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No new taxes: Voters let states borrow instead

Personal debt may be going out of style, but government debt remains very much in vogue, Tuesday's election results show.
/ Source: The Associated Press

Personal debt may be going out of style, but government debt remains very much in vogue, Tuesday's election results show.

Despite bleak budget pictures, voters approved nearly every state-level bond measure on display, including $10 billion in California for a high-speed rail network, $315 million in Alaska for transportation projects, and $400 million in Pennsylvania for water and sewer improvements.

With the significant exception of Washington state, where voters appeared to have approved increasing the sales tax to fund $17.9 billion in expanded light rail, voters across the country roundly rejected proposals to raise taxes. In Colorado, for example, sales and mineral tax hikes were rejected. In Massachusetts and North Dakota, tax-limiting measures garnered only about 30 percent approval.

This preference for debt-supported spending over tax increases is nothing new, experts said. But as states face massive budget shortfalls and struggle to cut programs, ballooning debt could begin to affect how much money states can spend before they face downgrades by credit rating agencies that would make future borrowing more expensive.

"Raising taxes has emerged as this politically radioactive move," said Sujit Canagaretna, senior fiscal analyst with the Council of State Governments, "so what do you do in turn? You end up borrowing."

Bond measures seem safe because they spread costs over a long period of time, he said, but increased debt-to-taxation ratios could lead to higher borrowing costs and make higher taxes or fees, or budget cuts, unavoidable.

Bonds can drive spending cuts
Given voters' antipathy for raising taxes, policy makers eager to protect their states' credit ratings will be forced to cut spending — especially at a time when real estate and sales tax revenues are sinking amid widespread economic weakness, said Scott Pattison, executive director of the National Association of State Budget Officers.

Dozens of states already are cutting payrolls, enacting across-the-board spending cuts and otherwise seeking to address revenue shortfalls that emerged in the opening months of the current fiscal year.

In the longer term, Pattison said ever-higher borrowing makes it harder for states to manage unforeseen problems like this year's credit market freeze, which compelled at least two states to request short-term loans from the Federal Government to fund basic operations.

That's how South Carolina ended up losing its AAA bond several years ago, after the state was pummeled by two hurricanes and a court decision required it to pay almost $1 billion to retirees, Pattison said.

Jennie Drage Bowser, who analyzes ballot measures for the National Conference of State Legislatures, said voters deserve credit for choosing the long-term stability of borrowing over the smaller, short-term benefits of tax cuts.

"Voters are being really savvy and taking a long-term view this year," she said. "A program might look like a good idea, but maybe this isn't the best year to pay for it. And where a tax cut may be beneficial to your checkbook balance next year ... it means that state benefits and services go away or other taxes and fees go up to replace lost revenue."

Borrowing a longer trend
She said the popularity of bond measures — 72.3 percent of the dollars proposed on ballots will be borrowed — is consistent with recent elections, when voters have widely accepted borrowing regardless of economic conditions.

"They just figure this is going to be a 20-year thing, and over 20 years things are sure to get better," she said.

The California bond measure, for example, approves the sale of nearly $10 billion in bonds as a down payment on an 800-mile high-speed rail network that would send electric trains zipping between Northern and Southern California at up to 220 mph.

As for the tax measures, Bowser suggested voters may be reluctant to upset the revenue picture in more direct ways when the economy is faltering.

But given the grim revenue situation most states face, unchanged tax codes won't keep states from scaling back or delaying projects they would otherwise promote, said Dan DeSimone, who directs the National Association of State Treasurers' federal relations office.

Treasurers are likely to "closely scrutinize the priority list of what the state wants to do, because either the revenues aren't there or the debt level to make up any shortfall could affect credit ratings or capital balance sheets," he said.