The Week in Public Finance: Trump's Impact on Trade, a Predatory Lending Loophole and More
A roundup of money (and other) news governments can use.
Trump's Impact on Trade
Sticks and stones aside, it turns out words really can hurt: President Trump’s protectionist rhetoric over the past year may be leading to lower tax revenue for border states.
The findings, laid out this week by Fitch Ratings, suggest that the president’s foreign policy agenda is cutting cross-border travel. Trump in January pulled the U.S. out of the fledgling Trans-Pacific Partnership. He has also said he wants to renegotiate the North American Free Trade Agreement (NAFTA).
Passenger crossings at several ports-of-entry were down year-over-year, particularly in Alaska, Idaho, Texas and Washington state. Notably, vehicle passenger traffic either fell or stagnated at three of the four largest ports-of-entry -- San Ysidro and Otay Mesa, Calif., and Laredo, Texas. Along the northern U.S. border, passenger vehicle traffic at Michigan’s three major border crossings all showed signs of softness.
Lower cross-border traffic, says Fitch, impacts sales and excise tax revenues collected in border communities.
The Takeaway: The reduced border crossings could be a sign of things to come if Trump implements protectionist policies. “Although reduced border crossings themselves are not credit negative, these fluctuations are an indicator of what border traffic declines might look like -- on a larger scale -- if NAFTA negotiations break down,” says Fitch’s Michael D’Arcy. “A re-imposition of tariffs would depress border traffic and sales tax receipts, factors which represent a credit risk to border municipalities, particularly in Texas and New Mexico.”
The Rent-a-Bank Threat
A bill is making its way through Congress that consumer protection organizations say could create a workaround in the 15 states that cap interest rates for short-term loans.
The so-called Madden bill in the House is in response to a court case last year that revolved around interest rates charged on bank credit card debt that was sold to a non-bank collection firm. Banks are subject to the federal National Bank Act, which does not cap interest rates. But non-bank institutions are subject to state laws and rate caps.
The ruling found that non-bank lenders couldn’t charge interest rates above a state’s cap, even if they were buying debt from a bank that had been charging higher rates. The Madden bill and its companion in the Senate, sponsored by Virginia Democrat Mark Warner, is billed as a fix to the court ruling and would allow non-banks to keep the higher rates.
The Takeaway: While the bill is purportedly in response to credit card debt, it would also apply to payday and peer-to-peer lenders, such as as LendingClub, Prosper and LendUp. Consumer protection organizations warn that the bill would create a loophole for payday lenders to exploit. There’s theoretically nothing, they argue, to stop payday lenders from partnering with a bank to originate a loan, buy the loan from that bank and then keep the high interest rate.
The Center for Responsible Lending calls this a “rent‐a‐bank” scheme, and is one of a dozen groups to lobby Congress against the bill. The legislation, they warn, "would open the floodgates” to high interest rate lending, even for the more than 90 million Americans who live in states with interest rate caps.
A World Without Property Taxes?
Earlier this month, Pennsylvanians approved a ballot measure that could eliminate homeowners’ property taxes. Currently, local governments can exempt about half of the assessed value of homes from the property tax rolls. The measure means they could exempt up to 100 percent.
What does that mean for this vital source of local government revenue?The following chart from Moody’s Investors Service shows to what extent local budgets could be blown open if the residential property tax were taken away. The numbers below don’t separate commercial from residential property taxes, but smaller cities like Erie tend to be more dependent on residential.
The Takeaway: Moody’s notes that school districts, which rely heavily on local property taxes, are left particularly vulnerable by the vote. The firm’s analysis also predicts that the lost property tax revenue will be replaced by hikes in income or sales taxes. That could lead to more financial instability because those two tax streams are more volatile in an economic downturn than are property taxes.
On the bright side, there are a few more hurdles to overcome. First, the General Assembly has to adopt “enabling legislation,” a law that will determine an alternative source of revenue to replace lost property taxes. After that happens, local governments could simply do nothing or reduce property taxes and adopt the alternative tax revenue option.