Indiana: Connecting the Dots Between Tax Cuts and Bond Ratings

From Indiana, yet more evidence that there's no free lunch. Earlier this year, state lawmakers enacted a property tax cap law which limits the tax on a residential property to 2% of its assessed value. The cap, oddly called a "circuit breaker" although it has virtually nothing in common with the property tax circuit breakers used in most other states, will also apply to business properties starting in 2010. For Indiana local governments, this means a fiscal "perfect storm," with tax caps biting at the same time that the state has cut aid to local governments in order to balance its budget.

No big deal, say Republican House leaders. Ways and Means Chairman Jeff Espich asserts that this one-two punch to locals is "not a real problem." But bond rating agencies are dissenting from this view. As the Indianapolis Star reports (sorry, no link):

Bond rating agencies, such as Moody's Investors Service and Standard & Poor's, are viewing the new law negatively because it also caps property taxes that pay off loans, thus limiting the pool of money available to pay off debts. The negative outlooks from rating agencies already are starting to drive up interest rates and the cost of borrowing. Southwest Allen County Schools was one of the first affected by the new law and a higher interest rate. The district will have to pay an additional
$97,000 in interest on $5.7 million in bonds sold last week to pay for additional elementary school classrooms. That was after Moody's gave them a lower-than-expected bond rating, citing the new circuit breaker law. In addition, the district couldn't buy bond insurance to insure its loan because only one company would offer a quote, and the premiums were too expensive.

At the federal level, it's a bit easier to pretend that unfunded tax cuts have no consequences. But at the state and local level, tax cuts do have to be paid for. And the easy tax-cutting choices made by state lawmakers just two months ago are already boomeranging back to hit local leaders.