Here’s a headline we all saw coming: “Mortgage applications slide as tax credit expiration looms.”
CNN Money reports that “Mortgage applications fell last week for the third week in a row, even as interest rates edged lower…  The drop in activity came as a popular tax credit for first-time homebuyers faced an uncertain future. The credit, which can be worth up to $8,000 for eligible buyers, is set to expire at the end of next month.”

Economics is always best understood “at the margin.”  The aggressive selling and lax mortgage lending practices in the mid-2000s pulled forward a significant number of sales of marginal buyers.  This includes both subprime borrowers (who probably should have never considered home ownership in the first place) and higher-quality borrowers who were persuaded to buy a home sooner than they might have due to the attractive financing options.

We see the same basic conditions today: the tax credit for first-time buyers has also convinced more than a few marginal buyers to step up and buy a house sooner than they might have in the absence of the tax credit. This has been one of the biggest forces driving the nascent recovery in new home sales.

There are two big problems with this, however Read the rest of this entry »

The Rockefeller Institute, at www.rockinst.org, is dedicated to the study of public finance, usually at the state and local level.  They have operated not in obscurity, but certainly out of what you would think of as the limelight.  For the last year, things have been different.  They get a ton of attention, and rightfully so.  They are counting in real-time the cost of this meltdown as measured in the flow of revenues to city and state governments.  The numbers are sobering.  In the 2nd quarter of ‘09, income tax collection down 27.5%, sales tax down 9.5%.  This at a time when we are demanding more services of those exact entities through medicaid payments and other social outreach programs.

There can be no escaping either the cause or the effect.  We are nationally making do with less.  The US government has stepped in not only to fund but also to spend, hoping that it can bridge the gap until our private sector picks up enough to take over.  That won’t happen anytime soon. 

We’ve written extensively about the dire straits in which the state of California finds itself (click here).  But the Golden State is certainly not alone.  The states that saw the greatest excesses during the housing bubble are the same ones feeling the most pain today.  Consider Arizona:  The New York Times reports that “In Need of Cash, Arizona Puts Offices on Sale.”

The office building houses most of the State of Arizona’s government and was recently put on the market to help this broke state close its budget deficit.

It is looking like a pretty good deal, if the state can prove it is credit worthy…

To help close a $3.2 billion revenue shortfall, lawmakers allowed the sale and lease-back of the executive office tower, the buildings that house offices for both chambers of the State Legislature, as well as 10 prison complexes, a state mental hospital and other buildings. (For now, the historic Capitol, with its grand dome and aging interior, is not for sale, though state officials continue to ponder the possibility.)

Yes, the State of Arizona is actually considering selling its Capitol building!   What’s next, corporate naming rights?  How does the “Coca-Cola Capitol Building” sound?  Or the “Starbucks Statehouse”?  The possibilities are endless.

At any rate, the handwriting is on the wall here:  States can only close their budget gaps so many ways, and all involve some combination of higher taxes and lower levels of services for those dollars. This problem isn’t going away.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Apparently, in today’s economy consumers really do change their habits based on taxation.  Not only are Florida residents driving across the borders to avoid the $1/pack increase in cigarette taxes, but New Hampshire, which does not tax alcohol, is cashing in on increased sales from residents of neighboring states.

While this might seem to be a blinding glimpse of the obvious, I think there is more to it.  State legislators do not raise taxes in a vacuum, they have budget staff that analyze potential responses to tax increases in order to make intelligent estimates of revenue.  As I posted previously in Time To “Geek Up”… the State of FL has a Measures Affecting Revenue report that clearly shows an estimate of lost tax revenue from lower purchases, but then increased tax revenue from the higher tax.  The net number is of course positive, because if the estimate was negative it would not be worth doing.

My point about this being a more substantial issue is based on the fact that consumers are indeed reacting in apparently big numbers.  I believe this speaks to the state of the economy and the heightened sense of conservation among spenders, whereas two years ago I think convenience, by and large, would have won out. 

Time and again I’ve discussed this issue of those paying a tax reacting to an increase in the level of taxation.  As we ponder very big programs with very big price tags, it is worth considering what happens when we increase the price of a pack of cigarettes by a buck. 

The United States is not the only country attempting to “soak the rich” in order to pay its bills.  The United Kingdom has also regrettably moved in that direction, and now Spain has indicated that it too will raise taxes on high-income earners.  The Financial Times writes, “Spain’s cash-strapped Socialist government is poised to emulate the UK and increase taxes on the rich, reversing its policy of tax cuts…”

With unsustainable budget deficits, the Spanish government has decided that it’s easier and more politically expedient to plug the gaps with tax hikes rather than unpopular spending cuts.  Sound familiar?

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Do the rich — as President Obama seems to think — fail to pay their fair share? Gerald Prante of the Tax Foundation recently took a good, hard look look at IRS tax data, and some of the results are pasted in the table below.

Yes, Mr. Obama, the rich do pay their share. The top 1% of Americans really do pay 40% of all taxes and also pay a higher percentage of their income. At 22.45%, they pay nearly double the rate of the average taxpayer, who pays 12.68%. The bottom half of all taxpayers contribute less than 3% to the tax pool and has an effective tax rate of only 3%! (It should also be remembered that these numbers reflect only those Americans who filed tax returns; if you consider the not insignificant number of Americans who do not bother to file a return, the burden upon the rich would appear even bigger.) Read the rest of this entry »

The healthcare system is flawed, no doubt.  As a small business, we are on the front lines of how inept and expensive the system has become.  Because we do not have group insurance (too few people), we buy individual policies, and therefore pay the highest rates.  Not only are the costs astronomical, but so are the regulations as to who can offer us insurance and what form it can take.

So agreeing that healthcare needs reform is easy.  What is not easy is understanding how the US government would be the best provider of such reform, because any reform would require a measure of cost cutting as well as cost bearing, and the judgment to determine who gets the short ends of those sticks.  That’s where the problems lie and the shouting begins.

Look no further than today’s WSJ, p. A1 and A5.  On A1,  there is a story about Congress “retreating” on the purchase of several jets worth hundreds of millions of dollars.  Apparently, before public outrage at the fact that Congress was requesting new jets in the teeth of a terrible economy, our esteemed legislators had no problem requesting these items.  On A5 there is the continuation of the story,  tucked underneath a story of where several Congressman are traveling during their summerbreak - Asia, Africa, etc. - all on our dime.

The reason these stories are instructive about healthcare is because they point to the most basic issue - there is a lack of trust that the US government, led by Congress, will be good stewards of our tax dollars on ANY program, much less one of monumental proportions and so dear to us individually as healthcare.  The source of our skepticism is Congress itself, through actions such as the jets requisition and summer jaunts.

Our lack of trust is only heightened when we ask for very specific details of how such a plan would work and are given generalities. 

On the side of how to pay for such a change as we are contemplating, we are told that much of it will come from “savings.”  If that is true, then I have a charge for my Congress.  I want them to spend the next 24 months pursuing those savings.  In fact, I’m somewhat annoyed that if such savings are obvious, then why have they not pursued them previously.  But back to the point, let’s go after those savings for two years, and at the end of the trial period we will have a clear understanding of exactly how much we have been able to trim from the budget and therefore how much we can count on for the remake of healthcare. 

My guess is that we will find the total amount “saved” is nil, just as many people suspect.  Which would mean that most if not all of any changes in healthcare would have to be paid for with increased taxes, right in the middle of the greatest downturn since the Great Depression.  After such a plan is instituted there will be no turning back, no chance to unwind it.  Taxpayers will be left holding the bag for the foreseeable future.  That is the fear, and a well-grounded one at that.

http://news.yahoo.com/s/ap/us_plummeting_taxes

I had a Finance Professor in college, Professor Droms, who used to  call things like this “BGO’s”, or Blinding Glimpses of the Obvious.

At the National and State levels, we are hemorrhaging cash and promising more.  Unsustainable.

Reading the news is an exercise in dis-jointed thought.  One of the biggest stories is of course the pending overhaul of healthcare to a system where we mandate coverage for all.  Just yesterday the Director of the Congressional Budget Office reported that his analysis contradicted the reports of the White House and those sponsoring the current legislation in as much as the cost will be much greater than forecast.  That means that the cost will be even more than the $1 trillion+ we have been asked to believe.

The way to pay for it…taxes, of course.  On those pesky rich people.  But wait a second, there are already people lining up to tax those pesky rich people.  And it’s not working.

Read the rest of this entry »

In his post yesterday, Rodney Johnson wrote about the “missing millionaires” in Maryland.   That state had hoped to plug its budget gaps by “soaking the rich” with a new tax.  Alas, upon implementation, they found that the number of taxpayers subject to the tax fell by a third.   Read the rest of this entry »