward, "redemption governments, often describing themselves as the 'rule of the taxpayer,' frankly constituted themselves champions of the property owner against the property less and allegedly untaxed masses." In comments published in the Richmond Dispatch, celebrated newspaper editor and Democratic congressman Henry Watterson proclaimed, "Intelligence and property must rule over imbecility and pauperism [for this is the] law alike of nature and society." Relative to the rest of the country, property taxes were set very low, and what public monies there were tended to be held inside the boundaries of white communities.
Excerpted from Taxing the Poor by Katherine S. Newman, Rourke L. O'Brien. Copyright © 2011 The Regents of the University of California. Excerpted by permission of UNIVERSITY OF CALIFORNIA PRESS.
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