Tuesday, May 5, 2009

Federal Aid Surpasses Sales Tax as Top Revenue Generator for States

Welcome to the most innovative, dynamic economy on the globe - perhaps best represented by the illustration below.

Now not only do we have a parallel economy created by the Federal Reserve [Mar 31, 2008: Financial Rescue Pledges Now $12.8 Trillion] to support the "real" $13-$14T US economy, but within that real economy we have taxpayer transfer payments generating the most real income for the states. That revenue which supports programs for ... other taxpayers. It's all circular - aka "prosperity". We started talking about this in 2007 [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You]

One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.

What's the solution? Print more money. Wait. You can only do that at the federal government level. So I guess the solution is.... well, I don't know what the solution is.

Then last April [Apr 25, 2008: Shoes Beginning to Fall in the States]

This is a theme I have been promoting for a while, and it's going to hit this year, next year, and 2010. Unlike the federal government who fixes all fiscal emergencies by simply printing money out of thin air or taking hat in hand to China, Middle East, or anyone who will buy our Treasuries, the states do not have that luxury.

Again, I keep repeating this: The pundits who are telling you we either have shallow recession or are coming out of recession are the same fellas who denied recession was even possible 6 months ago. How the same people who denied a recession was even possible, now have the cajones to tell us don't worry, we are going to be out of it by end of summer, is beyond me.

I used to worry about these things but with all the morphine the Fed has put into the system, I feel stress free. It's all good. As I said - our signposts are meaningless in the coming quarters as federal spending and Fed support creates paper printing prosperity (P cubed). [Apr 3, 2009: The Current (and Coming) Disassociation Between Economics and Stock Markets] So congratulate yourself, China, and the printing presses - you have created green shoots galore - out from under one shell and into another.

Via USA Today
  • In a historic first, Uncle Sam has supplanted sales, property and income taxes as the biggest source of revenue for state and local governments. The shift shows how deeply the recession is cutting. Federal stimulus money aimed at reviving the economy and a sharp drop in tax collections have altered, at least temporarily, the traditional balance of how states, cities, counties and schools pay for their operations.
  • The sales tax had been the No. 1 source of state and local revenue since the mid-1970s, according to the Bureau of Economic Analysis. Before that, property taxes were the primary source. That changed in the first three months of 2009.
  • The dominance of federal money is set to expand dramatically this year because tax collections are sinking while the bulk of federal stimulus aid is just starting to arrive. "This money isn't manna from heaven. It comes with a price," says Indiana state Sen. Jim Buck, a Republican. He worries that the federal money will leave states under greater federal control and burden future generations with debt. (please don't worry Mr. Buck - it's kick the can policies that have "worked" for 30 years - how can it go wrong now?)
  • The early flow of stimulus money helped lift total state and local revenue by 1.6% in the first quarter compared with a year earlier despite a 2.9% drop in total tax collections. Spending rose 1.5%.
  • Things are getting worse for states that rely on the income tax. Reason: Unexpectedly large refund checks in March and April are going to workers who lost jobs or had wage cuts last year. (but that's how we have green shoots in consumer discretionary spending so don't complain. The federal government i.e. taxpayer is here to save you - it's all a shell games and moving money from 1 account to another but we'll nod together and sing of mustard seeds) Michigan's income tax collections are down $200 million and refunds are up about $200 million — a $400 million swing. Connecticut has paid nearly $1 billion in tax refunds this year, about 20% more than expected. "These are big numbers. It's put us in a very bad situation," says Connecticut Comptroller Nancy Wyman.
  1. Sales tax. Collections started falling at the end of 2008 for the first time since the Bureau of Economic Analysis first reported data in 1958. The drop in sales of automobiles and construction materials has taken a big bite out of sales tax revenue.
  2. Property tax. The most stable tax is generating increasing revenue, mostly for schools, despite plunging property values. One reason: Forty-six states limit how fast property taxes rise or fall. (this has to strike homeowners well; paying more taxes on a fast depreciating asset)
  3. •Income tax. The most volatile tax produces big increases during boom times and giant declines during hard times. California, New York, Oregon, Connecticut and other states that depend heavily on taxing year-end bonuses and capital gains on investments have been hardest hit by the worst income tax drops since 2002.
Now for the fun one....
  • State and local governments spend about $2 trillion a year, and the federal government is now paying about 23% of those costs.
Think about that last statement, we have about a $13.5T economy... this year federal spending is somewhere around $3.5T... and state and local spending is $2T. (of which the federal government is generously kicking in $500B) But as we view our "dynamic" economy full of capitalism and innovation, consider the fact that government transfer payments are $5.5T of the $13.5T aka 40% of this economy. Leaving 60% for the "normal economy". But we're not at all like those socialists overseas in Europe with their weakling government supported economies. Just keep repeating the dogma - especially as government transfers dominate more and more in the years to come. Oh by the way, of the $3.5T and $0.5T (for the states) we are spending? We don't have it... we'll print it or borrow it. Because that's how you prosper.

[Apr 14, 2009: Cities Turn to Fees to Fill Budget Gaps; States Slash Social Programs]
[Feb 17, 2009: Kansas Joins California in Budget Woes]
[Dec 19, 2008: New York Times - States' Funds for Jobless Dry Up]
[Dec 6, 2008: How Bad is Minnesota's Budget Deficit? Mega-Bad]
[Dec 12, 2008: California - Missed the Budget Shortfall by THAT Much]
[Nov 24, 2008: WSJ - States Cut Services for Elderly, Disabled]
[July 25, 2008: WSJ: States Slammed by Tax Shortfalls]

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