Make Them Call it a Tax Increase

-- Posted by Neil H. Buchanan

The budget difficulties currently facing almost every state government in the country have led to calls for cuts in public employees' pay and benefits. While the dramatic political standoffs in Wisconsin and Ohio are ultimately not about budget questions, political leaders who are not trying to use budget crises as pretexts to wage a larger political battle against unions are nonetheless calling for cuts to public employees' compensation. For example, Mayor Bloomberg of New York City recently wrote: "If contract terms or labor laws from years past no longer make sense, we the people should renegotiate — or legislate — changes. Benefits agreed to 35 years ago that now are unaffordable should be reduced."

People like Bloomberg thus take for granted the rather radical notion that it is acceptable simply to throw out deals that people had agreed upon, and on which they had relied in planning their lives. The standard deal for public employees has long been that they would accept lower salaries than they could earn in similar private sector jobs, but they would receive in return greater job security and better benefits -- especially post-retirement benefits. The Great Recession has severely reduced both salaries and benefits in the private sector, however, which now makes public employees' pay packages look better by comparison across the board.

The calls for cuts in public employees' benefits, however, are not limited to demands for prospective cuts. Bloomberg and others are saying quite bluntly that the deal is off, that promised benefits are no longer affordable, so public employees must agree -- or be forced -- to give up what they were promised. If you accepted a lower-paying position twenty years ago in reliance on the better benefits that were promised, too bad for you.

The Daily Show recently ran one of its signature series of clips of talking heads, juxtaposing Fox News hosts screaming about the need to tear up public employees' contracts against the same hosts hyper-ventilating about the sanctity of the contracts that were the basis of Wall Street workers' bonuses. Such hypocrisy is especially egregious because of the degree of reliance interest that is present in the two contexts: public employees are told decades after the fact that they were foolish to make ongoing sacrifices in reliance on long-term promises, whereas Wall Streeters would have given back some of their bonuses for a year or two. It is too late for many public employees to make different choices to compensate for their impending losses, while financial workers have already been rewarded with bigger bonuses, only a year or two after the immediate financial crisis passed.

This cannot be explained as a matter of public money versus private money, of course, because the salaries and bonuses that financial workers received were made possible by public bailouts. As I argued in a column on FindLaw last year, recouping some of the personal gains that were made possible by direct government intervention is an especially strong case for the power to tax. Union contracts in the auto industry were torn up based on that very premise: no givebacks, no bailout.

Hypocritical as it is, however, politicians today obviously feel no shame or embarrassment when they call for breaching contracts with public employees. The crisis demands sacrifice, they tell us, and taxpayers will not tolerate "lavish" benefits for public employees. Even liberal voices like the editors of The New York Times have repeatedly accepted this premise.

If public employees are going to take the hit, therefore, there must be a way to make the politicians pay a price for delivering the blow. And the best way to make a politician blanch is by accusing him or her of increasing taxes.

The rhetoric of taxes has, of course, long been the source of much mischief. "Tax expenditures" are public spending in the form of tax credits, exemptions, and so on. If a politician wants to provide a subsidy for something, it is expedient to call it a tax cut rather than a spending increase. More broadly, the reverberations of "Read my lips, no new taxes" have caused politicians to deny that anything they are doing could ever be called a tax increase.

In the ongoing litigation over the Affordable Care Act, for example, the strongest argument for the constitutionality of the law (even stronger than the argument under the Commerce Clause, which is strong indeed) is that the "individual mandate" is simply a tax. The two federal judges who have directly considered that question -- including, bizarrely, the judge who most recently declared the law to be constitutional on Commerce Clause grounds -- have ruled against the law on taxing power grounds. Why? Because neither the Congress that passed it, nor the Obama Administration, called it a tax. Form apparently dominates substance, and the power to tax can thus only be exercised if the politicians call it a tax.

Public employee givebacks, however, are the equivalent of tax increases. Congress, or a state government, could close a budget gap by declaring that the promised benefits will be paid, but then impose a tax on those benefits. From the standpoint of a public employee, that would feel the same as losing the same chunk of their benefits outright. From the public treasury's standpoint, the improvement in the deficit situation is the same whether we collect $100 more in taxes or refuse to pay $100 in promised benefits.

If politicians want to take money away from some of the country's citizens, therefore, we should call it what it is: a tax increase. As a rhetorical strategy alone, that would be pretty potent, for the same reasons that politicians so assiduously re-label their pet projects tax cuts.

This can, however, go beyond mere rhetoric. When we tried to take back some of the taxpayers' money from bailed-out financiers, they screamed "tax increase." If we are going to breach our longstanding promises to public employees in the name of saving the taxpayers' money, we should make the politicians face the same music. The public employees' representatives and their unions should say: "We will agree to the givebacks that you demand, but only if you call it a tax increase." Let's see what the politicians say to that.