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Wednesday, June 21, 2017

The Fiscal Panic Clock Is Ticking

Yes, it is summer, and yes, the pace in state politics slows down from now through Labor Day. However, that does not mean our state's economic crisis takes a break. Government spending is as close to a perpetual motion machine as mankind has ever been. 

Or so it seems when the tax hikers in our state legislature get to set the political agenda. The problem is that their hard work to protect government spending from any long-term cuts is going to have major consequences for our state.
One of them is another credit downgrade, with all the consequences that follow. 

And those consequences are far more significant than probably the majority of our elected officials realize. A state that is sliding down the credit scale will not be attractive for businesses and entrepreneurs. 

We desperately want to avoid another credit downgrade. We have, as we all remember, already suffered one. On May 8 I explained:
Before the United States took a beating in credit ratings during President Obama's first term, the very thought of a U.S. downgrade was little more than the punchline of a joke to many. To others, though, who had spent some time studying the federal government's notoriously weak finances, the downgrades were just another "see I told you so". This downgrade for Wyoming is not nearly as alarming as the U.S. downgrades under Obama. That, however, does not mean that it is just fine to ignore it. Quite the contrary: when we put the downgrade in the context of our state's bad macroeconomic situation, it becomes a red flag. When we add to that the agenda for this week's revenue committee meeting, that red flag grows exponentially.
A state where the budget crisis smells of fiscal panic and destructive tax hikes will continue to lose jobs and businesses. At its meeting in Saratoga in May, the Joint Revenue Committee discussed a comprehensive review of the state's tax system and a gross receipts tax. It continued its tax-hiking conversation at its Riverton meeting, where committee members apparently lamented that there were two obstacles to higher taxes: voters who don't like tax hikes, and tax hikes that anger voters. 

Other than that, higher taxes are apparently just fine.

From a broader perspective, the Riverton meeting was a missed opportunity to turn our state's dwindling economy around. All is not lost yet, though the latest jobs numbers for our state indisputably show that we cannot afford the government we have today, let alone higher taxes. A small but growing number of legislators have pledged not to raise taxes in 2018, but the majority still appears to be open to the idea. In fact, most of them appear to be more concerned with how to coax voters into supporting higher taxes than what higher taxes will do to our state economy.

The problem is that pretending that higher taxes solve their problems is fiscally and macroeconomically bad. To ignore the opportunity for structural, liberating spending reforms and wait until fiscal panic sets in, is even worse. To then raise taxes, when fiscal panic sets in, is about the most reckless our legislators could do.

Unfortunately, if they keep missing opportunities like the Riverton meeting, we will slide down that scale into fiscal panic. Others have already done so. Take Illinois, for example, where fiscal panic has now taken the state in a firm chokehold. Explains the Wall Street Journal:
Bruce Rauner spent a chunk of his personal fortune running for Governor in 2014 to save Illinois from its tax-and-spend political class. More than two years later it looks like the former private equity star has made better investments. On Tuesday evening the Governor with the worst job in America explained why he and his fellow Republicans have offered to raise taxes for the sake of ending a multiyear budget impasse with Democrats. He said he’ll accept a four-year increase in the flat state income tax to 4.95% from the current 3.75%, expand the sales tax and implement a cable and satellite TV tax. This is a political defeat by any definition since Mr. Rauner campaigned on lowering the income tax to 3%, not on restoring the rate close to what it was under the last Democratic Governor. The “temporary” 5% rate partially sunset in December 2014. Democrats who run the legislature refused to negotiate over a budget unless Mr. Rauner agreed to a tax increase, and now they’re refusing to make notable spending or economic reforms in return.
Before all you tax hikers hit the comment button and point out that we really do not have any Democrats in our state legislature, let me ask you to take a step back and replace the Illinois Democrats with yourselves. How different are the tax-hiking Republicans here in Wyoming from the tax-hiking Democrats in Illinois? 

As a result of the tax hikers pushing Illinois from missed spending-reform opportunities, to the brink of fiscal panic, Governor Rauner - an otherwise fiscally reasonable man - has been forced up against the wall. With fiscal panic bearing down on the state capitol, Rauner has no choice but to maximize short-term revenue, with no regard to the long term consequences. 

What consequences? More macroeconomic decline, more private jobs lost, more businesses giving up - and more budget deficits. Down the road, this leads to more downgrades which in turn drive the tax-and-spenders in the legislature to send the state even further into the economic wasteland. 

Once credit rating agencies set a state in their crosshairs, all they care about, really, is to protect bond holders, current and future. They want, says the Wall Street Journal, "to see more revenue coming in so they can judge if bondholders will get repaid." However, the newspaper also explains, what really puts long-term bond holding in jeopardy "is an unrestrained tax-and-spend political culture that drives more people out of the state and pension liabilities ever upward."

In Wyoming, the situation is a bit different, with our piles of cash in the bank. However, we do not escape the wrath of the credit agencies just because we are depleting cash reserves rather than borrowing profusely. If our state does not come to grips with its structural, permanent budget deficit, we will continue down the path of macroeconomic decline and a snowballing deficit problem. So long as the tax hikers in our legislature continue to ignore the real problem in our state, they will push us to the same edge where Illinois is today.

Or, if Illinois is not a palatable comparison, consider Alaska. The Last Frontier State is in a general economic situation that is almost as bad as ours. Fiscally, they are about a year ahead of us and, as the Alaska Dispatch News reports, the lawmakers in Juneau find themselves under acute pressure from a looming credit downgrade:
A major credit rating agency said Tuesday that it will likely lower Alaska's credit rating if the state does not adopt fiscal reforms that lawmakers in Juneau have been wrestling over for months. Standard & Poor's, one of the "big three" rating agencies, put Alaska's AA+ credit rating for its general obligation bonds on what it calls "CreditWatch," with "negative implications," the firm said in a report. "(W)ithout structural fiscal reform in the 2017 legislative session, we would likely lower the state debt ratings," S&P said, adding that it expects lawmakers to enact a budget for the 2018 fiscal year in the next 90 days. If the state adopts "a balanced budget with fiscal reforms that does not significantly rely on reserves," the agency said it may remove the state's ratings from the credit watch without a downgrade. 
In this situation, legislators practically always choose the fiscal response that seems to reduce the deficit the most, in the shortest possible time. The Dispatch News again:
The Legislature is currently tasked with passing an operating budget for the state government for the coming fiscal year, which starts July 1, and also passing long-term fiscal reforms. But, as [the newspaper] reported last week, "lawmakers appear increasingly likely to skip over long-term reforms" in order to avoid a government shutdown on July 1.
After having stubbornly held out against spending reforms for too long, Alaska legislators have run out the fiscal clock. Inevitably ticking away their savings, it no longer leaves them with enough time to do the prudent reforms that can save their state for the long haul. All they have room for now are short-term, panic-driven budget measures that fill up the state's coffers fast, regardless of what the longer-term macroeconomic consequences are. 

Such short-term panic measures always consist of tax increases. The tax hikers get what they want, but when executed on the deep end of fiscal panic the consequences of those tax hikes are perhaps even more serious than they would be if passed today. Tax increases are bad on any day; they are worse in a macroeconomic crisis; they are catastrophic under fiscal panic. 

In its motivation for pushing Alaska to the brink of a credit downgrade, Standard & Poor explain that the state has been "running on reserves" over the past few years. This is exactly what Wyoming is doing, and the burden of guilt for putting our state in that situation is on the shoulders of those who will not give up their dream of raising taxes. 

Here is how Standard & Poor's credit expert Timothy Little explains the agency's decision to put Alaska on its downgrade watch (free subscription required): 
"The CreditWatch action reflects our view that the state could remain structurally imbalanced for fiscal 2018 based on the impasse for budget negotiations regarding adopting fiscal reforms," said S&P Global Ratings credit analyst Timothy Little. As noted in our prior reports, without structural fiscal reform in the 2017 legislative session, we would likely lower the state debt ratings. Over the next 90 days, we expect the state will enact a fiscal 2018 budget. "If Alaska uses a significant amount of its reserves again and remains structurally imbalanced, we would likely lower the rating," said Mr. Little, "but should it adopt a balanced budget with fiscal reforms that does not significantly rely on reserves, we may remove the state's ratings from CreditWatch without downward rating action."
There is a small but growing group of legislators here in Wyoming who simply will not vote for tax hikes in 2018. That is good. Now let us hope for a growing support for structural, permanent spending cuts instead. 

We still have time, but the fiscal-panic clock is ticking. 

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