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Friday, March 13, 2009

Will Corrupt, Incompetent and Bloated State Governments Assure Economic Disaster

This morning my email was flooded with many local and state watch dog groups warning me that our new Governor, Pat Quinn, is planning on raising the state's income tax a whopping 50%. Cook County, the state' largest county, is already battered by the massive sales tax increase instituted about six months ago. Unlike President Obama's dubious promise, these taxes affect every single citizen. If enacted, try and imagine what a tax increase would do to the economy of the state of Illinois if it's done into the teeth of the recession.

Unfortunately, the state of Illinois is NOT the only state currently raising their taxes. More troubling is the list of large states doing it. The biggest offender is the state of California which raised several taxes amounting to a $13 billion added bill for California residents.

The revenue proposal would raise the state sales-tax rate to 8.25 percent from 7.25 percent and boost vehicle license fees to 1.15 percent from 0.65 percent of the value of an automobile. The package doesn’t include a gasoline tax increase that was included in previous versions.

It also adds 0.25 percentage points to all personal income tax brackets for two years. A resident currently taxed at 8 percent will face an 8.25 percent levy. That increase would drop to 0.125 percentage point depending upon how much money California receives under the economic stimulus measure signed by President Barack Obama. The budget anticipates at least $7.8 billion in such federal funds.

Now, just try and imagine the economy of the state of California, already ravaged, and what will happen to it once taxes are raised into the teeth of a recession. The state of New York is looking at some radical tax increases.

Gov. Paterson's proposed $121 billion budget hits New Yorkers in their iPods - and
nickels-and-dimes them in lots of other places, too.

Trying to close a $15.4 billion budget gap, Paterson called for 88 new fees and a host of other taxes, including an "iPod tax" that taxes the sale of downloaded music and other "digitally delivered entertainment services."

"We're going to have to take some extreme measures," Paterson said Tuesday after unveiling the slash-and-burn budget.

The proposal, which needs legislative approval, did not include broad-based income tax increases, but relied on smaller ones to raise $4.1 billion from cash-strapped New Yorkers.

Movie tickets, taxi rides, soda, beer, wine, cigars and massages would be taxed under Paterson's proposal. It also extends sales taxes to cable and satellite TV services and removes the tax exemption for clothes costing less than $110.

The state of New Jersey is looking to add a punishing income tax increase only to those making $500,000 and more. The state of Maryland is proposing to raise the tax on alcohol. Michigan plans to raise its gas tax.

On and on it goes. Most states will face a budget shortfall in 2009. Most of these states are very unlikely to cut spending. As such, they will only be able to borrow, if it's allowed, or raise taxes. So, throughout the country tax payers will have all sorts of taxes go up: income, sales, property, alcohol, gas, etc. This will affect each state in its own unique way.

One thing that no one can get around is that raising taxes into the teeth of a recession is totally counter productive. It only ecacerbates the recession. The United States is a collection of fifty states. If New York, California, and Illinois lead a host of states all raising their taxes, it is a terrible burden on the economy of the entire country. It will be very difficult to see any sort of a recovery if state governments, of most of the large states, are ensuring that their own states see their economies worsen even more into the teeth of the recession with a plethora of new taxes.

Not every state is doing it for sure. So far at least, the state of Ohio for instance has not announced any tax hikes. The state of Florida is only looking at an alcohol tax hike. The state of Pennsylvania is proposing a very modest increase in the state's cigarette tax (about 10 cents a pack), but Governor Rendell is also floating the idea of allowing counties the ability to raise their own individual sales tax. One need only go to Cook County to see what effect that has on any local economy.

Still, while this won't be seen everywhere in the country, it will be seen in a lot of places. In each of these places, for the most part, these tax increases will have a localizing effect of perpetuating the recession. Of course, it will be damn near impossible to have any sort of recovery when California, New York, and Illinois move toward economic abyss. The recovery is hard enough without an endless stream of states and localities raising taxes to make things even more difficult.

This is happening for a number of reasons. In Illinois, a combination of corruption which lead to then Governor Blagojevich simply buying votes through things like near universal health care and free public transportation for seniors contributed to this budget short fall. In California, the state was bloated with all sorts of social services not to mention a massive debt piled on by its growing illegal immigration policy. Whatever the reason, almost no state showed any fiscal restraint throughout the beginning of the decade when revenues were much higher. As such, they now all face budget shortfalls with no cushion. Furthermore, it is rare to find the politician with enough courage to propose spending cuts. As such, states all over will raise taxes on their citizens as we enter the teeth of the recession. By doing so, all these governments have just made the task of overcoming the recession just that much harder.

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