Antitax Vote In California Sends Signal Nationwide

THE rejection by Orange County voters this week of a half-cent increase in the sales tax is being viewed as the most striking local example yet of the depth of antigovernment sentiment in the United States.

By resoundingly defeating a ballot measure that would have helped bail the county out of the worst municipal bankruptcy in US history, residents have sent a stern signal that they don't want government digging any deeper into their pockets until it has done more to get its own house in order.

An antitax ethos has always run deep in the conservative southern California county. But analysts say the defeat of Measure R, despite backing from both local politicians and Wall Street, reveals how much Americans distrust government and dislike taxes in the 1990s - a message ricocheting from Sacramento to Washington.

Listen to voter Dan Jones of Santa Ana, Calif.: "We would rather see the county fail in terms of its present financial debts and restructure itself than dole out more money so county officials can go on as usual."

"There are hosts of alternatives they haven't considered, from cutting services to selling assets," says the teenager. "They don't need to bail themselves out on our backs."

The vote is raising more than a few eyebrows in financial circles. The measure would have boosted the tax from 7.75 percent to 8.25 percent for 10 years, generating $130 million to $140 million annually. Its defeat, by 61 percent to 39 percent, now makes it harder for the county to repay its huge debts.

It is also casting a shadow on the face of counties elsewhere in California, whose ability to borrow in the future may become more costly, and local entities across the country, who are now seen as riskier investments by national bond-rating agencies.

"The consequences are very deep," says Joe O'Keefe, director of public finance for Standard & Poor's. "Up to this point we have always believed that government would do its best to repay a debt. This is the first significant time it appears that such a government, which has the means, has chosen not to."

Local officials are now back at square one in figuring out how they will bail the county out of its six-month-old bankruptcy. Nearly 200 public entities lost $1.7 billion after former County Treasurer Robert Citron used complex strategies, including heavy borrowing, to buy securities known as derivatives.

When interest rates climbed several times last year, he had to keep putting up more and more cash to guarantee loans. Finally creditors demanded so much that the county had to file for bankruptcy.

Approval of Measure R would have given investors, who are due money in coming weeks, assurances of clear payment schedules based on a loan the county could pay back over 10 years. Now that it has been rejected, residents and officials must consider alternatives. "There is no Plan B for now," says Rick Reiff, editor of the Orange County Business Journal.

Proponents felt that offering viable alternatives to the tax increase before the vote might undermine its passage. Several have been offered piecemeal in recent months, including selling county assets, trimming more county workers, and privatizing services.

Certainly, more belt-tightening now seems likely. County programs have already been cut 41 percent. But opponents of the measure believe there is plenty of room for more - starting with salaries.

During the campaign, they pointed to studies, such as one by the American Legislative Exchange Council, that showed county employees enjoyed 24 percent higher salaries than workers in equivalent jobs in the private sector.

"We showed that if you cut that advantage in half, you would save about $120 million a year," says William Dannemeyer, a former Republican state lawmaker who is leading the antitax forces. "That's about as much as Measure R was going to produce. And it showed they were just taking the easy way out."

Home to such well known attractions as Disneyland and Knotts Berry Farm, Orange County is one of the nation's wealthiest areas. In recent years it has become less of a bedroom community for Los Angeles and more of a job center.

Its changing demographics have also made it less monolithically conservative, though voters showed Tuesday they can still be stingy with their wallets.

Such a victory is "the clearest and best evidence yet in favor of those who say government has a spending problem, not a tax problem," says Pete Sepp of the National Taxpayers Union, an antitax group. He notes that 45 of 50 tax-increase referenda have failed nationwide in the past three election cycles. "Voters are saying, 'We are sophisticated enough to know the difference between an increase that is a necessary evil and one that is a frivolous excuse for bad fiscal management.' "