August 7, 2005

Debunking the Bond Rating Myth Again

Larry Daughtrey's column in today's Tennessean mocks anti-income tax activists for aksing legislators and candidates to sign a pledge promising to oppose any attempt to create a state income tax. Daughtrey's central point is that the push to create an income tax is dead, so no pledge drive is needed.

But Daughtrey ignores the elephant in the room.

While there is currently no active push on capitol hill to create a state income tax, it is incumbent Gov. Phil Bredesen himself who made the income tax a central issue of the upcoming 2006 election campaign in which he will be seeking re-election to a second term.

He did so three years ago, when he pointedly and very specifically left the door wide open to seeking a state income tax if re-elected to a second term.

That stance has historical resonance as Bredesen's three immediate predecessors in the governor's office all proposed or pushed for an income tax in their second terms. The previous governor did so after promising not to during his re-election campaign. (It's worth noting that Bredesen will face a high credibility hurdle if he loudly proclaims opposition to the income tax while running for re-election as the taxpayers of Tennessee will have heard the same promises eight years before, only to see the promise broken soon after.)

Daughtrey favors creation of a state income tax, so you can understand why his knee-jerk reaction would be to mock the anti-income tax pledge. But anti-income tax activists pushing the pledge are merely seeking to clarify where incumbents and candidates stand on an important issue - something that helps pro-income tax activists and voters too. After all, supporters of the income tax have in the past proclaimed some poll that purportedly shows a majority of Tennessee voters would support an income tax. If that's the case, then a list of the incumbents and candidates who won't sign the anti-income tax pledge is a good guide for the pro-income tax side to know who to vote for.

If the poll they cite is accurate - which I doubt - then the anti-income tax pledge will backfire big time against the anti-income tax side on election day.

Shouldn't the dean of the state capital political commentariat praise citizens for want to be involved and be informed? Of course he should.

There is much more in Daughtrey's column to take issue with, especially the section where he proposes several alternate "pledges" that cast opposition to the income tax in a negative light as opposition to better schools, tax fairness, etc.

I'll focus on just this one proposed pledge:

"I will watch the state's credit rating sink to junk bond status before I will vote for an income tax."

In June 2004, Standard & Poor's raised Tennessee's bond rating, even though the state did not impose an income tax. As I wrote here back then, "the bond rating agencies blamed Tennessee's declining rating on the state's lack of fiscal discipline, and the Sundquist administration's penchant for spending one-time funds on recurring programs, not its tax structure."

In 2001, I wrote this column for the Nashville City Paper explaining why pro-income tax activists and politicians were wrong to assert that the state's credit rating was falling because it didn't have a state income tax. I wrote:

Tennessee achieved a very high AAA bond rating during the administration of Lamar Alexander – and we had no income tax. We maintained it through the Ned Ray McWherter years and the first five years of the Sundquist administration – without an income tax.

Oregon has an income tax but no sales tax, and its AA bond rating is the same as Tennessee, which has a sales tax but no income tax.

Louisiana, which has both income and sales taxes plus a lottery and revenue from casino gaming, has an A bond rating, the lowest rating of any state (and only recently upgraded from A-).

New Hampshire – which has no state income tax (and no state sales tax either) – has a AA+ bond rating, which is higher than Tennessee.

The state of Washington’s bond rating held steady at AA+ last year, "despite predictions that a citizen tax revolt would hurt the state's bond rating," reported The Seattle Times. S&P reviewed the state’s rating and left it unchanged after a voter referendum passed and eliminated $750 million a year from state coffers.

Clearly, a state’s tax structure has no causal relationship to its bond rating.

Tennessee’s bond rating only began to drop after the Sundquist Administration started using non-recurring funds – such as raiding "rainy day" reserve funds – to pay for recurring programs. In public finance, that’s a no-no that will hurt the bond rating every time.

So what can Tennessee do to regain our lofty bond rating? Louisiana’s experience is instructive. Standard & Poor’s raised that state’s bond rating to A – still the lowest in the nation – after the state focused on cutting spending to match revenues.

S&P said the rating upgrade reflects Louisiana’s "commitment, over the past five years, to improve its underlying financial structure. The capacity for the state to react and contain fiscal deficits is much improved by efforts to match expenditures to revenues, build a rainy day fund, and greatly reduce its debt burden. While economic weakness is expected to periodically draw Louisiana into financial crunches, including current and future-year forecasts of revenue shortfalls, it is expected that newly institutionalized budget discipline will prevail to identify appropriate levels of budgetary cuts to maintain structural budget integrity."

Interestingly, S&P said nothing about that state’s tax structure or tax increases.

UPDATE: Lance Frizzell calls Daughtrey's piece "incoherent."

That's the only word for Larry Daughtrey's anti-income tax screed in today's Tennessean. He spends the first half of it saying the debate over a state income tax was definitively won by anti-tax folks in 2002 and the second half advocating a state income tax at some point in the future. In a new twist, pro-tax forces are compared to the KKK.

The editorial page adds to the misinformation: "Important issue"? The only people talking about a state income tax are the tax protestors.

Well, the tax protesters and the sponsor of a bill to enact a state income tax in Tennessee. It's House Bill 2120 and was filed on February 17, 2005 and sent to the House Finance Committee on February 24, 2005. But other than that, maybe no one is talking about a state income tax.

Nathan Moore responds to Daughtrey, saying, "We won the battle, not the war."

That's true. And yet the other side is urging disarmament.

Also, Mark Rose dismembers both Daughtrey's column and the Tennessean's editorial on the same subject - and also notes that not only did Standard & Poor's raise Tennessee's bond rating last year (despite the state not having an income tax!) but Moody's did as well, crediting the state for having taken steps to "create structural budget balance."

Four years ago, income tax proponents were saying that only an income tax could create structural balance for the state's finances. Moody's says otherwise.

I'll finish by quoting Mark Rose quoting me:

The only way to guarantee Bredesen won't seek a state income tax in a second term is to deny him a second term.