The Illinois Tax Increase Aftermath

Previously I have written of the financial difficulties of states. Of particular interest, for a variety of reasons, is the precarious situation in Illinois, of which I wrote of in the January 19 post ("Financial Situation Facing Illinois")

The Wall Street Journal had a June 9 editorial titled "Illinois Tax Firesale" which contained the following excerpts:

"Illinois gained nationwide notoriety in January when Governor Pat Quinn signed into law a 67% hike in the personal income tax rate while lifting the corporate tax rate to 9.5%, the fourth highest in the nation."

also:

"...according to the state's Department of Commerce, Illinois has already shelled out some $230 million in corporate subsidies to keep more than two dozen companies from fleeing the state. And more are on the way."

also:

"The irony is that the recipients of these sweetheart deals are the very enterprises that Mr. Quinn was counting on to pay more taxes. Six months ago the Governor and union economists said the Illinois tax hike wouldn't chase businesses out of the state. Now Mr. Quinn is seducing businesses to stay by chopping their tax liabilities."

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Various complex facets arise when taxes are increased during slow or weak economies. I have written of these facets in posts of February 23, 2010 ("Tax Increases And Our Economic Situation – Follow Up") as well as the "America’s Trojan Horse" article.
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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1287.87 as this post is written

Financial Situation Facing Illinois

The state of Illinois has received much attention lately for its budgetary shortfalls and recently enacted personal and corporate income tax increases.  A January 13 Wall Street Journal article titled "Illinois Braces for Tax Increases" provides a summary of the current budgetary situation.

I was quite surprised to see state Comptroller Judy Baar Topinka declare on a recent news broadcast that the state's current amount of unpaid bills is $9 billion, as  several well-respected news sources, including the aforementioned Wall Street Journal article, have been quoting a figure of $6 billion.  I find this difference, as well as several other facets of the Illinois financial situation, to be disconcerting.

I believe that there are a variety of factors that up until now have allowed Illinois to avoid facing the enormity of its situation, given the current budget deficits and substantial long-term liabilities.  Perhaps foremost among these factors is that the markets appear to believe that should a state require a "bailout", such a "bailout" would be exercised by the federal government.

Illinois finds itself in a precarious situation; that of increasing taxes during a less-than-strong economy.   I've previously commented upon various complex facets of this situation in posts of February 23, 2010  ("Tax Increases And Our Economic Situation - Follow Up") as well as the "America's Trojan Horse" article.

As I wrote in the August 25 post: "By "sweeping (financial) problems under the rug" instead of truly solving the deficit problems, it almost seems as if states are inherently betting (in a big way) that current economic hardship is transitory, and that better future economic conditions will "save the day."  In effect, there is little need to solve structural budget/financial problems because a strengthening economy will alleviate or eliminate such issues."

For many states, this "better future economic situation" has failed to materialize, and now the markets appear to be increasing their scrutiny of the states' financial conditions.  For a variety of reasons, this situation deserves close monitoring.
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A Special Note concerning our economic situation is found here
SPX at 1295.02 as this post is written

"60 Minutes" On State Budget Problems

On Sunday, "60 Minutes" did a segment on state budget problems.  Both video and a transcript are available.

The segment is worth viewing, especially for those who lack familiarity with the issue.  While I don't agree with some of its comments, it provides a good overview of the situation and some of the complexities involved.

I have written a few posts on the state budget issue.  I believe its severity lacks recognition.

A Special Note concerning our economic situation is found here
SPX at 1247.08 as this post is written

State Budget Deficits

On Monday The Wall Street Journal had an Op-ed by Steve Malanga titled "How States Hide Their Budget Deficits."

Of particular interest is this excerpt:

"Last week, however, the Securities and Exchange Commission (SEC) filed fraud charges against New Jersey for misrepresenting its financial obligations, particularly its pension obligations, and misleading investors in its bonds. New York—and many other states—had better sit up and take notice."

I have previously written of the topic of state budgets and methods used to "balance" them in the July 21, 2009 post.

There is a lot that can be written about the efforts to conceal the true nature of states' financial conditions.    By "sweeping (financial) problems under the rug" instead of truly solving the deficit problems, it almost seems as if states are inherently betting (in a big way) that current economic hardship is transitory, and that better future economic conditions will "save the day."  In effect, there is little need to solve structural budget/financial problems because a strengthening economy will alleviate or eliminate such issues.

As well, of course, the federal government has provided relief.  As the Op-ed states, "...Washington does little to enforce responsible budgeting. In its fiscal stimulus packages of 2009 and 2010, for instance, the federal government funneled hundreds of billions of dollars to the states without regard for their fiscal practices, treating irresponsibility in New Jersey and New York the same as prudence in, say, Texas and Indiana."

It is not hard to envision a scenario in which the three aforementioned "crutches" states are employing to "make it through" their financial crises are no longer available.  Exceedingly dubious "quick fixes," placing large (inherent) bets on "sunnier" economic days ahead,  and receiving large-scale federal government support are not conditions that can, or should be, relied upon on an ongoing basis.  Of course, these "crutches" should never have been viewed as feasible options in the first place.



SPX at 1051.87 as this post is written

Debt And Taxation

On Saturday The Wall Street Journal had an editorial titled "Escape from Taxation." The link is here.

In the editorial, it is mentioned that higher-income people are moving out of New Jersey as the tax rate is increased.

In my article "America's Trojan Horse" found at this link, I discussed the widely-held fallacy that debt and deficits are almost inconsequential because governments can always increase taxation to service and repay debt.

What is happening in New Jersey is an important example of how this "increasing debt / increasing taxation" dynamic plays out in the "real world" - especially during times of prolonged economic stress and high indebtedness.

The implications are very far-reaching with regard to the resolve of heightened levels of indebtedness.


SPX at 1083.50 as this post is written

"Quick Fixes" To Balance State Budgets

I wanted to briefly comment on this recent (July 17) Wall Street Journal article that mentions how Illinois and California are working to "balance" their budgets:

http://online.wsj.com/article/SB124776520979752661.html

The article brings to mind a term that I have used before, "quick fixes." Sadly, some of the means by which these budgets are apparently being balanced might not even meet the low threshold of a "quick fix."

Here is another article, from Forbes, with the subtitle, "Some of the games states are playing to plug vast holes in their budget deficits."

http://www.forbes.com/forbes/2009/0803/opinions-economy-state-budgets-heads-up.html

SPX at 954.45 as this post is written