Is grover over? Norquist's anti-tax jihad stumbles in the states.

If ever two men seemed to share one political soul, surely they were Grover Norquist and Mitch Daniels. From his perch as president of Americans for Tax Reform, Norquist was the architect of President Bush's strategy to cut taxes every year and has elicited signed promises from virtually every congressional Republican never to vote for a tax hike. Norquist once famously boasted that he hoped to "reduce [government] to the size where I can drag it into the bathroom and drown it in the bathtub? During Bush's first term, it was Daniels, the White House budget director, who began running the water. During his 6me in the White House, Daniels conceded nothing in arguing for the president's tax cuts, even going so far as suggesting that the president's trillion-dollar tax cut represented "our best chance of another unexpected surplus? So if the smile on Norquist's face seemed extra-wide on Election Day, even considering the Republicans' reinforced grip on Washington power, it might have had something to do with Daniels's election as governor of Indiana. Daniels was bringing Grover's jihad back to the Heartland.

Where he promptly dropped it. Daniels had campaigned touting citations from Norquist's ATR and other anti-tax groups. But eight short days after settling into the Indiana Statehouse, Daniels proposed a budget that sought to close a $600 million budget gap by socking high-income Hoosiers with a 29-percent increase in income tax. Norquist quickly accused his old cohort of "betraying" taxpayers with his budget proposal. "This is the fastest any governor claiming to be a Reagan Republican has folded under the pressure of the big-spending interests," Norquist said. Daniels was stung. "Two years ago, Grover was giving me the Hero of the American Taxpayer Award," Daniels lamented to the Indianapolis Star. "I'm the same guy I was then."

To bring pressure on the apostate, Norquist publicly and negatively compared him to other governors who he said hewed more closely to the doctrine that taxes can go in only one direction: down. "On behalf of Indiana's families and businesses," Norquist wrote Indiana state legislators, "I urge you to prevent Gov. Daniels from closing Indiana for business, and turn to people like [Texas] Gov. Rick Perry ... for alternative solutions?' But just four days later, it was Perry's turn to break Norquist's heart. Introducing a new tax program to the Texas Association of Businesses, Perry said Texas had a "once in a generation opportunity ... to put in place an educational system to really impact our children and our children's children."

Poor Grover. Nearly everywhere he looks, it seems, a Republican governor or legislature is finding the seductions of tax hikes too powerful to resist in the face of reduced federal support and soaring education and health-care costs. Anti-tax groups such as ATR, the Club for Growth, Americans for Prosperity, and Freedom-Works seem to have feet-on-the-desk privileges in the White House and Republican Congress. For a time, they appeared to have even more pull in the states, where 1,200 of 7,400 state legislators have signed Norquist's pledge never to vote for a tax increase. Anti-tax advocates are quick to threaten political death to any Republican who strays from the no-tax gospel. But with the red ink still flowing, even after collectively closing more than $200 billion in budget shortfalls over the last three years, cracks are forming within the no-tax coalition. Governors are finding that they can't cut more without endangering programs that hit people where they live--such programs as road construction, nursing home assistance, and reading, writing and arithmetic lessons. Surprisingly, legislatures are going along. Indeed, the day after Norquist announced his opposition to Daniels's budget plan, the Republican chairmen of the Indiana House Ways and Means and Senate Budget committees admitted that they didn't consider the no-tax pledges they had given the ATR binding because they signed them years before they acquired their current budget responsibilities. Another Republican Hoosier lawmaker complained to The Indianapolis Star, "I knew it [ATR's no-tax pledge] was like a marriage when I signed it, but now I want a divorce"

It was not always thus. In the early '90s, state Republican parties rode the anti-tax backlash to power, going from controlling five statehouses in 1992 to 20 today. (Democrats and Republicans split control of ten others.) A big reason why was the fundraising and organizational help offered from national anti-tax groups. "You can not discount the impact of Grover Norquist and Americans for Tax Reform and the Club for Growth," says Bill Pound, executive director of the National Conference of State Legislatures, the main umbrella group for state lawmakers. "To their credit, they have had considerable effect" And indeed, many a Republican statehouse still keeps a light on for Norquist and his Washington friends. ATR and others have helped beat back major tax increase proposals from Alabama and Arkansas to Oregon and Washington in recent years.

Lost among press stories heralding the Republicans' victories in the presidential and Congressional elections, however, is evidence that the tide may be turning. Voters in November rejected every tax-limitation measure on state ballots, including a Maine property tax initiative that was the most ambitious of its kind in 20 years. Voters in several other states, meanwhile, approved tax increases to pay for specific programs such as schools, roads and mental health. States have not exactly gone on a spending spree--they've cut spending much more than they've raised taxes over their last few years of budget difficulties--but because they are under so much pressure, they are increasingly resistant to the ministrations of Norquist and others who are telling them to cut taxes even more.

No state demonstrates the rise and wobble of the anti-tax movement better than Colorado. In 1992, at the instigation of Douglas Bruce, now a county commissioner in Colorado Springs, Colorado voters passed a referendum known as the Taxpayers Bill of Rights, or TABOR which attached an amendment to the state constitution that required any tax increase to be approved by a vote of the people and limits state spending increases to inflation, with adjustments made for population growth. Any amount that the state collects above its spending limit has to be returned as a tax refund, unless the public specifically votes to allow the state to keep the money. So far, no Colorado official has even tried to bring the question to a vote. "It sounds good, so it's hard to fight politically," says Brad Young, the former Republican chairman of Colorado's joint budget committee.

TABOR has completely warped Colorado politics ever since. One of the original supporters was a little-known state representative from Aurora named Bill Owens. Six years later, Owens was elected to be Colorado's first Republican governor in 24 years. It wasn't long before national Republicans began to notice. National Review named him "America's Best Governor" in 2002 and admiringly listed his government-cutting bona tides. Anti-tax advocates began touting TABOR as a national model and Owens as a potential presidential candidate for 2008.

But while Colorado has been terrific for TABOR, TABOR has been a nightmare for Colorado, and for Colorado Republicans in particular. The state budget was fine as long as the state's economy was growing, and bills could be pushed into the following year. Once things slowed down, retrenchment became a serious business just as health care and education expenses began to shoot upwards. Thanks to TABOR, the state can't increase its spending on roads and other expenditures it's been putting off. Now, Gov. Owens himself has proposed a ballot measure to curtail some of the law's limits.

Business is the chisel driving a crack between moderate Republicans and the anti-tax fanatics. Although there is no group in Washington more loyal to the GOP's anti-tax doctrine than the Chamber of Commerce, in the states, reality often trumps ideology. "For businesses to be successful, you need roads and you need higher education, both of which have gotten worse under TABOR and will continue to get worse," says Tom Clark of the Denver Metro Chamber of Commerce, who notes that higher education has shrunk from 25 percent of the state budget in 1995 to about 10 percent today. "I'm a Republican," Clark says, "but I made the decision not to give any money to the state party"

Throughout the state, moderate businessmen such as Clark kept their political checkbooks closed to many Republicans last year. Several statehouse incumbents who might otherwise have counted on huge campaign spending advantages over Democratic challengers instead faced something approaching parity. A tightly organized state Democratic Party was able to take advantage, knocking off enough Republican incumbents to gain control of the Colorado legislature for the first time in 40 years. Democratic leaders in the state legislature are now reaching out to moderate Republicans to make changes to TABOR. As for Owens, he's term-limited and preparing to begin his last two years as governor. With a reinvigorated Democratic majority in the statehouse and a conservative base disappointed with his concessions to budget realities, he's quacking lamely. TABOR is at no risk of being jettisoned altogether, but its reputation as the third rail of Colorado politics has taken a permanent hit, as have Owens's hopes for competing in the GOP presidential primary 2008.

The fight now moves to Virginia, where, last year, business groups helped enact the state's largest tax increase since 1966. Democratic Gov. Mark Warner conceded he might be "a lunatic" for trying to reform his state's tax system. He had run on a no-tax pledge, but recanted after finding that the state's fiscal hole was deeper than he could fill. He spent his first two years in office slicing spending by $6 billion, but finally concluded that the state would continue to bleed red even if the economy grew by higher than historic rates. The state would be facing deficits through 2010, just funding current programs. So Warner proposed raising taxes by $1.1 billion by offering tax breaks to most people but raising a number of rates, such as sales and cigarette taxes, and closing up some of the most gaping loopholes. Republican lawmakers began sharpening their knives until they realized that many of their constituents, business groups among them, were squarely behind the Democratic governor. Over the howls from national anti-tax groups, Virginia Republicans actually outdid the governor's tax hike, increasing it by an additional $700 million, fully two-thirds larger than Warner's proposal.

Norquist and the Club for Growth have vowed to defeat dozens of Republican legislators who supported the tax hike, dubbing them "Virginia's Least Wanted" "We had a bunch of worthless Republicans in the Senate who have been there forever and don't have any core free market beliefs," complained Club for Growth then-President Stephen Moore in an online chat. "They sold us out and then enough Benedict Arnold Republicans in the House went along. The good news is that these Republicans are through politically--we will be sure of that"

Two years ago, anti-tax groups made good on earlier threats to target legislators who referred regional sales tax hikes to voters, unseating the House transportation committee chair. But there is a different mood in Richmond. John Chichester, the Republican president pro tempore of the Virginia Senate who steered the tax hike through as finance chairman, calls Norquist and Moore "generals without armies.... The Norquist crowd--if they had a flame burning someplace, it's dimming now. The shrillness and strident rhetoric probably did their cause more harm than good"

As in Colorado, business groups have already come to the financial and organizational aid of the apostates facing challengers in this June's primaries. "The 17 members of the Republican House majority who voted for the modest tax increases demonstrated statesmanship and political courage in the old-fashioned sense," says Hugh Keogh, president of the Virginia Chamber of Commerce. "We'll do whatever seems to make sense to help encourage their reelection."

Given that kind of support from business interests, which have formed a new PAC specifically designed to help Republican lawmakers who supported Warner's tax increases, coupled with the fact that the moderate Republicans are mostly well established and well-liked in their districts--it may be difficult for Norquist and Moore to dislodge very many of them. "No doubt, Norquist and his allies can bring some money in on the other side," says University of Virginia political scientist Larry Sabato. "But to beat the legislators, he'll have to find strong opponents, always tough with established incumbents; catch the incumbents napping, which they aren't; and significantly outspend them, which I doubt he can do ... In some competitive districts, Norquist's efforts might elect Democrats in the fall."

It is a bizarre notion when set against Norquist's outsized reputation as the preeminent Washington conservative powerbroker. But with Colorado looking shaky for Republicans and Daniels launching his administration with a direct slap to the anti-tax crowd, Virginia's statewide elections later this year loom large. If "Virginia's Least Wanted" survive their primary challenges or Democrats pick up seats in November's statewide election, Norquist and the anti-tax movement's threats could carry significantly less sting in the 2006 midterms nationwide. Grover is a long way from being politically neutered, to be sure. But it is in the nation's capital, rather than the states, that he continues to find his soul-mates. From statehouse Republicans, such as his former friend Daniels, Norquist keeps hearing heresies. "Many other states have cut education spending--I didn't want to do that," Daniels said. "Many have cut higher education spending--I didn't want to do that" But weep not for Norquist and Daniels. They'll always have Washington.

Daniel Franklin is a Washington Monthly consulting editor. A. G. Newmyer III is managing director of U.S. Fiduciary Advisors.