In Wednesday’s Wilmington Star, state budget director Andrew Heath explains why the $2 billion Connect NC bond, which is on the ballot next Tuesday, will not require a tax increase. The question that he essentially poses is this: assuming that we are going to make the $2 billion capital investment, can the state make the necessary payments to pay it off without raising taxes, and, presumably, without cutting other spending? He argues that, given the current tax law and reasonable assumptions about the revenue that will be raised under that law, this can easily be done. As Heath explains it:
Aggressive debt retirement, strong revenues, and a conservative bond proposal well within the state’s credit capacity is why the Connect NC bond will not require a tax increase today or in the future.
He goes on to point out that:
The Connect NC bond proposes taking on only half of the debt we can conservatively afford. A recent report by the state’s Debt Affordability Advisory Committee, a nonpartisan oversight committee, demonstrates that even with the issuance of the $2 billion Connect NC bond, North Carolina could comfortably borrow an additional $2 billion over the next ten years and still keep its hard earned AAA rating
My point here is not to question the soundness of Mr. Heath’s arguments. In fact, I assume they are correct. But this is not the end of the story when it comes to implications of this, or any, bond proposal for tax policy.
Instead of asking whether taxes will have to be raised to pay back the bond, what if we asked a somewhat different question. As an economist, my first thought always turns to the question of opportunity costs. Clearly, noting that taxes will not have to be raised in order to pay for the bond doesn’t mean that the $2 billion, plus interest, is free money. The opportunity cost question regarding the impact of the bond on taxes is not whether they will have to be raised but whether taxes have to be higher than they otherwise would have to be if the $2 billion wasn’t spent, regardless of how it’s financed. The answer to this question is clearly yes. If the bond is passed, the $2 billion plus interest will have to be paid back and the money will have to come from someplace. That someplace for state government is tax revenues.
What this means is that, for the voter, the question that should be considered is not whether the bond will require a tax increase. The bond will have to be paid back and the money will come from taxes — if not higher taxes, as Heath argues, then taxes that are higher than they would have to be without the additional spending. That’s just arithmetic. The question that the voters should be pondering between now and Tuesday is, are the benefits from the projects that the bond money will be spent on worth the opportunity costs? Will there be a positive return on investment relative to other uses of the money, either by government or the taxpayers if their taxes were reduced?
My point here is not to argue for or against the bond but to introduce what might be called "the economic way of thinking" about costs and benefits into the discussion. In doing so, hopefully I am offering the voter an alternative way of assessing not only the tax implications of the Connect NC bond but more importantly the net benefits of this and all such bond proposals going forward.
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