By Brenda Fullick

The year: 1791. The newly formed United States government had taken on the states' massive debt from the Revolutionary War, and it needed a way to collect money. So at the suggestion of Treasury Secretary Alexander Hamilton, Congress adopted the nation's very first tax: a tax on distilled spirits.

America's already-struggling pioneer settlers, many of them farmers who relied on the production of alcohol as their primary way to make money, were taxed at a rate of 9 cents a gallon.

However, large alcohol distillers on the East Coast were taxed just 6 cents per gallon.

So the very first tax on an American product was what economists call a "regressive tax" - a tax hitting the poor and working classes harder than the wealthy.

Politicians at the time openly justified the disparity, saying the U.S. needed an aristocratic class of Americans who could afford to develop the fledgling country.

"It was intended to concentrate wealth in the hands of a few people who, Alexander Hamilton believed, could use that wealth to fund large national projects," says William Hogeland, author of the book "The Whiskey Rebellion: George Washington, Alexander Hamilton, and the Frontier Rebels Who Challenged America's Newfound Sovereignty."

And, of course, the tax was popular among many of the richest Americans, Hogeland says. "The big players were for it, because it actually favored large commercial operators."

However, the ordinary citizens grew increasingly resentful, because they could see that the Philadelphia politicians were cronies of the big western Pennsylvania distillers benefiting from the tax. Many settlers viewed the tax as an example of blatant insider deal-making. Politically, "it was a tight, closed system," Hogeland says. "People actually began to feel then that the entire American Revolution had been for nothing."

In an attempt to take their country back, loosely organized groups of citizens resorted to an armed rebellion in 1794. As part of their civil disobedience, they robbed postal carriers and interrupted court proceedings. So Commander-in-Chief George Washington sent the federal militia to subdue his own citizens, conducting mass arrests, searching people's homes, torturing prisoners, and forcing every adult male to sign an oath of loyalty to the new government.

In one of this country's more successful examples of political spin, Hamilton marginalized the angry citizens by labeling them "whiskey rebels." The term implied that this was just a tax on an unnecessary luxury, rather than a tax on the pioneers' livelihoods. Says Hogeland, "It makes it sound like it was about a bunch of drunk hillbillies who were pissed off about having to pay more for their whiskey."

By most accounts, Hamilton won the propaganda war. The "whiskey rebels" are generally relegated to short, quirky asides in history textbooks, rarely acknowledged as early American populists who recognized the implications of a regressive tax plan.

The biggest difference between the late 18th century and now is that people like Hamilton felt comfortable openly advocating the creation of a wealthy class as a way to help the country grow, Hogeland says. "Now, people who may believe that aren't saying that."

In today's society, the most regressive tax that working-class Americans face isn't the whiskey tax, but the sales tax.

"The issues are not dissimilar," Hogeland says. "It really has to do with how government tax policy can be used, either to benefit more people or to benefit fewer people."

Sales tax trends

Although economists agree that sales taxes hit the poor and middle classes harder than the wealthy, there has been a shift in the United States to rely on sales taxes more often as a way to pay for government spending.

Bill Frenzel, a scholar on economic studies with the Brookings Institution, spent 20 years representing Minnesota in Congress, and he served in the state legislature before that. Frenzel recalls that, partly because of President Ronald Reagan, "things began to change around the beginning of the 1980s. People began to think in an unkindly way about income taxes."

As economists see it, the income tax, with all its complications and permutations, is actually the fairest tax we have because people pay according to their ability. However, "there's been a lot of pressure, particularly from wealthy individuals and the organizations that represent them, to push downwards on state income taxes," says Nick Johnson, from the nonpartisan think tank Center on Budget and Policy Priorities.

And politicians are responding to that pressure from the wealthy, partly because there's so little resistance from the average citizens, Johnson says. Rightly or wrongly, most people prefer sales taxes over income and property taxes, he says. Sales taxes tend to be seen as "voluntary" taxes, since people could opt not to spend their money, Johnson says. "You make the choice every time you buy something."

In the past 10 to 20 years, states have begun to rely more heavily on sales taxes, says Harley Duncan of the Federation of Tax Administrators, an association of state tax administration agencies (the Iowa Department of Revenue is a member).

At this point, 45 states have adopted statewide sales taxes, and 30 states also allow local-option taxes. Three states - Iowa, Georgia and South Carolina - allow school districts to collect sales taxes, too.

Studies show that roughly 40 to 50 percent of sales taxes are paid by businesses, such as manufacturing companies buying tools, or doctors buying medical equipment, Duncan says.

However, the poorest residents pay a disproportionate share of sales taxes, compared with the rich, Duncan says - and that's regardless of whether basics like groceries and pharmaceutical drugs are exempted. "I think the evidence is pretty clear," he says. "That's how the arithmetic works."

Mathematically speaking, sales taxes take a disproportionate amount of the income from families with household incomes of less than $70,000, Frenzel says. "If you're below that level, you're less well off with sales tax than you would be with an income tax."

However, working-class people tend not to complain as much about a sales tax because they tend not to notice it tacked onto a purchase price, Duncan says. Comparatively speaking, property taxes seem like a bigger burden because they're paid quarterly, or with one huge annual check. "That looks like a college tuition check once a year."

So states are turning to sales taxes to provide an increasingly large share of their revenue.

In 1983, Iowa's state sales tax was just 3 percent, and there were no local-option sales taxes at the time. However, Iowa now has a statewide sales tax of 5 percent. In areas with extra taxes for both schools and local governments, people are paying as much as 7 percent.

There has been some resistance to this sales tax trend from the business community, Swenson says, because many business owners realize that for every 1 percent tax increase, their customers will have 1 percent less money to spend.

However, most middle-income citizens don't know that sales taxes actually hurt them, says Iowa State University Economist Dave Swenson. Some Iowans actually prefer sales taxes because they think poor people are getting away with not paying property taxes by renting. However, landlords pay property taxes at the commercial rate (higher than what homeowners pay), so landlords typically pass along property taxes by raising their rents, he says.

"The average Joe Sixpack and Jolene Chardonnay both think that sales taxes are more 'fair' because everyone pays them," Swenson says. "Load that gun, shoot your foot. Call it economic development and a brave new world."

Because what has the rising sales tax rate really meant to individual Iowans?

In 2003, the Washington, D.C.-based Institute on Taxation and Economic Policy released its analysis of sales taxes, with national data and state-by-state breakdowns.

The nonpartisan group found that Iowa's richest 1 percent - people with incomes averaging $640,000 - are paying just 5.8 percent of their income to state and local taxes. That's counting sales taxes, property taxes and state income taxes, after federal deductions.

However, Iowa's middle-class families earning between $28,000 and $44,000 a year are paying 10.4 percent of their income in state and local taxes - nearly double what the ultra-rich pay on a percentage basis.

And the poorer you are, the more you're spending on sales taxes, percentage-wise.

If you're an Iowan with an annual income of less than $14,000, sales taxes alone eat up 6.9 percent of your total annual income.

But if you make between $110,000 and $257,000 a year, you're paying just 2.1 percent of your salary toward sales taxes.

Project Destiny

It was Central Iowa's business community that came up with the "Project Destiny" proposal to add an additional 1 percent sales tax in Polk, Dallas and Warren counties. The Greater Des Moines Partnership has been working with area mayors to promote the idea of a regional tax to be used partly for regional attractions, partly to finance property-tax reduction.

In 2003, one of the Partnership's committees on Project Destiny came out with a report that talked about creating a more efficient, cost-effective matrix of local governments than the complex overlap that Central Iowa has now. The report suggests that by diversifying revenues with a tri-county sales tax, the region could share revenues to create public amenities and offer a higher quality of life.

Many people are realizing that there are problems with the current tax structure in Central Iowa, says Jay Byers, senior vice president of government relations and public policy for the Greater Des Moines Partnership.

After all, roughly 70 percent of the people working downtown live in the suburbs, which have comparatively low property taxes and new city infrastructures. But the city of Des Moines is struggling under the weight of aging streets and sewers, and prime land is occupied by nonprofit groups that don't pay taxes.

If the central city falls apart, no one wins. The suburbs and downtown Des Moines need each other to be successful, Byers says. "We sink or swim as a region."

The idea of a regional tax for the common good is revolutionary, Byers says. "It's a philosophical shift, in a very positive way." Support for a more regional tax approach "is very strong out there - stronger than we had ever hoped."

When Iowa businesses complain that their tax burdens are too heavy, economists say they're absolutely right.

"It seems to me that Iowa's property tax is ripe for repair," says Matt Gardner of the Institute on Taxation and Economic Policy, the nonprofit that conducted the state-by-state study. One problem is that Iowa's residential rollback is so high, Iowa's businesses get stuck paying unusually high property taxes, he says. "There's a lot of room for repair there."

But the question is, should the sales tax be used to support that tax shift?

"No one pays less of their income on sales taxes than the very wealthiest Iowans," Gardner says.

Sales-tax advocates like Byers are quick to point out that Iowa has made its sales tax fairer by exempting certain purchases. For instance, Iowans pay sales tax on food they buy in a restaurant, but not on food they buy in a grocery store.

But Gardner says that when the Institute on Taxation and Economic Policy conducted its sales-tax study, it factored in those exemptions.

Sales taxes "are all regressive," Gardner says. "Even in the states that have chosen to exempt food, clothing, utilities, prescription drugs.

"Exempting food from the sales tax is absolutely a progressive thing to do in the short run," he allows. "But the sales tax is still unfair at the end of the day."

One Des Moines businessman, Laurance Tovrea, questions the motivations of many of the major players behind the Project Destiny push.

For instance, G. David Hurd, chairman emeritus of Principal Financial Group, has served as co-chair of the Project Destiny project, along with Doextra Corp. President Sunnie Richer. Their names are on a Project Destiny report that starts out with a magnanimous-sounding quote from Proverbs: "Where there is no vision, the people perish."

But would Project Destiny help all of "the people," or primarily the rich ones?

Tovrea notes that both Hurd and his corporation stand to benefit by shifting to sales taxes rather than property taxes. Principal's 2004-05 property taxes in Polk County came to $3.17 million, and Hurd himself had a property tax bill of $9,047 for his home.

"These people are in business and they own property, and they want to reduce their property taxes," Tovrea says. "The reason this is so important is that the downtown area is primed for development. The costs are going up."

Statewide school tax

While the Partnership promotes Project Destiny, the school lobby is promoting a statewide sales tax for school construction.

At the moment, school districts in 97 of Iowa's 99 counties are collecting sales taxes, taxes that must be renewed by the voters every 10 years.

However, the Iowa Association of School Boards (IASB) is promoting a statewide 1 percent sales tax to replace the local school sales taxes that are sunsetting at different times.

IASB lobbyist Margaret Buckton argues that it's difficult for companies doing business in multiple counties to keep the various taxes straight, so a statewide sales tax for schools would make life easier for accountants.

It's also difficult for school districts to plan their construction projects when they're not sure if the local school sales taxes will be renewed, she says. Although the Legislature might adopt a sunset on a statewide sales tax for schools, she says, it wouldn't be likely to rescind that tax once it's in place.

But Rep. Jodi Tymeson, a Republican from Winterset, argues that the Legislature should do more - not less - to give local citizens control over their own taxes.

Tymeson proposed a bill in the last session that would have required school districts to ask for local tax increases at times when the voters would normally expect important ballot questions, like on the first Tuesday in November.

In some school districts, superintendents openly encourage their boards to schedule ballot questions when the fewest citizens are likely to turn out, like during vacations and holidays, hoping that the die-hard school supporters will outnumber the more casual voters.

"This happens everywhere. Special elections are scheduled when people are not aware of them," Tymeson says. She argues that any time people are talking about raising taxes, those public referendums should be scheduled for maximum voter awareness participation.

Just a penny

Advocates of sales taxes, for schools as well as Project Destiny, like to refer to them as "1-cent" sales taxes. And to most people, a penny doesn't sound like all that much.

Of course, people are paying that penny many times over.

Des Moines School Board President Phil Roeder says he's not concerned that sales taxes are unfair to middle-income and lower-income people. With the sales-tax exemptions adopted by the Legislature, "it's not nearly as regressive in Iowa as it is in some places," he says. Besides, Iowa doesn't have the most progressive property tax system in this country. And he figures schools will have to get their money from either sales or property taxes, because income taxes are the most unpopular form of tax. "If we're going to continue to support public school building improvements, the funds are going to need to come from somewhere," Roeder says.

The Des Moines School Board has supported IASB's proposal for a statewide sales tax for schools. In three to five years, school sales taxes in those 97 counties will be expiring, but those districts will still need money, Roeder argues.

Personally, Roeder doesn't really care whether the money comes from sales, property or income taxes. "It's really kind of a zero-sum game, and the money's going to come from somewhere no matter what you call it."

But others think the type of tax makes all the difference in the world.

The sales tax is so regressive that it should not exist, argues Windsor Heights resident Richard Christie. "It's just not right to take money from someone who makes less money than you do so you can have a better quality of living."

When Central Iowa's business leaders propose the Project Destiny sales tax for property tax relief, he says, that's a little like asking a homeless person for a quarter to help you pay your property taxes.

Big corporations like Principal and EMC are supporting Project Destiny because they stand to make a lot of money, Christie contends. With a 10 percent reduction in the property tax rate, a corporation that pays $2.8 million a year in property taxes could save $280,000 - far more than the initial investments that businesses have been anteing up to promote the new tax.

And when Project Destiny proponents talk about spending part of the money on public projects, that's basically candy to entice voters, Christie maintains. "You see it as one of the good things that government brings you."

Back in November 2003, Project Destiny infrastructure task force chairs Jim Hubbell and Bill Knapp II signed their names to a joint public message that talked about the importance of creating public trails - a "green infrastructure" - proposing that $6 million a year of the Project Destiny money be spent on recreational trails connecting Central Iowa communities. And at first blush, the idea of more bike and walking trails sounds good to a lot of people.

The proposal from two big-name developers may or may not have anything to do with the fact trails could help drive up property values and boost real-estate sales in those areas.

Real estate transfers, incidentally, are exempt from the sales tax.

Christie has launched a blog, at www.nonewsalestax.blogspot.com, to help educate people about what he thinks the Project Destiny proposal really means.

"I will be organizing people," he says. He hopes to develop a series of public forums on the topic, with people arguing both for and against the tax. He'd like to see these forums moderated by a broadcast professional and aired over Des Moines' public TV channel.

Christie wants people to think about what Project Destiny would mean to them personally. And he's not holding his breath for The Des Moines Register to present a fair picture, especially when Publisher Mary Stiers was 2005 Partnership chair.

Voters need to know what's in their own self-interests, Christie says. "The big hitters know that they've got to vote for it. People by and large aren't driven by moral choices in this life, because that's not how you get to live in a $400,000 house."

However, people also need to think about the wider ramifications of their actions, he says.

For instance, Christie recently bought a high-end camera. He wanted to buy it from a local camera store, but he found an online dealer with low overhead offering the camera for about $400 less.

Christie says he still wanted to keep his business local. But the tipping point, he says, was the sales tax. He just couldn't bring himself to pay that much more just to support local merchants, even though he knows those sorts of decisions can make the entire community suffer.

Christie admits that Iowa's low- and middle-income residents are the most disenfranchised, and the least likely to vote on the matters that affect them.

But "you don't have to have money to think," he says. "Nobody can stop you."

Postponing Destiny

On July 18, District Court Judge Robert Hanson ruled on the lawsuit that a group of Des Moines parents filed against the Des Moines School Board because it voted to close five neighborhood schools. Hanson concluded that although the board had spent $78 million not included in the Schools First plan that the district used to promote the 1 percent sales tax to voters, the school board still has a legal right to close schools.

Just one day after the ruling, on July 19, Project Destiny organizers announced that they would postpone the Project Destiny vote to the summer of 2007.

Originally, the organizers planned to put the Project Destiny tax proposal on the November ballot. However, market research showed that voters wouldn't approve the tax this fall because there's so much mistrust is the community about government spending right now, says Cyndi Fisher of Flynn Wright, who has been hired to handle publicity for Project Destiny.

The sales tax "wasn't winnable" this fall because of a political cloud, Fisher says. "That political cloud, we feel, is CIETC."

She says the decision to postpone a vote on Project Destiny had nothing to do with Des Moines citizens' frustrations over school closings.

But Marc Wallace, one of the parents involved in legal action against the school board, disagrees.

"It's disingenuous of the Partnership folks and the Project Destiny folks to say it's only CIETC," he says. "It's CIETC, and the Des Moines schools, and several things that have led to this disillusionment that people have [about] paying more taxes for things they may want but don't believe are going to happen."

As Wallace sees it, people were angry about the school closings long before the salary scandal erupted at CIETC, the program that was supposed to help down-on-their-luck Iowans get jobs.

One reason many residents are skeptical about Project Destiny is that it involves some of the same players behind the extra school spending. For instance, the school's controversial Pappajohn Center plan is a concept that came out of a 2003 Project Destiny group.

"I think the folks in the Greater Des Moines Partnership are behind many of the new projects that the Des Moines School Board spent $79 million on," Wallace says. "It's the same folks. They're looking for money that will help the business community."

But Roeder, Des Moines' school board president, says he thinks the public hesitation over Project Destiny has nothing to do with either the school closings or CIETC.

Roeder thinks people just don't understand the concept yet. After all, he says, he's probably got an above-average understanding of the issue because of his own civic involvement, and he's still trying to figure out what it all means.

Essentially, the proposal is for another 1 percent sales tax in Polk, Warren and Dallas counties. The tax is expected to generate just shy of $80 million in its first year. The money would be divided into three parts:

• One-third of the money would be used to reduce property taxes overall.

• One-third of the money would be controlled by local governments, which could either use the money to pay for public projects or simply roll that into additional property-tax relief (which the city of Johnston is considering).

• The final one-third of the money would be controlled by a 15-member board, with representatives of the business community as well as area governments. One-half of that third (one-six of the total projected revenue) would be used for things benefiting the public, like arts and theater projects and recreational trails. The other half of that third would be set aside to pay for capital improvements and additional property tax relief.

"It probably isn't that complicated, but it's a new concept, and the funding is controlled a little differently," Roeder says. So it's probably good to postpone the vote for a little while, he says. "I think it's going to take at least some time for them to prepare a successful campaign."

Fisher, who's responsible for finessing Project Destiny's public image, has been describing it as a "tri-county grassroots campaign."

Grassroots?

"We have the support of the business owners," Fisher says. "We have the support of the local chambers of commerce."

Dreaming big

For all the debate about what's fair and what's not, there are those who are disappointed that the Project Destiny vote was postponed because of the good things that could come of it.

One of them is Tracy Levine, executive director of the Metro Arts Alliance, who's concerned about the fact that Iowa ranks 44th per capita for spending on the arts, according to the National Assembly of State Arts Agencies. Each year, Iowa spends just 41 percent per person on public arts funding, far below the national average of $1.09. Minnesota spends $1.67 per capita on public arts projects.

As far as Levine is concerned, Central Iowa seriously needs to think about additional ways to make art more available to improve the overall quality of life. "Des Moines needs to be more than just a stepping stone for people," she says. "It needs to be a place where we're attracting people."

Levine is hopeful that Project Destiny will be able to provide more public arts in the metro.

Another person frustrated by the delay is DeSoto Mayor Marty Glanz, who's one of three regional co-chairs on the People for Project Destiny committee.

"I think it is a really big opportunity for area cities to share resources to do some really great things together, to build regional facilities, and to make Central Iowa as a region more competitive on a national basis," Glanz says.

Then again, Glanz admits that some cities need more time to talk about what they would do with their share of the money. "Most towns have a long list of things that they could do. But what are the highest priorities?"

If the Project Destiny sales tax had been on the November ballot, the participating cities and counties would have had an Aug. 31 deadline to sign their inter-governmental agreements and decide how their money would be spent.

Adel Mayor Jim Peters says he likes the idea of Project Destiny, but he's also glad the vote was postponed because it gives his city time to talk things out.

"I think the local-option sales tax is a good thing," Peters says. "I think the revenue would help improve the community, and it would provide some tax relief."

However, Peters also thinks the tax will be a harder sell in the areas away from Polk County, since most of the money spent on regional attractions would probably be clustered around the capital city.

Time for a change?

The one thing that people seem to agree on, from all political sides, is that Iowa's current tax system is unfair.

For one thing, it's hard for Iowa mayors like Glanz and Peters to attract businesses to their towns when commercial property taxes are so high.

But it's not always easy to whip up public sympathy for the business community when - in Iowa as well as nationwide - the biggest corporate players tend to get massive tax breaks.

"Some of the biggest and most profitable companies are paying nothing, or close to nothing, while the vast majority of corporations do pay their fair share," economist Gardner says.

Meanwhile, there's been an increasing reliance nationwide on the sales tax, despite the fact that there are people on both sides of the aisle who recognize that "it's not smart for government to push their low-income families further into poverty," Gardner says.

Nationally, the total combined sales taxes - state, county and local - have risen from an average 6.5 percent in 1981 to an average of 8.5 percent in 2005, according to Vertex, a Pennsylvania-based provider of state and local tax software and research data.

And as the gap between the richest and poorest Americans continues to grow, there is reason to believe governments will increasingly rely on sales taxes to pay the bills.

In fact, back in 2004, President George W. Bush mentioned that a national retail sales tax is worth considering.

But even beyond the issue of whether sales taxes are inherently regressive, there's the issue of whether Central Iowans are willing to trust the people behind Project Destiny. As dubious Cityview reader Scott Saunders puts it, "I feel like I've been sold this golden goose before, and the ordinary mallard I got is nothing like what I was promised."

Byers, of the Greater Des Moines Partnership, says he and others have been working to make Project Destiny "a model of accountability and transparency."

Project Destiny is important for the area's economic growth, he argues.

Central Iowa is "never going to have mountains. It's never going to have oceans. But we can have the best trail system in the world. ... People can hardly even fathom the great things that this is going to do."

Others, like Wallace, see Project Destiny as a bit more self-serving for the business community.

"The whole point of [building public attractions] is they are trying to show that they've got interesting things in Des Moines, Iowa, so that workers will be attracted to their companies," Wallace says. "That may be a laudable goal, but it shouldn't be coming out of taxpayers' pockets unless that's the language on the ballot."

Mayor Glanz sees huge potential in Project Destiny, partly because it's an idea for reinventing the tax structure. "In general, I think that this is exciting in that it's sort of a revolutionary concept," he says. "I think that it's the kind of thing that government needs to do."

A couple of hundred years ago, Glanz says, maybe it made sense for Iowa to have 99 counties, plus township governments, plus county governments, in addition to the municipal governments. But today, he thinks regionalism sounds more efficient. He likes the idea of pooling financial resources to make the area a destination spot.

"In Central Iowa, we don't need 41 zoos," Glanz says. "But it would be nice to have one world-class zoo."

Project Destiny is "a step toward regionalism," he says. "It's a step toward realizing we're all in this together, and we need to do what's best for the people." CV

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