Constitutional Amendment That Could Raise Borrowing Costs is Advancing through the Legislature

Thursday, February 20, 2014 at 11:23 AM by

A constitutional amendment that would make tax reform more difficult, could deepen recessions, and potentially make it more expensive for the state to invest in building projects is making its way through the Wisconsin legislature.

The proposed amendment would change the state’s Constitution to require a two-thirds majority of both houses of the Legislature to pass an increase in the rate of the state individual income tax, corporate income tax, or sales tax. Under this amendment, the Legislature could raise tax rates without a supermajority if voters approved the change in a statewide referendum.

This proposed amendment was approved by the Assembly earlier in February, and is now under consideration in the Senate. A proposed constitutional amendment requires passage by two consecutive legislatures and approval by voters to be enacted.

If implemented, this constitutional amendment could cause a number of problems, including making it more difficult to reform the tax system, limiting options for cushioning the effects of a recession on Wisconsin’s families, and causing fees to rise. Read more here for reasons why this proposed amendment is harmful and unnecessary.

A supermajority requirement in the state’s constitution could also raise state borrowing costs, making it more expensive to maintain roads and bridges and finance other building projects. A supermajority requirement risks a downgrade of Wisconsin’s credit rating, according to a Wisconsin Budget Project fact sheet released today. Credit rating agencies frown on supermajority requirements, and a lower credit rating could make it more expensive for Wisconsin to issue routine debt for transportation initiatives and other building projects by requiring the state to pay higher interest rates to creditors.

Rating agencies give the highest scores to states with the flexibility to raise taxes if needed. For a state to receive the highest score, the credit rating agency Standard and Poor’s requires that:

“The state has autonomy to raise taxes and other revenues (rate and base); in addition, there is no constitutional constraint or extraordinary legislative threshold for approval (a simple majority requirement for approval of new taxes, for example) and state policymakers have, in our view, a proven track record of implementing tax increases as one of the alternatives to address budget imbalances.”

States with significant hurdles to raising taxes, including constitutional amendments, receive a lower score, and risk a lower credit rating and the higher borrowing costs that go along with that.

Here are other recent blog posts we’ve done that describe the negative effects this proposed amendment would have on state finances:

Letter Enumerates Unintended Consequences of Proposed Constitutional Constraint on Taxes (February 16) — A broad range of groups sent a letter to state Senators, asking them “not to tie the hands of future lawmakers by putting a supermajority requirement into the state constitution.”

Unnecessary Constitutional Amendment Would Limit Budget Options (January 23) — Supporters argue that supermajority requirements keep state taxes lower than they otherwise would be. However, history shows this not to be the case.

Supermajority Amendment Puts Wisconsin’s Future at Risk (December 23) — The amendment would limit future budget options and make it more difficult to manage the state’s finances.

Tamarine Cornelius

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