The Week in Public Finance: States Vulnerable to NAFTA Changes, New Amazon Taxes and a Credit Ratings Spat

A roundup of money (and other) news governments can use.
by | February 3, 2017

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Where a Change to NAFTA Could Hurt the Most

When it comes to trade, a handful of states rely heavily on Canada. That relationship could significantly change if President Trump follows through on his intention to renegotiate the North American Free Trade Agreement (NAFTA).

In an analysis, RBC Capital Markets’ Chris Mauro looks at which states are the most exposed to changes. As it turns out, half of Canada’s exports wind up in the U.S., and 35 states have Canada as their top export destination. Michigan and Illinois are the top destinations, absorbing 16 percent and 11 percent, respectively. Meanwhile, more than two-thirds of North Dakota’s goods land in Canada and nearly half of Maine, Michigan and Ohio’s exports are sent there.

The Takeaway: Trump has called NAFTA a bad deal for the U.S. Although no specifics have been outlined, it’s safe to assume that he would promote more protectionist policies. In his analysis, Mauro warns that “the risk that Canada implements countervailing duties or that the U.S dollar appreciates significantly would severely affect the competitiveness of these U.S. states.”

Mauro also questions whether a NAFTA renegotiation would protect U.S. jobs. Noting that 11 states have a disproportionate dependence on trade with Canada, "it is hard to conceive," he said, "how disrupting established trade flows between the two countries would improve the 'balance' that the protectionist policy hopes to achieve."

Dealing With Amazon

This week, Amazon began remitting sales taxes on purchases made in five states: Mississippi, Missouri, Rhode Island, South Dakota and Vermont. Come March, Wyoming is scheduled to start receiving Amazon tax revenue as well. In fact, more than three-quarters of states and the District of Columbia now have some kind of agreement in place with Amazon to collect sales taxes.

Current law says that Amazon only has to remit sales taxes in states where it has a presence. But since California renegotiated a deal with Amazon to collect them in 2012, states have followed suit.

The Takeaway: Amazon previously had a reputation for resisting sales tax efforts. But over the past year, Amazon has notably changed its tune and is approaching governments on its own. Finance officers in states and D.C. report that it was Amazon who made the first move in proposing new sales tax deals. The deals now in place in roughly 39 states amount to millions of dollars in more revenue. In its first year of implementation, for instance, California collected $260 million from Amazon sales alone.

The company's new push to make deals comes at a time when states are mounting legal challenges to the current sales tax law prohibiting them from collecting on all online purchases. Louisiana Revenue Secretary Kimberly Robinson recently said the U.S. Supreme Court decision not to hear a challenge to a Colorado sales tax law is likely what spurred Amazon to collect in Louisiana. The law requires out-of-state companies selling products to Coloradans to tell them they are required to pay the state’s 2.9 percent sales tax on their purchase. Robinson believes the ruling will prompt other remote retailers to do so as well.

A Ratings Fight Over Chicago Schools

In a highly unusual move, Fitch Ratings this week issued a credit analysis of Chicago Public Schools (CPS) that directly attacked a previous analysis by competitor Moody’s Investors Service. In a bristly toned release, Fitch disputed Moody’s earlier assessment that the financially troubled school system could “elect to use unrestricted general state aid” to support school operations instead of debt service and could pledge property tax revenue to pay that debt.

“Unless by 'elect' Moody's is referring to a successful ballot referendum,” Fitch said, “a plain reading of the Act indicates this is not the case.”

A spokesman for Moody’s declined to comment on Fitch’s analysis.

The Takeaway: While it’s unusual for one rating agency to directly call out another, agencies disagreeing with each other in their assessments of government financial health seems like the new normal.

The divergence is largely a byproduct of the fact that many governments have stopped buying an AAA rating for themselves through bond insurance. Before the financial crisis, roughly half of bonds issued in the municipal market came with insurance. But then the bond insurance market collapsed and now less than 5 percent of bond issues have it. Without the cloak of insurance, governments have to rely solely on their credit quality -- and that quality can be subjective.

Hence, the disagreement among agencies. In fact, about 40 percent of municipalities that have ratings from different agencies have what’s called a split rating. CPS, for example, is rated by four agencies and has four different ratings.

This disagreement means also that those who buy government bonds are seeking out more direct relationships with issuers so they can judge credit quality for themselves.

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