In yesterday’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 to be paid for. The question that he essentially poses is this; assuming we are going to make the the $2 billion capital investment, can the state make the necessary payments to pay it off without, raising taxes? 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. My point here is not to take issue with Mr. Heath’s arguments.
But 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 by 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 will 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 pad back and the money will have to come from someone. That someone for state government is the taxpayer.
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 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 next 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 proposal going forward.