Voter Approval of Tax Hike Could Ha4rm State Bond Rating

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If Oklahoma voters amend the state constitution so that any tax increase would be subject to voter approval, the state's general obligation bond rating could suffer, bond analysts said.

"I'm not personally taking a position on whether this is something the state should do or not, but it could have some impact on our credit rating," said Stan Provus, Oklahoma State Bond Advisor.

Pending in the Oklahoma Supreme Court is an initiative petition for a state question to subject all tax increases to a popular vote.

Timothy Tattam, vice president of Standard & Poors, a New York City bond rating firm, said, "When you have another barrier for approval of something, obviously it's going to make it a bit harder to get that approval. It's going to raise some doubt and make it more difficult to plan for, and that can't be considered positive in the evaluation of credit."

The unfettered ability for lawmakers to raise taxes affects the state's credit rating because in issuing general obligation bonds, the state gives a full faith and credit pledge, Provus said.

According to the Oklahoma Constitution, legislation must be enacted to authorize the debt, indicating how the proceeds will be used and how a direct annual tax will be collected to pay for the bonds.

"In Oklahoma, our outstanding general obligation bond issues are really double-barrel bonds," Provus said. "They are directly backed by the cigarette tax. We currently pledge 13 cents of 23 cents a pack to general obligation bonds."

The second barrel is the state's full faith and credit pledge, which Provus said essentially commits its unlimited taxing power.

"Should that cigarette tax not be sufficient, we are pledging to service our debt with other tax sources of the state," he said. "If that hypothetically means raising taxes to get that money, you are obligating yourself to do it.

"I don't want to be perceived as arguing against this tax initiative," he said.

"The voters have to decide what's best for them, sometimes regardless of credit ratings."

Provus said it was unclear to him how a law that said voter approval was needed to raise taxes would work in the context of existing full faith and credit pledges on bond issues.

"Cigarette taxes have been declining here over the last several years, and if you found you really needed to raise additional revenue and you had to raise taxes to do that, you're pledging to the bondholder that you're going to do it," he said.

"On the other hand, if you have to go to the voters, that to me would dilute a full faith and credit pledge. In a sense, you'd be drawing back on your earlier promise.

"I guess it's not clear to me in this current context how any law that required voter approval for any tax increases would work. …