ESAs

Tax Code Shaken, Economic Outlook Not Stirred

June 9, 2016 Posted by Joe Horvath - No Comments

A common argument put forth by proponents of tax-and-spend schemes is that pro-growth tax reforms are a guaranteed way for a state to destroy its bond rating. Following a recently updated assessment of Maine’s economy by prominent credit ratings firms, the state’s current path of pro-growth tax reforms clearly has not hindered its economic outlook or competitiveness.

Maine is enjoying better economic growth than the rest of New England, state revenue projections are being met and credit ratings are not in danger of reaching 2005 levels, when the state suffered considerable downgrades thanks largely to an economic downturn.

Two of the world’s most prominent credit rating agencies recently provided an update on the status of Maine’s bond ratings. Moody’s reaffirmed Maine’s 2016 general obligation (GO) bonds with an encouraging “Aa2” rating, citing Maine’s economic outlook as “stable.”

In this case, the “stable outlook reflects expectation that the economy will grow steadily over the next few years.” While reaffirming an AA rating to Maine’s GO bonds, Standard & Poor’s said “stable outlook reflects our opinion that, although economic growth trends are sluggish, they have been relatively stable.”

When it comes to fiscal reform, the ideological divide is often fairly clear. Free marketeers believe that spending control and pro-growth tax reform lead to widespread economic opportunity, balancing out the playing field by making sure more taxpayers get to keep more of their money.

Capital, which money represents, is better utilized in the free market than by being swallowed up in a perpetual boondoggle. Opponents of pro-growth tax reform, on the other hand, worry about where government will get its money, and how all-too-often worthless projects will be financed. They often point to any dip in state credit ratings as an indicator that government requires an endless stream of revenue; otherwise their bonds will be worthless. This is not the case, as many high-tax states have poor ratings.

Joe Graph 2

The table above, which appears in the eighth edition of the complete Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, shows that high-tax states do not enjoy better credit ratings than low-tax states.

In fact, one need look no further than North Carolina, which recently passed a historic package of tax reductions, but still maintains a AAA bond rating from all three credit ratings agencies thanks to its corresponding spending reduction and economic growth.

Despite their apparent dedication to collecting as much revenue as possible, they are not rewarded by the ratings agencies. The truth is that spending levels drive deficits and debt, and are therefore chief contributors of a state’s fiscal health. It is generally accepted that an individual cannot live above his means. The logic should only follow, then, that a state should be similarly restrained.