RALEIGH – Here’s a rule you can take to the bank, though you may not want to: when the state of North Carolina faces a fiscal deficit, the state politicians of North Carolina will promise to save you pennies while depriving you of dollars.
In the early 1990s and again in the early 2000s, leaders of the General Assembly sought to justify hundreds of millions of dollars in state tax increases in part by warning that without them, North Carolina would lose its coveted AAA bond rating. I wrote at the time that this argument, while commonplace and guaranteed to garner headlines, was nonsensical.
If the state lost the highest bond rating, the interest rates on its debts would modestly increase. The annual increase in debt-service expense would be an order of magnitude smaller than the higher taxes needed to head off the event – even if, indeed, bond-rating agencies truly preferred tax increases to budget reductions as proof of fiscal responsibility during economic recessions.
Well, North Carolina has another big budget deficit in 2009-10. So the bond-rating argument will soon be back, not that it will have at all improved with age.
Don’t blame State Treasurer Janet Cowell. She recently urged the General Assembly and Perdue administration to consider the interest-rate consequences of various fiscal policies. She was right to do that. It is entirely legitimate for a state treasurer to focus like a laser beam on issues within her purview, such as bond ratings. And it is legitimate to question the fiscal soundness of some state budgeting tactics such as shifting pay dates, deferring debt payments, or furloughing employees rather than eliminating positions (permanent reductions in force are a better way to reduce stress on the state budget, and happen to be justified in North Carolina right now, anyway).
It’s the next round of political rhetoric that I’m worried about – the point at which advocates of broader tax increases cite the bond rating as an argument for their position.
So let me state this clearly once again: if you raise my taxes $1 a year to save me a few cents a year in debt service, you are doing me no favors. You are not managing the state budget responsibility. You are acting foolishly.
Should taxpayers be concerned about North Carolina’s bond rating? Absolutely. On balance, it’s better for borrowers to have excellent credit than mediocre or poor credit. But let’s defend the AAA bond rating by eschewing budget tricks and putting state spending on a sustainable course for the long run. These actions save taxpayers money twice, immediately and through lower debt service.
For politicians to “defend” the AAA bond rating by forcing North Carolina taxpayers to surrender more of their money to the government is offensive.
They’ll do it again, you watch.
Hood is president of the John Locke Foundation