Standard & Poor’s Rains on Candidate Parades

Standard & Poor's "negative" rating on Virginia's AAA bonds could squelch candidates' plans for spending sprees and tax cuts.
Standard & Poor’s “negative” rating on Virginia’s AAA bonds could squelch candidates’ plans for spending sprees and tax cuts.

When you run for governor in Virginia, you have to make promises, and when you make promises, the only ones that cut through the media clutter are vows to cut taxes or launch expansive new spending programs.

Thus, this year, Republican candidate Ed Gillespie has rolled out a plan to cut taxes by $1.25 billion (assuming tax-revenue forecasts allow it), Democrat Ralph Northam proposes to eliminate the sales tax on groceries at a cost of $500 million, Republic Corey Stewart pledges to abolish the income tax entirely, and Democrat Tom Perriello has touted spending proposals that would jack up spending by $1 billion. Republican Frank Wagner wants to ramp up transportation spending, but he at least proposes a gasoline tax increase to pay for it.

Amidst all these promises, Standard & Poor’s Global Ratings has issued a sobering warning. While the firm affirmed Virginia’s AAA bond rating, it has dialed back its outlook from “stable” to “negative,” writes Jeff Schapiro in the Richmond Times-Dispatch.

Schapiro paraphrases Secretary of Finance Ric Brown as saying:

S&P is worried about two things, both of which are inextricably bound: the cash cushion the state maintains against a reversal in the economy and doubts about Trump-era federal spending, which would significantly increase defense spending — and Virginia’s nagging dependence on D.C.

S&P cited the big withdrawal — about $600 million — from the so-called rainy day fund that Gov. Terry McAuliffe, a Democrat, and the legislature used to help close a $1.5 billion hole in the budget attributed to sequestration.

With a balance in the emergency account of only $281 million, the credit agency views “this as a low level of reserves relative to similarly rated peers and a situation which could weaken the commonwealth’s ability to respond to economic and financial downturns in the future,” said Brown.

Concern about the draw-down of the rainy day fund is easy enough to understand. Less comprehensible is S&P’s worries about the Trump budget, which includes a proposed $50 billion in increased defense spending. The budget may or may not be good for the nation (we can debate that another time), but it would be unquestionably good for Northern Virginia’s and Hampton Roads’ defense-heavy economies.

Whatever… S&P has its reasons. And state legislators are paying attention. When Schapiro asked Chris Jones, R-Suffolk, chairman of the House Appropriations Committee, if tax cuts and spending hikes are justified, he replied: “From my perspective, I have an obligation to the commonwealth to have a structurally balanced budget that is conservative and prudent.” In other words, Jones is extremely cautious regarding any big spending and tax-cutting plans.

Update: In a statement released today, Gillespie is using Standard & Poor’s announcement to double down on his tax plan. He regards his 10% across-the-board cut to state income tax rates as part of the tonic — along with changes to education and workforce training, regulatory reform and a new approach to economic development — needed to “spark the natural, organic economic growth our Commonwealth needs.”

I still like Gillespie’s tax plan, but spending pressure from Medicaid, K-12 schools, higher-ed, mental health and other sources is not abating. The news from S&P reduces Virginia’s margin for error.

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11 responses to “Standard & Poor’s Rains on Candidate Parades”

  1. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    The Commonwealth of Virginia and Standard&Poor both need to Get a Life. Their problems reside not in the stars but in themselves.

    Standard&Poor needs to crawl out of Plato’s Cave into the light of reality. It’s is a Dinosaur living in an age of meteor strikes. It needs to die so others have a a better chance to survive.

    Northern Virginia has got to stop feeling sorry for itself and blaming others for its own failure to solve its own self induced problems that are now killing its golden goose, location.

    Neither the Federal Government nor sequestration are driving Northern Virginia into the ditch. Northern Virginia has been driving itself into the ditch and now over the cliff for the past 40 years, madly building itself into long obvious gross physical obsolesces. For reasons of short sighted greed by a few leaders, Northern Virginia, is now physically dysfunctional. Absent a massive fix of the problem, any effort at prosperity now will kill Northern Virginia. Now, its chocking itself to death trying to get people where now they must go to live, thrive, and grow.

    Gillespie’s just released statement might be a reason for hope, however faint. He might even understand the real problem.

  2. Steve Haner Avatar
    Steve Haner

    I have read only the news stories, but I suspect Standard and Poor’s is more worried about Virginia’ anemic economic growth rate than it is about any potential tax changes, and also frets over our continued reliance on federal spending. Schapiro was drawing his own shaky conclusions for his own partisan reasons.

    A serious evaluation of any or all of the tax proposals floating around is impossible because so far they are sketchy on details and they are not yet placed in the very important context of possible federal tax changes. If Virginia amends its tax code, and how, will depend about 150 percent on whether Congress really does anything on taxes and federal spending. Only once that is known can we really look at ways to put VA ahead of the pack again. A personal income tax rate cut might not be the best thing after all.

    But the primary is June 13 so the temptation to promise something is strong. No Car Tax! worked politically and generals like to re-fight the last war. Both parties should have learned some lessons from that.

  3. LarrytheG Avatar

    If promised tax cuts are not linked to spending cuts – then it’s just more bogus supply-side/Laffer theory idiocy –

    virtually all of govt spending is on salaries.. and when you cut spending – you cut employees. Some folks may think that the state and local govt have employees to cut – but need to spending reduction to force it.

    but that laid off employee is also one less person buying stuff in the economy unless they just find a private sector job … which means the tax cut money just gets redirected to the private sector… it’s not a net new private sector job. It is, at best, a trade for perhaps a more productive employee but not necessarily if the re-directed money goes for more restaurant meals or cruise boats or lotto, etc.. It just means the taxpayer gets more choice of what to spend the money on.

    so we could cut the gasoline tax, cut VDOT and cut roads … and let those VDOT employees go find other work in the private economy but I suspect more than a few people would not find that to their liking. So those folks might think that cutting MedicAid or prison guards, or Fairfax County teachers would be more to their liking – and thats’ the fly in the ointment that makes promises of tax-cuts without specifying what spending cuts so effective and so cynical.

    And in a state that already can’t fully fund it’s pension obligations.. it’s just downright reckless and irresponsible and all the more so coming from someone who promotes himself as a fiscal conservative.

    And doing that in a state that itself is hostage to the Federal Govt deficit spending is.. what can I say? we’ve heard this tune before. It’s one that so-called Conservatives love playing over and over and it does really work well with the voting rubes in the states rural areas – the same folks who rely on MedicAid, Social Security Disability and other govt “help”.

    Give the GOP credit – they KNOW their voters!

    1. djrippert Avatar

      “virtually all of govt spending is on salaries’

      So, salaries > entitlements?

      1. LarrytheG Avatar

        For Medicaid yes.. the money goes to pay Medical Providers..

        TANF and similar are cash transfers.. that then go to pay for food and other – which basically pays salaries to those who provide the goods and services.

        so yes.. I need to amend my words to make that more clear.

    2. Steve Haner Avatar
      Steve Haner

      I have always said that businesses don’t pay taxes, only people pay taxes. And it is true. I guess it is a reasonable corollary that taxes can only be spent on people. Money ends up in somebody’s pocket. But along with salaries and wages, Larry, I would include transfer payments and interest payments.

  4. djrippert Avatar

    So, we could hedge the first year of Gillespie’s tax cut with one half of the UVA trust fund built up secretly? If I were Gillespie I’d change my approach. I’d say that I will cut taxes by $1.25B in my first year in office. If increased economic activity hasn’t added to the state coffers then I’ll take the difference from the UVA slush fund and transfer it to the general fund. Next year, I’ll do the same thing. If it hasn’t worked after 2 years I’ll raises taxes back to where they were.

  5. LarrytheG Avatar

    just to get a handle on how much a billion dollars is .. if those were govt jobs.. teachers, police, etc.. at 50K a pop .. that’s 20,000 jobs.

    Now, the other side of the coin.. 20K divided by 133 Va jurisdictions is about 150 jobs per jurisdiction.

    for small rural it would be a dozen or two.. for places like Fairfax, hundreds if not thousands.

    so how much is a billion in tax cuts for the average 2.5 person family in Va? It’s about $300.

    1. djrippert Avatar

      So, I guess UVA’s slush fund is 20,000 jobs for 2 1/2 years. What do you want more – the jobs or UVA to move a couple of notches up the rating scale?
      I’ll take the tax cut and the slush fund.

  6. LarrytheG Avatar

    I’d prefer that UVA keep it’s slush fund and send their obviously competent folks to train Virginia how to keep an adequate rainy day fund and fully funded pension system rather than some faux-Conservative fool promising tax cuts that will “pay for themselves”.

  7. TooManyTaxes Avatar

    While I question whether an income tax cut would pass the General Assembly, it’s very consideration would cause great pain to the editorial board of the WaPo and, hence, should be considered.

    An income tax cut would also help narrow the unfairness of Virginia’s school aid formula to NoVA residents by taking away more money that could be used to subsidize excessively low real estate taxes throughout much of the state.

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