Starting a column for State Tax Notes after more than 40 years in public administration is a new and somewhat daunting experience. This publication is a uniquely valuable resource to the state tax community. It requires careful thought and judgment to develop a new column that adds value to this excellent resource.
The hope is that the readers of State Tax Notes will find this column useful and thought provoking. It will offer a distinctive focus -- a focus on what is necessary to make state and local taxes work well. Although the column will at times address current issues, it will do so in the context of a long-term perspective of improving tax systems. I invite your comments, suggestions, and ideas.
Which brings us to the title of the column. It obviously began as a play on the phrase "state fair" -- a place this author recalls nostalgically from his now distant youth. The word "fare" has multiple meanings: as a price for a service, the person paying the price, food nourishing people, and a state of being or result. Each of those meanings has a tax counterpart: taxes as the price for public service, taxpayers who pay that price, taxes nourishing those services, and an inquiry into how well taxes are doing in the current economy. The last meaning tipped the scales in favor of this title over nearly a dozen others. This column will ask: How are state and local tax systems faring? And how can those systems fare better in achieving public goals?
When it comes to the public goals that are used to evaluate the quality and direction of tax systems, one could simply begin by repeating the time-worn words of efficiency, effectiveness, equity, transparency, uniformity, and neutrality. However, in too much of the contemporary public discussion of tax policy and administration, those words have lost meaning. They are tossed about as slogans by lobbyists and propagandists to further their particular objectives -- typically the narrow financial interests of their clients or benefactors. In too many legislative hearings, one advocate can find a proposed law to be equitable, while another advocate denounces it as inequitable. There is no meaning to the term "equitable" in that context other than that it helps one party and hurts another. Just as a vampire sucks blood out of a previously vibrant body, lobbyists drain all meaning and use out of those previously robust analytical concepts.
So we need some real flesh-and-blood context restored around those fine words to reclaim the usefulness and value of those standards for public policy. For this context, this column turns to what the author knows best: the high standards of policy and practice arising from the Montana Constitution and the laws and measures that faithfully implement it.
The 1972 Montana Constitution is a magnificent document. Its commitments to equality in all public matters, especially taxation -- to transparency, openness, and public participation in government; to individual human dignity; to a clean and healthful environment; to fiscal accountability; and to the prevention of abuses of the public by individuals, organizations, and corporations -- as well as a preamble that is pure poetry, make the Montana Constitution a breathtaking read and a source of enduring truths about the values that create a positive human community. It is a grand starting point for considering the public values, goals, and institutional mechanisms that should inspire and guide the larger practice of taxation in the contemporary world.
This constitution arose out of the particular history of Montana -- sometimes rough and rollicking, rarely dull, and always as big as the sky overhead. Larger-than-life characters have roamed the Montana landscape: Lewis and Clark and Sacagawea; the powerful Blackfeet Nation; Chief Joseph; Sitting Bull and Custer; Jim Bridger and John Jacob Astor; Jeannette Rankin, Burton K. Wheeler, and Mike Mansfield; radical Wobblies and fascist "Councils of Defense"; Robber Barons, Copper Kings, and the Rockefellers; and on and on. Ultimately, it was the latter group -- wealthy industrialists and their financiers -- who would dominate Montana from the 1880s into the 1960s. Much of what has happened since, including the 1972 constitution, can be viewed as a reaction and counterreaction to that earlier era.
In the 1880s copper was discovered in Butte, Mont., on the eve of the large growth in demand for copper wire to carry out the revolution in electrical energy and telephonic communications. Over the next two decades, three men would figure most prominently in the development of copper mining in Butte and the exercise of political power in the state: Marcus Daly, William A. Clark, and Frederick Heinze. Their economic and political rivalries became known as the "War of the Copper Kings" -- the stuff of legends and lengthy manuscripts. I will note only a few points of interest.
Clark served as president of the 1889 Constitutional Convention (and an earlier one in 1884), which produced Montana's first constitution. This document had two major features useful to wealthy mining interests. Overall, it created a weak state government that would often prove to be an inadequate mechanism for the public to challenge the abuses of large corporations, especially mining interests. It also enshrined in the constitution a tax regime substantially favorable to mining and subject to manipulation by the taxpayer.1 A 1916 legislative study concluded that although mining accounted for 55 percent of gross production in the state, it paid only 9 percent of the taxes.2
Large-scale copper mining required enormous resources and services to produce a marketable product. These mines required timber and water. So mining interests and their railroad allies owned large tracks of private timberland and lumber mills. They owned the municipal water systems in Butte and Missoula. To extract the refined mineral from raw ore, smelters were needed. So several were built -- strategically located to maximize political favor. The mining interests built favorable alliances with railroad interests, especially James J. Hill and his financier, J.P. Morgan, and with the new dominant electrical utility in the state, the Montana Power Co. Mining requires a compliant populace, so they purchased and controlled major newspapers. Finally, to further maximize their profits at the expense of ordinary Montanans, mining interests needed to own judges and legislators, so they purchased those as well. For example, Clark desired greatly to become a U.S. senator (which he ultimately attained after three tries). His initial election to a Senate seat through flagrant bribery of the State Legislature of Montana in 1899 led to a refusal by the U.S. Senate to seat him and prompted the movement toward direct election of federal senators.
As long as those vast economic and political resources were in the hands of rivals, there was some room for the public to influence events. However, between 1899 and 1910, the assets of Daly (who died in 1900), Clark, and Heinze all flowed to the Amalgamated Copper Co., renamed the Anaconda Copper Co. in 1915. Anaconda Copper was controlled by Standard Oil executives, including William Rockefeller, brother of John D., and later William's son Percy. For 50 years, a single company would control forestlands, lumber mills, water systems, all the major newspapers save one, and more. What it did not control directly, it controlled indirectly through its sister company, the Montana Power Co., with which it shared the same president and, through interlocking financial interests, with the railroads. Throughout this period, the Anaconda Co. would dominate Montana and effectively prevent any public challenges to its authority -- aided by a weak 1889 constitution that also granted favorable taxation to mining at the expense of other Montanans.3
The Anaconda Co.'s domination of Montana was not benign. It was characterized by public policies, including taxation, that were inequitable and granted special favors to the company and those allied with it. Much government policy was decided in secret behind closed doors. Ideas and information contrary to the interests of the company and its allied businesses were suppressed through its control of newspapers. The company intimidated or persecuted people who disagreed with it. In a famous case of blatant violation of academic freedom, the company secured the dismissal of a young economist at the University of Montana, Louis Levine, who published the book The Taxation of Mines in Montana, which described the inequitably low taxes paid by mining companies. Although he was later reinstated, the professor soon moved on to succeed elsewhere. Independent centers of power, such as labor unions, were alternately manipulated, infiltrated, co-opted, or weakened in various ways. All through the course of its history, the Anaconda Co. imposed environmental and human costs on others -- much of which Montana and the nation is still seeking to remedy. As historian Harry Fritz said, "Anaconda ran it all. The railroads, the ranchers, the power company, the newspapers, the miners, everything. They had iron control of the Legislature in the 1920s. It was amazing."4
While the Anaconda Co. could not be challenged or changed from within Montana, the company was ultimately no match for the larger forces in the nation and world after World War II. The growth of competing broadcast and print media made the value of near-monopoly control of newspapers less an asset and more an embarrassment. So Anaconda sold its papers in 1959, and some fresh air and sunshine began to flow into the public sphere. The generation that won World War II was raising families and sought new opportunities for themselves and their children. They became frustrated with weak state and local governments unable and unwilling to respond to their aspirations. The rise of movements for civil rights and the rights of women created greater demands for equality of all persons and for greater openness and participation in government. In 1964 the U.S. Supreme Court in Reynolds v. Sims struck down state constitutional provisions or laws that allocated a legislative seat on the basis of an area, most often a county. The 1889 Montana Constitution provided for one state Senate seat to each county. That ruling added to the discussion of general constitutional revision in Montana. The economic fortunes of the Anaconda Co. were waning as well, and its effect on the state was beginning to decline.5
All those forces came together by the late 1960s and helped build a movement for a new constitution. Three talented, well-educated, and savvy women -- Dorothy Eck, Daphne Bugbee, and Jean Anderson -- who lobbied for the League of Women Voters persuaded the 1969 Legislature to call for a constitutional convention on the 1970 ballot, a call that was approved the voters.6 There was some historic justice to the manner in which the 1972 Constitutional Convention came about. Many delegates to the 1889 Constitutional Convention were famously misogynistic. Although Wyoming had granted women the right to vote in 1869, followed by Utah in 1870, the Montana delegates refused to do so. (The right to vote was extended to Montana women in 1914.) One 1889 delegate, responding to a woman's suffrage proposal, argued it could not be considered until the convention first passed a motion that a woman could be considered a human being or person.7 In more ways than simply the role of women in society, the work of those three strong advocates for the League of Women Voters -- whose purpose was the public good, not private profit -- led to changes in Montana greater than could have been imagined just a few short years earlier.
Before the convention could meet, two more events shocked Montana in 1971 and helped shape the context for the convention the next year. In 1971 the Allende government in Chile expropriated the Anaconda Co.'s largest mine; the company's decline accelerated rapidly and its grip on the state loosened significantly. The colonial domination of Montana by the Anaconda Co. was coming to an end. In a sense, the convention became the means by which the people of Montana would gain control of their state for the first time. The urgency of that effort was sharpened by the publication later in 1971 of the "North Central Power Study" by the U.S. Bureau of Reclamation, in cooperation with more than 20 out-of-state utility companies. The study proposed the siting of 21 coal-fired energy facilities in Montana. Although only four such power plants would be developed, the study created the specter of a new era of domination by corporate coal mining and electric power interests to replace the domination by copper mining interests, which was drawing to a close. The opportunity for the citizens of Montana to seize control of their own state was at hand -- and none too soon, for that window of opportunity could close again.
The 1972 Constitutional Convention produced an amazing document. The new constitution begins its "Declaration of Rights" with a strong statement of popular sovereignty: "All political power is vested in and derived from the people. All government of right originates with the people, is founded upon their will only, and is instituted solely for the good of the whole." Like a clear mountain stream that nourishes life in its course, the rest of the document flows swiftly from there with provisions empowering the citizenry with the means of responsibly shaping the future of Montana to meet its best needs and aspirations.
If inequality wounded Montana previously, the new constitution would seek to heal those wounds with a sweeping declaration of equal rights:
The dignity of the human being is inviolable. No person shall be denied the equal protection of the laws. Neither the state nor any person, firm, corporation, or institution shall discriminate against any person in the exercise of his civil or political rights on account of race, color, sex, culture, social origin or condition, or political or religious ideas.
If the 1889 constitution embedded property tax inequality in its provisions, the 1972 constitution sought to do the opposite. To ensure tax equality, it established a statewide system of property valuation "to appraise, assess and equalize the valuation of all property which is to be taxed in the manner provided by law."
The 1972 constitution sought to end secrecy in government and corporate control of decision-making with two strong provisions concerning open, participatory government. The first established the right of individual citizens to participate in the operation of agencies before the agencies make final decisions. The second established the public's rights to know about the operations of government, examine documents, and observe governmental deliberations -- a right balanced only by a right to individual privacy. Other provisions reinforce those rights by further ensuring in multiple ways the accountability of officials to the citizenry.
The new constitution contained a "right to a clean and healthful environment" and required the State Legislature to "provide protection and education for the people against harmful and unfair practices by either foreign or domestic corporations, individuals, or associations." Both those provisions can be viewed in part as effort to prevent the excesses of the Anaconda era, but they are also expressions of an enduring hope of the citizenry for the future.
Beyond the requirement for a statewide property valuation system to equalize property values, this constitution also requires that taxes be levied by general laws for public purposes. It declares the tax power "inalienable" and to "never be surrendered, suspended or contracted away." It requires the "strict accountability" of all public revenue. It also requires the Legislature to provide for independent tax appeal procedures, including a review procedure at the local level.
One cannot overestimate the importance of the 1972 convention's action establishing a statewide valuation system. The convention rejected the existing system of property taxation because property values set by elected local assessors were inequitable. Del. Mick McKeon declared local assessment to be perhaps "the greatest evil we have in our system." He noted, "Local assessors have exerted on them great pressures for favoritism." The convention staff identified the two major problems of property tax administration as "underassessment and the lack of uniform assessment."8 The convention staff traced those problems to local assessors seeking to shift state property taxes to other counties, creating a need for more state aid for their local schools, currying favor with local voters, and other political objectives that undermined equitable valuation of property. McKeon cited the ability of counties with oil and copper net proceeds to reduce those values (net proceeds can be easily manipulated) to secure more state school aid and thereby drain the state general fund.
Beyond simply ending a system fraught with favoritism and untoward political objectives, the delegates also saw property tax equalization as serving the purposes of more equal funding of public schools and economic progress. On the latter point, Del. Dave Drum, a prominent entrepreneur, made the case linking tax equality to a level playing field in the marketplace, saying, "If Montana is to go ahead, we are going to have to have equalization in the eyes of those who would like to either stay in Montana and invest money or those who would like to come to Montana and invest money, creating more jobs for our young people."9 Other delegates saw property equalization as a matter of simple justice and of conforming to the constitutional standard of equal protection of the laws for each citizen.10 In that way, delegates traced a line directly from tax equality to the clause on the right of individual human equal dignity, equal protection, and nondiscrimination.
Establishing a statewide property valuation system (which only one other state, Maryland, has done) was a bold step taken in the 1972 constitution. That one measure put an end to decades of property tax favoritism and inequality that characterized the Anaconda era in the state. The goal was to establish a professional and objective valuation system independent of untoward pressure and manipulation. It is a step that is reinforced strongly in state law with a provision that charges the Department of Revenue with doing "all things necessary to secure a fair, just, and equitable valuation of all taxable property among counties, between the different classes of property, and between individual taxpayers."11 Better yet, the system has worked. Statistical studies indicate that department values are accurate and uniform across the state -- which was certainly not the case before 1972.
So what are the values and goals that arise out of this historical and constitutional context?
Tax equality is obviously an overarching value and goal that arises from the Montana Constitution and its history. Tax equality is to extend beyond the design of tax policy to the administration of policy. Tax decisions should be substantively uniform in their impact. Public authorities should prevent special favors for anyone, but especially for the well connected and powerful, who often expect favoritism. Further, both tax policy and administration should minimize opportunities for manipulation and abuses of the tax system by taxpayers.
Tax equality is joined by integrity, openness and transparency, and public participation as critical values. Decision-making should be universally accessible among the public and not limited to the powerful. The taxing power is inalienable and is not to be surrendered, suspended, or contracted away. Hence, public authorities are to prevent and avoid private law and private tax arrangements. Adopting rules to cover established practices is not an exercise of agency authority as much as it is a duty of an agency to provide an equal opportunity for the public to know and engage in public decision-making.
Efficiency and effectiveness are values that arise from constitutional provisions not discussed here in detail: the requirements for strict accountability of revenue and a balanced budget. Revenue intended by law to be raised should be collected. Public resources used to administer tax laws should not be wasted.
Respect for each citizen in the administration of tax laws is an important value arising from the right of individual human dignity. There is no room in the Montana Constitution for failing to respect each citizen. Tax authorities do not serve customers who simply get a service from the agency. Tax authorities serve citizens with rights and responsibilities.
Finally, the preservation of popular sovereignty is another preeminent value. Tax laws derive from the sovereign authority of the people as a community. Taxes are levied for the good of the whole community -- for public purposes -- not private benefit. Tax authorities should defend the sovereignty of their public and should not take any action that undermines or discredits that sovereignty.
Those are the values that State Fare will seek to apply when judging whether state and local tax systems operate successfully. Those values arise from the particular context of Montana -- but with universal applicability to tax systems anywhere.
* * * * *
State Fare is a new column by Dan Bucks. Bucks served as Montana director of revenue from 2005 to 2013, the longest tenure in the state's history, and also as the executive director of the Multistate Tax Commission from 1988 to 2005. He is now a public policy and management consultant.
1 The general description of the 1889 Montana Constitutional Convention and its results is taken from Michael P. Malone, Richard B. Roeder, and William L. Lang, Montana: A History of Two Centuries, Revised Edition. Seattle and London: University of Washington Press, 1976, pp. 195-198. See also Krys Holmes, Montana: Stories of the Land. Helena, Mont.: Montana Historical Society Press, 2008, pp. 421-422. Also, I know and have spoken at length with several delegates to the convention.
2 K. Ross, Toole, Twentieth Century Montana: A State of Extremes. Norman, Okla.: University of Oklahoma Press, 1972, at pp. 205 and 206. Toole also discusses taxpayers' ability to manipulate the net proceeds tax.
3 The description of the era of the Cooper Kings and the emergence of Anaconda in the preceding paragraph is taken from Malone et al., Holmes, Toole, and also Toole, Montana: An Uncommon Land. Norman, Okla., University of Oklahoma Press, 1959, pp. 186-210.
4 Quoted by Michael Jamison, "A Company Built From the Ground Up," Missoulian, Feb. 18, 2001.
5 The general description of the factors leading to the 1972 Constitutional Convention is condensed from Holmes, supra note 1. Information was also drawn from many personal conversations with Rich Bechtel, staff member of the convention.
6 Charles S. Johnson, "1972 Con-Con Delegate Daphne Bugbee Jones Dies," Helena Independent Record, Feb. 21, 2012.
7 Lyndel Meikle, "Montana's 1889 Constitutional Convention: The Founding Fathers -- The Floundering Fathers," in Speaking Ill of the Dead: Jerks in Montana History, edited by David Walter. Guilford, Conn.: The Globe Pequot Press, 2000, pp. 68-70.
8 Montana Constitutional Convention, 1971-1972, Verbatim Transcript, March 1, 1972-March 9, 1972, Volume V. Helena, Mont.: Montana Legislature and Montana Legislative Council and Constitutional Convention Editing and Publishing Committee, 1981, p. 1388.
9 Id., p. 1389.
10 Id., p. 1392. Note especially comments by Del. Dorothy Eck on the link of property tax equalization to the U.S. Constitution's Equal Protection Clause. Eck and Bugbee, who on behalf of the League of Women Voters had advocated holding the convention, were elected as convention delegates.
11 Section 15-9-101(1), Montana Code Annotated 2011.
END OF FOOTNOTES
About Tax Analysts
Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.
For reprint permission or other information, contact email@example.com