Indiana Bicentennial 9.9: Paul McNutt (1933-1937) – Tax Reform, Government Reorganization, & the “Two-Percent Club”

McNutt and the Democrats also were finally successful in changing the state tax structure. Readers may recall that Governors Marshall and Goodrich had unsuccessfully attempted to amend or replace the Constitution to address the tax situation.  As the economy had changed since 1851, the tax system had not kept pace. Local property taxes were overburdened, and intangible wealth was escaping taxation. In 1933, McNutt advocated and the legislature passed a state gross sales tax — in effect a combination sales and income tax. It taxed salaries, wages, and commissions as well as certain retailers such as clothing stores. “There were two rates: 0.25% applied to wholesaling, manufacturing, and agriculture; and 1% applied to other business and individual gross receipts. A basic exemption of one thousand dollars was allowed each taxpayer.” The state was then able to maintain its pre-Depression revenues while reducing the percentage of that revenue that came from property taxes. The state balanced its budget and provided additional money to schools.

Another area that McNutt tackled was organization of the state bureaucracy. “More than 100 state departments and agencies existed in a haphazard patchwork of uncertain authority and imprecise control.” He overhauled the system, putting the agencies into eight departments with more clearly defined responsibilities and more centralized control. Indiana had a grand tradition of patronage. (Repeating my high school teacher’s adage that today’s reform is tomorrow’s corruption – in the days of Andrew Jackson, patronage was seen as a reform. It got the government out of the hands of the blue blood elitists and into the hands of the common man.) McNutt’s reform of the state bureaucracy allowed him to expand his patronage power. State employees became beholden, to one extent or another, to the governor. There were suddenly a lot more loyal McNutt Democrats in state government. They were “encouraged” to show their support by joining the Hoosier Democratic Club — commonly known as the “Two Percent Club,” because that percent of their pay was assessed as the price of membership. Theoretically membership was voluntary, but it was generally assumed that a state job was not secure if one did not belong. Republicans vehemently denounced the Two Percent Club but somehow changed their mind about its merits when they returned to power in the 1940s.

I watch bad TV, and politics often reminds me of “Survivor.” Alliances tend to be fairly strong when the opposition is fairly well balanced. They break apart when the opposition is weak. I can’t say that the Democrats fell apart, but there was a fair amount of infighting and resentment between the new, younger McNutt Democrats and the old guard who had been in the wilderness for quite some time. Senator Frederick VanNuys would come to be a prominent leader of the old guard Democrats in opposition to McNutt. They resented the high handed manner of the young democrats. And, there is no doubt that the demographics of the Democratic party was changing during this period. Blacks, ethnic voters, industrial workers, and urban dwellers were important parts of this new Democratic majority. However, the major fractures would come later. During McNutt’s term as governor, he was able to hold sway over the whole party. The time in the wilderness and new found power was enough to paper over factional differences.  

Even though he was constitutionally limited to one term, McNutt’s tenure in office was one of the most influential. McNutt sought the Presidency in 1936 and was a front runner for a period of time until Roosevelt announced his intention to seek a second term. Roosevelt beat him easily. McNutt also angled for the Vice-Presidency, but Roosevelt remembered McNutt’s maneuvering during the 1932 convention. Instead, Roosevelt made McNutt High Commissioner of the Philippines. The position was mostly ceremonial, but McNutt managed to cause controversy by being fussy over protocol and proposing the construction of a summer palace. He did manage to raise the number of Jewish refugees who were allowed admittance from fascist countries — even though they weren’t allowed into the U.S. itself in large numbers. In 1939, he became head of the Federal Security Agency, an umbrella agency for several New Deal programs. Once again, he was thought of as a Presidential contender in 1940, but Roosevelt ran for a 3rd term.

During the war, “McNutt publicly urged ‘the extermination of the Japanese in toto’. When asked for clarification, McNutt indicated that he was referring to the Japanese people as a whole—not just the Japanese military—“for I know the Japanese people.’” McNutt would serve a second term as commissioner of the Philippines and then ambassador when it became an independent nation. He died at the age of 63 when after a surgery, he went to the Philippines to recover. His condition worsened there, and he came back to New York to seek better care, but to no avail. He passed away in 1955.