Forging fiscal reform: Constitutional change, public policy, and the creation of administrative capacity in Wisconsin, 1880-1920

At the turn of the twentieth century, Wisconsin, like many northern industrial states, faced a profound fiscal challenge. As one concerned citizen succinctly explained, "The two great administrative problems before our people at this time are, first, the control of corporate wealth, and, second, the establishment of a rational system of taxation."The largescale structural pressures created by the rise of corporate capitalism and the decline of an obsolete tax system forced all levels of government to re-examine the substance and administration of their fiscal policies. At the state and local level, many governments addressed the mismatch between the increasing demand for state services and the declining supply of revenue by turning to new levies and innovative forms of administration. In confronting the impending fiscal dilemmas, Wisconsin was a leader in forging fiscal reforms. Political activists, lawmakers, and other government actors in the Badger State led a turn-of-the-century property tax revolt when they sought to replace the aging, locally administered general property tax with a graduated income tax managed by a centralized, administrative bureaucracy. After a long and arduous process, reformers were able in 1911 to enact the first effective state-level income tax that would soon become the model for other states and even the national government. Although the income tax did not become a wholesale replacement for the general property tax, its limited success was achieved in part because tax reformers overcame numerous institutional barriers as they helped promote a more equitable and effective distribution of fiscal burdens. By confronting the entrenched power of political parties, state constitutional constraints, and cultural resistance to centralized authority, activists and politicians established an institutional beachhead for the subsequent development of a new fiscal order-one that was guided not simply by the need for greater revenue but by concerns for equity and economic and social justice. Because the campaign to use progressive income taxes as a complete replacement for the property tax was ultimately unsuccessful, the turn-ofthe- century tax reform movement reveals both the limits and accomplishments of fiscal reform. The inability of Wisconsin's lawmakers to relinquish their reliance on the property tax was perhaps a missed opportunity during a unique period of political plasticity. But the income tax campaign did initiate the incremental process of diminishing Wisconsin's dependence on property taxes. Indeed, by the end of the 1920s, the income tax generated a significant portion of the state's revenues. Still, the income tax did not become the dominant source of subnational government revenue throughout the country, as some reformers had envisioned. Over time, as part of the institutional compromise of federalism, different levels of American governance divided the sources of tax revenue. By the end of the twentieth century, the federal government would come to control most income tax revenue, state governments would rely on a combination of sales and income taxes, and local governments would be left primarily with property taxes. Despite the limited success of the income tax, the early twentiethcentury tax reform campaign had a durable impact on the administration of public finance. Since the property tax was embedded in the nineteenthcentury state-level system of "courts and parties," activists seeking to make taxation more transparent, rational, routinized, and fair inevitably had to confront the local process of tax administration.3 In challenging the dominance of the locally administered property tax, reformers wrestled power away from local political parties and consolidated it in the hands of elite professional experts. They attempted, in the process, to alter the popular and cultural perception of local self-government, which at the time valorized local administration by party officials as an established part of the nation's republican traditions. This essay investigates how and why tax reformers in Wisconsin were able to help build the administrative capacity to levy new forms of taxation but were unable to replace the property tax with a progressive tax on income. Other studies of state and local tax reform during the Gilded Age and Progressive Era have had little to say about the peculiar persistence of the property tax, and even less to say about Wisconsin's administrative achievements. Those scholars who have examined the political history of Wisconsin's tax reforms have generally elided the development of administrative capacity; instead, they have depicted the new tax laws and policies as the consequences of newly formed interest groups or coalitions that sought to recalibrate tax burdens by increasing taxes on corporations and wealthy individuals.4 By contrast, others have explained the emergence of the Wisconsin income tax as an apolitical solution to the technical problems posed by the dysfunctional property tax.5 Scholars who have explored state and local tax reforms more generally have frequently noted the persistence of the property tax, but given their broad comparative analysis they have not attempted to explain why particular tax policies within specific states crystallized or wasted away. In analyzing the qualified achievements of the Wisconsin income tax movement, this essay provides a glimpse at a larger narrative about the dramatic structural transformation in American public finance that occurred at the turn of the twentieth century. The tax reforms that were enacted in Wisconsin and other northern industrial states not only presaged changes at the national level; they also reflected a broader and more fundamental revolution in American state-society relations. Although graduated income taxes, both at the national and state level, had modest beginnings-with low marginal rates and high exemption levels affecting only the wealthiest of taxpayers-they were, as the legal historian Lawrence Friedman has noted, "the opening wedge for a major transformation of American society."7 By reallocating the burdens of financing a modern industrial democracy, this new form of fiscal governance was concerned with redefining the meaning of modern citizenship, facilitating a fundamental change in existing political arrangements, and underwriting the emergence of the modern American liberal state.