Supermajority Amendment Could Lead to Higher Borrowing Costs

February 20, 2014

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A proposed constitutional amendment that would restrict state revenue could make it more expensive to maintain roads and bridges and finance other building projects by raising the state’s borrowing costs.

The amendment, approved by the State Assembly, would require a two-thirds “supermajority” vote in both houses of the legislature to increase tax rates for the state individual income, corporate income, or sales tax. Constitutional amendments must be approved by two consecutive legislatures and by citizens at the ballot box before going into effect.

Credit Rating Agencies Frown on Supermajority Requirements

A supermajority requirement to raise tax rates risks a downgrade of Wisconsin’s credit rating, which the rating agency Standard and Poor’s currently puts at “AA,” meaning Wisconsin has a “very strong capacity to meet financial commitments.” 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, 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.

In downgrading Nevada’s credit rating, Moody’s rating agency noted that Nevada’s “supermajority requirement to raise taxes presents a hurdle to achieving balance on an ongoing basis.” Moody’s also cited Arizona’s supermajority requirement as a reason for a credit rating downgrade, noting that “limits on the state’s financial flexibility” resulted from “a requirement for a 2/3 majority vote of the state legislature or vote of the people to increase revenues.”

A Credit Rating Downgrade for Wisconsin Would Lead to Higher Borrowing Costs

States with lower credit ratings face higher borrowing costs. After Illinois’ credit rating was downgraded in 2013, state taxpayers have paid $18 million more each year in interest for a single bond sale compared to higher-rated states, according to some estimates.

If Wisconsin had a lower credit rating, taxpayers would pay more in interest costs, and there would be fewer resources available for investments to improve the state’s workforce, quality of life, and economic competitiveness.