The Week in Public Finance: Tardy State Budgets, Philly's Soda Tax Sputters and Raising the Debt Ceiling

A roundup of money (and other) news governments can use.
by | August 4, 2017
Connecticut state Sen. Majority Leader Bob Duff, left, holds a GOP budget alongside state Democratic President Pro Tempore Martin M. Looney. (AP/Jessica Hill)

And Then There Were Three...

It's been one month since the fiscal year began and three states still don't have a signed budget. Meanwhile, Rhode Island just enacted its budget Thursday night.

Gov. Gina Raimondo signed Rhode Island's new budget almost immediately. The $9.2 billion plan includes a $26 million cut in the car tax, free community college tuition and an increase in the minimum wage, among other policies. The agreement means the governor now has to find $25 million in savings across state government.

The three remaining states without a budget are Connecticut, Pennsylvania and Wisconsin. In Connecticut, the legislature recently approved a new collective bargaining agreement with public employees that’s projected to cover $1.5 billion of the state's estimated $5 billion budget deficit over the next two years. The deal may now help move along negotiations on how to address the rest of the budget gap.

Pennsylvania lawmakers have approved a spending plan, but have yet to address the state’s revenue problems. Key in the coming days will be whether the state’s House approves the Senate’s revenue package that includes several tax increases and expansion of legalized gambling.

And Wisconsin has a partial budget, but lawmakers remain divided over how much money the state should borrow to pay for road projects.

The Takeaway: It's unusual to have this many delayed state budgets this far into the fiscal year. And while credit ratings agencies are watching the developments, they seem -- at least so far -- relatively unconcerned.

There are two possible reasons for this. One is that these impasses are far from a crisis. Fitch Ratings this week said it expects states will take all the appropriate measures to pay their debt on time.

The other reason is that budget impasses have become normal in recent years as revenue shortfalls and clashing ideologies have made it harder for lawmakers to find common ground. Sadly, Illinois’ historic two-year impasse seems to have set a low bar for budget talks.

 

Less Than Bubbly About Philly's Soda Tax

Philadelphia overestimated revenue totals for the first fiscal year of the city's 1.5-cent-per-ounce soda tax. But does that mean the tax itself is a failure? The Tax Foundation thinks so.

This week, the foundation released an analysis noting that the new tax revenue stream had finished about 15 percent -- or $7 million -- off the city’s total revenue projection for January through June of this year. The report’s author, Scott Drenkard, says this is because the new tax is prompting consumers to buy soda elsewhere and thus hurting local retailers. “Just as the city overestimated soda tax revenues,” he writes, “the city underestimated how much the beverage market would be impacted.”

The Takeaway: One year of off revenues does not make a program a failure, particularly when policymakers are trying to guess how much a new tax will earn.

But Drenkard argues that Philadelphia, unlike other cities with a soda tax, enacted the measure to raise revenue, not as a policy aimed at combating obesity. And whereas other sin and sweet tax revenues tend to go toward public health measures, Philadelphia’s liquor, cigarette and soda taxes are primarily slated for education funding. This approach, says Drenkard, makes the “city’s underperforming tax collections all the more noteworthy” because sin taxes generally dampen consumption. Now, he says, school funding is vulnerable to that trend.

 

The Debt Ceiling and the Municipal Bond Market

Congress has adjourned for its August recess without addressing whether it will raise the debt ceiling. Lawmakers have until early October to decide what to do.

Unless it acts quickly, though, we could be headed for yet another debt ceiling crisis. That would not only throw the stock market into turmoil, but would also negatively impact the municipal bond market.

The Takeaway: Looking back at the 2011 debt ceiling crisis and resulting historic downgrade of the U.S. government’s credit rating, a recent analysis by Wells Fargo Securities found that both the treasury and municipal markets lost money, but then rallied.

While the author Natalie Cohen notes it’s hard to predict whether that will happen again, she says that the “municipal market is several steps removed from the political volatility in Washington, D.C.” To be sure, investors would still want safe investments in a volatile market. That factor, says Cohen, should help keep up demand for state and local municipal bonds, even during a potential federal fiscal cliff.

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*This story has been updated to refect Rhode Island's adopted budget.