Lawmakers want to anchor down income tax rate, but worries loom over bond ratings

Ohio Senate Republicans want to anchor down the nearly 40-year low on the state’s income tax rate, though worry has settled in over blowback from credit agencies.

Senate Joint Resolution 3, if approved by a supermajority of lawmakers and a majority of voters during the 2020 election, would amend the state Constitution to require supermajority votes in both the state House and Senate to raise income taxes in future years.

However, concerns about how the three major credit ratings agencies would react to the structural change could torpedo the bill, which lists several Senate Republican leaders as cosponsors.

“The thought that our bond rating could be impacted in a negative way gives me pause,” said Sen. Louis Blessing, R-Colerain Township, and vice chair of the Senate Ways and Means Committee.

Analyzing the bill for lawmakers, the Legislative Service Commission warned restricting the legislature’s ability to generate revenue could be a factor in the reduction of the state’s bond rating, citing guidance from the Standard & Poor ratings agency.

A reduced bond rating would signal greater risk to investors and could be associated with higher borrowing costs on bond funded projects.

Speaking to the Senate Ways and Means Committee on Tuesday, Zach Schiller, research director with Policy Matters Ohio, a progressive public policy research group, said states have seen their ratings adversely affected upon implementing such legislation.

“Why would Ohioans want to pay higher interest rates and limit our ability to make new investments?” he said.

Schiller argued the real intent of the resolution is to cement into place an “upside down” tax code that disproportionately favors wealthy people over the lower and middle class. This sparked a heated back-and-forth over fiscal policy at large between Schiller and Sen. Bob Hackett, R-London.

Despite the dustup, Hackett said in an interview after the hearing that he’s not sure how he’ll vote on the resolution, or what effect the resolution could have on the state’s bond rating.

“I understand what he’s [the sponsor] trying to do. I believe in that, but 75%. That’s hard to get,” Hackett said. “And would it break down the system? I don’t know.”

Assuming the constitutional change is enacted, an income tax hike would require 22 of 33 votes in the Senate and 66 of 99 votes in the House.

David Hitchcock, senior director of S&P Global Ratings, said a supermajority legislative requirement would raise the legislative hurdle to increase revenues and constrains the tolls the state has available. 

However, Ohio’s diverse revenue base and “history of conservative budgeting” serves as a strong offset to any change, he said. 

Fitch Ratings Group, however, doesn’t weigh the supermajority as heavily as Moody’s and S&P.

“In and of itself, it wouldn’t trigger a rating change,” said Karen Krop, Fitch’s senior director and lead analyst for the state. “But to the extent it makes it harder for a state to manage its budget, that’s where we might see an impact from a ratings perspective.”

Sen. Dave Burke, R-Marysville, introduced the bill to the committee late last month. At the time, he said the constitutional change would steer lawmakers toward cutting spending instead of raising taxes when the economy cools.

When asked by Sen. Vernon Sykes, D-Akron, if the resolution would downgrade Ohio’s bond rating, Burke said he didn’t think it would, but had not spoken to the ratings agencies about it.

Ohio’s income tax rates have trickled downward since 2005. In 2018, income tax rates hit their lowest level since 1982.