The case Romney made to Standard & Poor's is a far cry from anti-tax absolutism. Taxes key to Mitt's '04 pitch to S&P

Gov. Mitt Romney lobbied the credit ratings agency Standard & Poor’s in 2004 to raise his state’s credit rating in part because Massachusetts had raised taxes during an economic downturn two years earlier.

The claim was part of a presentation to the ratings agency obtained by POLITICO under a state freedom of information law from the Massachusetts Executive Office of Administration and Finance. The Nov. 4 presentation, stamped “confidential,” helped persuade S&P to raise the state’s grade and handed Romney the perfect talking point for last week’s humiliating national downgrade by the same agency.


“When I was governor, S&P rewarded Massachusetts with a credit rating upgrade for our sound fiscal management and the underlying strength of our economy,” Romney boasted. “That didn’t happen by accident. The president’s failure to put the nation’s fiscal and economic house in order has caused a massive loss of confidence that resulted in an embarrassing downgrade.”

But Romney’s case to S&P is a far cry from the anti-tax absolutism of the Republican Party he hopes to lead. Indeed, it bears a far closer resemblance to the right-of-center grand compromise rejected by House Republicans this year — dismissed because it would include new taxes and end tax breaks President Barack Obama described as “loopholes” — or the more modest compromise that passed, than to the Cut, Cap, and Balance plan Romney “applauded.”

The presentation to the ratings agency reveals that Romney’s administration made the case to Standard & Poor’s that his state was creditworthy because of both spending cuts — the current preferred GOP method — and new revenues, including fees he imposed and tax “loopholes” he closed. The presentation also prominently cited a controversial set of tax increases in the summer of 2002, which Romney, then a candidate, had opposed.

The documents, 27 pages of confidential “discussion materials” (Part 1, 2, 3, 4) and a 50-page presentation focused on the 2005 budget, don’t make clear whether Romney participated in the presentation. Eric Kriss, who served as Romney’s secretary of administration and finance, said he believed Romney and his top aides had delivered the presentation on a conference call with the ratings agency analysts.

Romney’s spokesman then and now, Eric Fehrnstrom, said he wasn’t sure whether Romney was present, and current Massachusetts officials were unable immediately to say, though it would be typical for the executive to star at such a high-stakes meeting.

And Romney said in a radio interview Tuesday that he was proud of his personal involvement in the process, in contrast to Obama. "The president really ought to personally sit down and meet with S&P. I did that when I was governor; I met with the ratings agencies and talked about our future and tried to instill confidence in our future because, look, how they rate our debt and how they rate our future as a nation will affect the interest costs that we end up paying and will affect homeowners and borrowers all over the country," he told the San Diego station KCBQ.

The agency was duly impressed: “Over the last few years, Massachusetts has taken certain actions that have reduced budget uncertainty, reined in spending, and prudently managed resources during a difficult national economic slowdown,” Standard & Poor’s said in the March 2005 report in which it upgraded Massachusetts to AA from AA-.

The 2004 presentation cuts to a truth about the ratings that has been obscured in the current debate: While raters may have some views on economic policy, their basic concern is that government income is on track to pay government obligations. The question of whether higher taxes or lower spending will produce that outcome is secondary to their evaluation.

“When you’re talking to ratings agencies, you are trying to emphasize your fiscal strengths irrespective of what might be your long-term policy,” said Kriss, who said Romney had been “vehemently opposed” to the tax increases despite their role in balancing the budget.

Many observers said Romney’s broader fiscal policy fit that technocratic, budget-balancing mold.

The one-term governor was “focused on balancing the budget and creating surpluses instead of spurring economic growth,” said David Tuerck, executive director of the anti-tax, anti-regulation Beacon Hill Institute, who added that while Romney had cut some taxes, one of his greatest accomplishments was building up a large rainy-day fund. “He erred in the direction of building up revenues in the stabilization fund in place of moving toward a more robust policy of economic expansion.”

Romney, in his presentation to S&P, touted the growth of that fund, and the combination of emergency spending cuts and new revenues he’d used to fill it.

Massachusetts “successfully managed revenue and expense positions” during a downturn in fiscal years 2002 and ’03, the presentation said. “The commonwealth acted decisively to address the fiscal crisis.”

The claims are followed by a chart indicating that the state stayed solvent as tax collections plunged: “July 2002 — Legislation to increase tax revenue” by more than $1 billion in each fiscal year; a tax amnesty; and “tax ‘loophole’ legislation” worth $269 million.

The document also noted that the fiscal 2004 budget “increased fees to raise $271 million yearly,” a move Romney’s critics denounced at the time as a stealth tax.

New revenues amounted to a larger sum than the emergency spending cuts of about $500 million that Romney touted, but they weren’t the only element of the case for a ratings upgrade. Romney also argued that the state had succeeded in shifting school construction and other costs onto a more sustainable fiscal footing, and that he’d avoided some of the questionable one-shot measures — like borrowing against anticipated tobacco lawsuit payments — to which other states resorted.

Romney’s aides, asked about the presentation, pointed out that Romney, once he took office as governor in 2003, never signed a tax increase, but instead passed on most of the fruits of an economic boom to taxpayers in the form of tax cuts.

“Gov. Romney balanced the budget primarily by cutting waste and inefficiency, by streamlining and economizing, and by reducing nonessential state spending,” said Romney spokeswoman Andrea Saul in an email. “Obama was talking about raising taxes.”

“At the time of Massachusetts’s upgrade, [Romney] clearly said he was proud to have done it without raising taxes and he cut taxes 19 times as governor,” she said.

Romney’s aides also argued that Romney’s loophole closures were more authentic than Obama’s. While some of the tax breaks Obama would end are policy choices aimed at boosting specific industries, Romney targeted what his allies say amounted to mere corporate trickery — banks, for instance, reclassifying themselves as real estate companies in order to be taxed at a lower rate.

“Loophole closings are not tax increases. Companies sometimes use aggressive accounting techniques to lower their tax liability in ways that were never intended by the law,” said Saul. “When that happened, the state closed the loophole. That’s called tax enforcement.”

Local analysts didn’t buy that all of the “loopholes” were that straightforward.

“He, like everybody, when they’re raising corporate taxes, calls it ‘closing tax loopholes,’” said Michael Widmer, president of the business-backed Massachusetts Taxpayers Foundation. “A couple of these were real loopholes but by and large they were increases in corporate taxes by changes in tax policy.”

That dispute is relatively common in fiscal policy. Harder to square with Romney’s public rhetoric is the presentation’s blunt claim of credit — on behalf of the Commonwealth, if not Romney — for the deeply contested 2002 tax increase. Faced with declining revenues, the Democratic-controlled Massachusetts Legislature passed a package worth more than $1.1 billion dollars in new taxes. They suspended planned cuts to the personal income tax, sharply raised long-term capital gains tax rates, and added a 75-cent tax to each pack of cigarettes.

The state estimated at the time that the hikes would cost the average non-smoking resident $317 the following year, while costing a pack-a-day smoker $592.

The measure passed over the veto of acting Republican Gov. Jane Swift, and helped force her out of a race for a full term. Romney ran a sharply anti-tax campaign, benefiting from public anger at the increases, though he opposed as too radical a ballot measure that would have abolished the state’s income tax.

Boston Globe columnist Joan Vennochi predicted in 2002 that Swift’s failure to stop the tax increases would, in the end, appear as a favor to Romney: “He can say he opposes the [income tax freeze] and the new taxes; if elected he will benefit from both.”

Emily Schultheis contributed to this report.