WSJ: States Slammed by Tax Shortfalls

Nice interactive chart on the Beige Book accompanies this realistic article on the precarious conditions of State finances:

"The stumbling U.S. economy is forcing states to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year.

That gap — identified Wednesday in a survey by the National Conference of State Legislatures — is more than triple the size of the previous year’s. It is the result of broad economic weakness at the state and local levels that could cause pain throughout this year and into 2010. Sales-tax collections, for example, have been hurt by the housing slump and high gasoline prices, which are prompting cutbacks in consumer spending. Personal income-tax collections have been hit by rising unemployment, while corporate income-tax collections have been eroded by falling profits…

Several state-university systems are being forced to raise tuition and tighten their belts…States are also reducing their payrolls and programs. Vermont is cutting about 400 jobs through attrition, while Tennessee is using buyouts and possibly layoffs to eliminate about 3,000 government jobs. Social services have been hit hard. Ten states have made targeted cuts in Medicaid, while three have cut contributions to the Temporary Assistance for Needy Families program."

Of course, it all comes back to Real Estate. Declining housing sales cuts into transfer taxes, Construction spending is down, and employment is way off. The cascading effect of less sales means fewer durable goods sales, home improvement expenditures, etc. As virtuous as the cycle was no the way up, its now that vicious on the way down.

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Click for interactive chart
Beige_book

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Source:
States Slammed by Tax Shortfalls
CONOR DOUGHERTY, AMY MERRICK and ANTON TROIANOVSKI
WSJ, July 24, 2008
http://online.wsj.com/article/SB121682740001077489.html

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What's been said:

Discussions found on the web:
  1. Owner Earnings commented on Jul 23

    “Deficits don’t matter” (VP Cheney)

    The government can do whatever it wants.

    If the government doesn’t like the game being played then they can simply change the rules.

    Brokers need access to cash, change the rules.
    Need a loan to buy a brokerage firm, change the rules.
    Government debt nearing the maximum amount, change the rules.
    Foreclosures not going the way the government wants, change the rules.
    Stock prices too low (short sellers), change the rules.
    GSE’s need money, change the rules.
    Oil prices to high (futures market), change the rules.

    I wouldn’t be surprised to see government force the rating agencies (as if they are reliable anyways) to change the definition of AAA.

    The only thing all this rule changing has done is delay the result. Invest accordingly.

  2. Mike in NOLa commented on Jul 23

    For us, non-subscribers to the WSJ, what exactly does the color legend on that illustration mean? Can’t be actual deficits, as La. has none. (High oil and hurricane relief) La is projected to have one in two years.

  3. Automated Robot commented on Jul 23

    “Every cloud has a silver lining”
    If the States could only slash spending and employees on the way up too.

    Mike, click on the chart, you don’t have to be a subscriber. According to the chart LA has a 4-8% budget gap.

  4. Stuart commented on Jul 23

    Will be very interesting to watch the effects on state govt employment. They have been a material contributor to hiring over the past years and with the states now in a downturn, this one would think will quickly end, if not reverse. We should see this in July and August. Of course there is always the Birth/death model to add tens of thousands of construction jobs to offset…dumb.

  5. EdDunkle commented on Jul 23

    There are ways to raise revenue, but the states won’t do it.

    If it wasn’t for DEA problems, California could collect $100,000,000 in sales tax for medical marijuana. Just think how much they could collect if they legalized it and put a “sin” tax on it.

  6. MarkTX commented on Jul 23

    Think how much the state govts.
    could make if they taxed their own stupidity.

    There would never be a shortfall….

  7. problembear commented on Jul 23

    I’ve been crunching some numbers and I think I have a plan for at least stabilizing the dollar and getting out of debt. all accross the country people are sitting in their kitchens and budgeting for the new economy. they are eliminating debt and making sacrifices. now it is time for the wealthiest 1% (>6M)to step up and make a contribution. see it at:
    http://problembear.wordpress.com

  8. DC commented on Jul 23

    More tax cuts post-haste!

  9. Ecklebob commented on Jul 23

    barry, This is an off topic question. How do we get a House roll call list for how the individual members voted on the “Housing travesty bill.” The list should be posted on every trading/financial blog on the internet. The members who voted “yes” do not deserve to be re elected to another term.

  10. Trainwreck commented on Jul 23

    Is it really accurate to call a virtuous cycle such as what we saw virtuous? I have problems with that label when such unsustainable growth is bought with fraud and blind greed. The cycle up was vicious, the cycle down will bring back a bit of virtue, at least I hope.

  11. Richard commented on Jul 23

    the states will just find a way to gouge their residents to make up for some part of the shortfall. already here in NJ the property tax rebate rules have been changed to not provide a rebate for those with gross incomes above $150k. this is completely unfair on a # of fronts. first off when did $150k in NJ equate to someone who doesn’t need tax relief with the one of the highest costs of living and property taxes in the country? logic would also dictate all those that pay property taxes should be entitled to a property tax “rebate”.

    somehow and someway the states will find a way to continue to rob their residents to make up for this shortfall, you can bet on it.

  12. johnnyvee commented on Jul 23

    Bary: this is what I have been saying. Gov’t reports such as inflation, GDP, etc., at best, may not tell the whole picture. But tax revenues cannot be manipulated. But, historically, what does falling tax revenues mean for states, countie, cities. They mean recession or to create a better term TAX REGRESSION.

  13. Martin commented on Jul 23

    Looks like the rest of the states might have to face what michigan has been facing since 2001, constant budget shortfalls.

    But unlike the feds, we’ve had to actually balance our budget. We’ve felt the pain.

  14. bsneath commented on Jul 24

    Florida’s April tax collections were 12% below the prior year whereas in a normal year, they would increase 8% – 10%. In other words, economic activity is about 20% below normal. Anecdotally, I heard of two instances last week where folks are moving out of State – one to Chicago and the other to Rhode Island (foreclosure). You see far fewer hispanics in the area now that housing construction is at a standstill. I am seeing commercial strip mall developments that stop construction after the parking lot is paved. Amazingly some multi-family and commercial starts are still breaking ground. I figure they must have gotten financing a while back and delayed as long as they could.

  15. Ecklebob commented on Jul 24

    Joshua, Thank you for the link.

  16. constantnormal commented on Jul 24

    I think this is just part of the “natural beauty” of the cycles of boom and bust/expansion & recession. If it were not for times like these, government would NEVER make any cuts whatsoever.

    If anything, we need more frequent recessions (and of less than brink-of-extinction severity).

  17. Steve Dallas commented on Jul 24

    I live in Illinois and the state government is ALWAYS totally messed up. The economy has nothing to do with. Same could be said of CA.

  18. Greg commented on Jul 24

    If someone would please be so kind as to answer the following question:

    Everything else constant, how is it possible for the states to be taking significantly less tax money, and for the economy not to be in a recession?

    Unless you have tax cuts, which i think you don’t, one would seem to imply the other no?

  19. dwkunkel commented on Jul 24

    This search functionality is already present in Firefox. Edit -> Find in this page.

  20. Ritchie commented on Jul 24

    constantnormal: “If anything, we need more frequent recessions (and of less than brink-of-extinction severity).”

    I’m all for that. Surely there’s some sort of financial kludge I could construct to make a buck from that pattern…

  21. George S commented on Jul 24

    An easy way to help state governments is to add higher Federal tax marginal rates for the ultra wealthy. Right now the top rate is only 35% and applies to the upper middle class on up.

    Suppose two addition income tax brackets were added:
    40% for $500,000 – $5 million
    50% for > $5million

    This would greatly reduce municipal bond interest rates directly helping state governments. I expect that Obama and maybe even McCain will do some variation on this.

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