Boom2Bust.com

States Raise Taxes On Oil And Natural Gas Production

Continuing on the topic of energy, I stumbled on a piece by the Wall Street Journal’s Ben Casselman yesterday in which he wrote revenue-starved states are hiking taxes on natural gas and oil production. Casselman said:

Cash-strapped states are considering raising taxes on oil production to plug yawning budget gaps, but they face strong resistance from oil companies, which warn the moves could lead to lost jobs and higher energy prices.

Lawmakers in Pennsylvania and California have proposed what are known as severance taxes on oil and natural gas produced in their states. A tax increase took effect in Arkansas at the beginning of the year, and Alaska last year raised its oil-production tax…

“Given the economy, any source of revenue is significant,” said Chuck Ardo, a spokesman for Pennsylvania Gov. Ed Rendell.

Mr. Rendell has proposed a 5% tax on natural gas produced in his state, which faces a one-year, $3.2 billion budget deficit. A legislative committee this week approved the measure, which requires approval by the full House of Representatives.

In California, Democrats are pushing a 9.9% severance tax to help close the state’s projected $24 billion deficit. But Gov. Arnold Schwarzenegger, who earlier this year supported adopting a severance tax, is now opposed, saying the state has raised taxes enough already.

Energy interests argue that higher taxes would lead companies to shift their drilling elsewhere, leading to lost jobs and lower tax revenue. And they say reduced drilling could lead to greater dependence on imported oil and higher energy prices.

Should Pennsylvania or California go through with their proposed severance taxes, Louisiana looks to welcome their oil and gas producers with open arms. Casselman added:

Some lawmakers in Louisiana want to take the opposite tack, in a bid to attract more drilling. The state House of Representatives recently approved a package of tax cuts targeted at certain high-cost forms of oil and gas production. Democratic Rep. Nickie Monica, the lead sponsor of one measure in the package, said he hopes to give Louisiana a competitive advantage at a time when other states are raising taxes. “We’re bucking a national trend,” he said.

Tax competition sucks, huh?

Source:

“States Consider Gas and Oil Levies”
Ben Casselman
Wall Street Journal, June 30, 2009

CBO Warns U.S. Long-Term Fiscal Health In Danger

The non-partisan Congressional Budget Office has come out with a new report warning that the nation’s long-term financial health is in jeopardy. From the Washington Post’s Lori Montgomery this morning:

The nation’s long-term budget outlook has darkened considerably over the past six months, and President Obama’s plan to extend an array of tax cuts and other policies adopted during the Bush administration has the potential to “create an explosive fiscal situation,” congressional budget analysts reported yesterday.

In a new report, the Congressional Budget Office found that extending the Bush administration tax cuts, reining in the alternative minimum tax and canceling a scheduled reduction in payments to Medicare doctors would dramatically slash tax collections at a time when federal spending would be “sharply rising.” The resulting budget gap would drive the nation’s debt over 100 percent of gross domestic product by 2023, the report says, and past 200 percent of GDP by the late 2030s.

Obama has not proposed to extend all of the Bush tax cuts, which are scheduled to expire in December 2010. But he would keep all cuts benefiting the middle class — a substantial portion of the total — and has advocated additional borrowing to cover the costs of that and other policy changes analyzed by the CBO…

Democratic lawmakers generally agree, and the budget resolution they adopted earlier this year assumes that many of the Bush tax cuts will be extended and future deficits will rise. Yesterday’s CBO report highlights the cost of that trade-off.

Montgomery pointed out that even if the extra funds were collected, the situation might be little improved. She wrote:

The news is not particularly good even if the government were to collect the extra money, primarily because of the rapidly rising cost of Social Security and federal health programs for the elderly and the poor. According to the CBO, the annual gap between spending and revenue would briefly drop below 2 percent of GDP in the next decade before rising to 5.6 percent in 2035, 8.3 percent in 2050, and nearly 18 percent in 2080. But the outlook is much worse if the tax cuts and other policies are extended, the CBO found: Annual deficits would never drop below 4 percent of GDP; they would approach 15 percent by 2035 and surpass 42 percent by 2080.

Already heavily in debt, the nation would be forced to borrow ever more massive sums to keep the government afloat, the CBO warns, with the national debt nearly 200 percent of the overall economy by 2035.

Source:

“CBO Paints Dire Portrait of Long-Term Revenue, Spending”
Lori Montgomery
Washington Post, June 26, 2009

Quote For The Week

Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, appeared on the Alex Jones Show this past Tuesday. Dr. Faber, also known as “Dr. Doom” by the press, is famous for advising his clients to get out of the U.S. stock market one week before the October 1987 crash and for predicting the current financial crisis. The Swiss-born investment adviser told Jones and his listeners:

Basically, we had two systems until the end of the 1970s in the world. Essentially, free market capitalism— the market economy— and the planning economy. And, as you know, under communism and socialism, central planners totally failed with their policies to create sustainable economic growth. And if you traveled to Russia in 1980 or to China in 1980, these countries were really impoverished. And, the U.S., in particular, today is moving towards an interventionist policy of the government moving into the economy and trying to fix the economy left, right, and center. In the extreme case, you would go essentially to the planning economy. But it’s not going to happen right away. But, basically, the more the government has an influence in the economy, and intervenes in the economy, the current crisis is not the failure of free markets, it’s the failure of government intervention. One of the big interventions was obviously Fannie Mae and Freddie Mac which essentially had cheaper access to funds and the banking system. These were the big bankruptcies in America, in terms of size, and also other regulatory— the intervention into the money market and the supplies of money by the Federal Reserve post 2001, also, as I had just mentioned, created a problem. It’s not that the free market had failed, it’s the interventions by the government that failed. And now, these failed policies are even enlarged, and that is where I have a problem with the current economic policy makers…

So, I think we will have high inflation, and at the same time, I think what we will eventually have, is some kind of social unrest, because I can’t believe that people will be fooled forever, by what you call crony capitalism…

It can go on for quite some time, and make things much worse. But, my view would be that within the next 5 to 10 years, when the public realizes that the economy does not improve, and possibly, in my opinion, actually deteriorate, and be faced with higher taxes, which may not be obvious but they will happen because of the large deficits, then at that stage I think there will be a social revolution, or some kind of social revolution, or the next thing the government will do to distract, or distract the attention of the people from bad economic conditions, they’ll start a war somewhere…

Coldwell Banker: Spring Home-Buying Season ‘Lackluster’

Curious about how the spring home-buying season went this year? Here’s what the head of Coldwell Banker had to say. From Reuters last night:

This year’s peak home-buying season was lackluster, as buyers seeking to trade up to larger houses were absent, said the head of one of the country’s largest real estate firms.

Jim Gillespie, president and chief executive of Coldwell Banker Real Estate, in an interview with Reuters, said sales were only modest during the spring, with demand overwhelmingly dominated by first-time home buyers and investors.

“The more important ‘move-up’ buyers were absent and that is not encouraging,” said Gillespie, who is based in Parsippany, New Jersey.

Move-up buyers are those seeking to trade in their current home for a larger one, and Gillespie said that group is important for sustaining a healthy real estate market.

Because of the sharp decline in housing prices and the collapse in consumer demand, homeowners are having difficulty selling their current homes to move up to pricier properties.

“They are key to a U.S. housing market recovery,” he said. Gillespie said some of this lack of demand could be alleviated through more incentives. He recently met with U.S. Congressional leaders to discuss housing, and said he supports a bill currently in the Senate calling for a $15,000 tax credit for all buyers of primary residences, with no income limit, for a period of 12 months.

The current $8,000 tax credit, first passed in February as part of a $787 billion fiscal stimulus plan, is limited to first-time home buyers and expires at the end of November. The proposed plan would expand eligibility to all home buyers and increase the credit to $15,000.

Source:

“Housing Sales Lackluster This Spring: Coldwell”
Reuters, June 18, 2009

David Walker: Obama’s Tax Pledge ‘Ridiculous Promise’

“Let me tell it to you straight. The. Math. Politicians. Sell. Does. Not. Work. And if we don’t start dealing with the truth soon, this country could face dire consequences.”

-David M. Walker, Comptroller General of the United States, October 2007

Before I closed shop late last night, I stumbled on the following from Bloomberg’s Brian Faler and Nicholas Johnston:

President Barack Obama said he is “confident” that he won’t have to raise taxes on most Americans to close the budget deficit as long as the economy picks up steam.

“One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”

Obama has repeatedly said he would keep his campaign pledge to cut taxes for 95 percent of working Americans while rolling back tax breaks for households making more than $250,000 a year.

“I’m confident that we don’t have to raise taxes on ordinary working families,” he said.

Now, many will argue the U.S. President still needs to build up his “street credibility” on economic matters. It remains to be seen if President Obama, despite his vast experience in other areas, can grasp the multitude and degree of the financial difficulties at hand.

That being said, consider what someone who’s already achieved “street cred” has to say about the Obama campaign pledge to cut taxes for the “ordinary working families.”

The person I’m referring to here is David M. Walker, former Comptroller General of the United States (nation’s chief accountant), former head of the U.S. Government Accountability Office (GAO), and current President and CEO of The Peter G. Peterson Foundation.

I’ve been following Mr. Walker’s career for quite some time now. Back on June 20, 2007, I wrote:

The tremendous financial burden brought on by entitlements also frightens David Walker, who is basically the nation’s accountant-in-chief. Walker is touring the United States through the 2008 elections, and according to Bloomberg, is “talking to anybody who will listen about the fiscal black hole Washington has dug itself, the ‘demographic tsunami’ that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.” His speaking tour includes economists and budget analysts from across the political spectrum. The message they are conveying is that if the U.S government continues to conduct business as usual in the coming years, the national debt ($8.8 trillion as of today) could reach $46 trillion or more, adjusted for inflation.

I added on February 26, 2008:

On February 15, David M. Walker, Comptroller General of the United States, announced his resignation as head of the U.S. Government Accountability Office (GAO). Since November 9, 1998, Walker has served as the nation’s chief accountability officer, leading the GAO in its mission to help improve the performance and accountability of the federal government for the benefit of the American people. Back on February 15, Richard Cowan wrote in Reuters that:

Walker repeatedly urged Congress to waste no time in reforming massive government programs, such as health care for the elderly, which will grow significantly as the U.S. population ages.

“The picture I will lay out for you… is not a pretty one and it’s getting worse with the passage of time,” the blunt-talking Walker told Congress more than once.

Despite those warnings, Congress and the White House have yet to begin cooperating on how to tackle the huge growth in health care and retirement benefit costs…

Yesterday, Bill Donoghue from MarketWatch had this to say about Walker’s departure:

Facing indifference on the Hill and unrealistic spending promises, Walker is resigning with five years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson, senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, has pledged an astounding startup budget for the foundation of $1 billion.

That money will attack what the foundation considers “the most substantial economic, fiscal and other sustainability challenges of our current age” — including federal entitlement programs, health care, unprecedented trade and budget deficits, low savings rates, mounting foreign debt, soaring energy consumption, an uncompetitive educational system, and the proliferation of nuclear warfare materials. Maybe Congress will listen this time.

The departing Comptroller General told Reuters:

As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO’s client — the Congress.

My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country.

MarketWatch’s Donoghue lamented:

This sounds to me like the ultimate sell signal on America…

When the nation’s best-informed watchdog resigns and few are acting on his recommendations on his “Fiscal Wake-Up Tour,” it’s time to reconsider over-optimistic domestic stock investments and look elsewhere, or bet against the U.S. market.

So, what is this dedicated public servant saying these days?

This past Monday, Mr. Walker appeared on CNBC’s “Squawk Box” and said the following about the Obama campaign pledge to cut taxes for 95 percent of working Americans:

His pledge to not raise taxes on people making less than $250,000 was totally unrealistic, especially given $1.8 trillion-plus deficits, and growing structural deficits going forward…

It was a ridiculous promise. I don’t know why he made it. Politicians are good at making these type of promises during campaigns. Anybody that passed basic math would have known that you cannot end up dealing with our structural problems in our deficits without having more revenues.

David M. Walker Interview
CNBC Video Link

Sources:

“Obama Says ‘Robust’ Growth Will Prevent Tax Increases (Update1)”
Brian Faler, Nicholas Johnston
Bloomberg, June 16, 2009

David Walker Interview
CNBC, June 15, 2009

Gun And Ammo Sales Still Brisk

The other weekend my dad and I were at the local hardware/rental/sporting goods/you name it we got it store in Burlington, Wisconsin, buying bait and tackle for fishing. While waiting for our minnow bucket to be filled, I asked a salesperson, who was leafing through a firearms catalog, how gun and ammunition sales were going. Times are good, he said. When asked about ammo sales in particular, he said ammunition was flying off the shelves. I told him that I’d recently heard of gun dealers in the Chicagoland area that were rationing out ammo, limiting purchases to two boxes in some cases. At this point, my dad joined the conversation and asked, “Why are people buying up all this ammunition?” The salesman’s response?

“They’re scared.”

Back in April, I discussed the booming sales of firearms and ammunition. And business still appears to be brisk these days. From Jim Meenan of the South Bend Tribune (Indiana) this past weekend:

Guns sit under clear glass cases or are mounted one after another on walls. Guns — about 2,000 of them —- are on display at the spacious Midwest Gun Exchange on Grape Road, small pistols costing about $150 to assault weapons in the $1,000 range, and everything in between.

“I think a lot of people have the misconception of what a gun shop looks like and what kind of people who work there look like and what kind of customers are coming into a place like this,” says Brad Rupert, general manager at Midwest Gun Exchange.

He credits that open atmosphere in the new 8,000-square-foot store — along with its fall opening coinciding with the presidential election — leading to a big increase in sales.

The possibility and then the reality of Barack Obama becoming president, along with a Democrat-controlled Congress, have provided the industry a boost seldom seen, both locally and nationally.” The word is that he (Obama) is the greatest salesman the gun industry has ever had,” said Roger Hawn of Goshen, who shops at both Midwest shops.

Statistics from the FBI’s National Instant Criminal Background Check System would seem to back that statement.

Requests for NICS checks went up nearly 450,000 nationally in November of last year compared to November 2007. In December, the increase was nearly 300,000 for the month. Even in October, as the campaign heated up, NICS checks rose about 158,000 over October 2007.

NICS checks are required on dealer sales of both new and used guns, as well as for people redeeming guns from a pawn shop. NICS checks are also conducted for firearms and explosives-related licenses and permits, so the following numbers also include those.

Substantial increases in NICS checks have continued through May in comparison with 2008 numbers. In January, the increase was more than 270,000. It was more than 235,000 in February, more than 300,000 in March, about 285,000 in April and more than 135,000 in May.

By contrast, most 2008 monthly numbers were up over 2007 numbers from as little as about 27,000 in June to as much as about 133,000 in July.

“Industrywide they say it’s a 40 to 50 percent (increase) at least, just since Obama got elected,” Rupert said.

He says it’s mostly attributed to the fear that Obama will reinstate gun control legislation. The last assault weapons ban occurred from 1994 to 2004, and the Bush administration opted not to seek its renewal.

“People are worried about anybody passing any gun legislation or restrictions on ammunition or higher taxes on ammunition,” Rupert said. But other factors are at work, too, Rupert said, such as the crime rate, and in his case, the new store and its size. “You’ve got people who believe they need a gun on themselves, whether in their home or in person or out in public,” he said.

TJ Repaich, manager of Midwest Gun & Range in Elkhart, says his store has seen a 25 percent increase in first-time gun purchases by women, too.

Widows who just lost their husbands, as well young couples, all add to the increased demand, Rupert said.

“You put those factors together and a new store and location, and it’s done really well for us,” he said.

Meenan also addressed the talk of ammunition shortages. He wrote:

What has resulted, though, is an ammunition shortage. Repaich, of Midwest Gun & Range, said he probably went about two months without .380 ACP rounds and also has run out of 9 mm rounds for a very short period. An increase in demand, two wars going on, and the increasing numbers of federal law enforcement officers are some of the reasons, he believes.

Leonard Grummell of Len’s Ammo Shop in South Bend adds to that Obama’s efforts as an Illinois state senator at gun control.

Rupert said the fear of legislation on the “serialization” of ammunition has also contributed.

Serialization of ammunition refers to the law making sellers take a person’s license and the serial number on the bullets to keep a record of it, in theory allowing crimes to be more easily traced.

Not wanting to deal with that possible hassle has helped fuel the shortage.” Ammunition is very difficult to find,” Hawn said. “Nine mm handgun ammunition is virtually nonexistent. It’s a hoarding situation, and it’s escalating.”

Hawn thinks it could be the government’s way of banning guns.

“If you have a gun and you don’t have any ammo, it’s basically a ban,” he said.

Source:

“Gun boom: Sales up, ammo scarce”
Jim Meenan
South Bend Tribune, June 14, 2009

Mayors: Give Us, Not The States, More Money

Speaking of bailouts… from Reuters’ Camille Drummond this morning:

Without more direct aid to U.S. local governments, Washington may make matters worse for cities facing falling tax revenues and increased spending needs, the nation’s mayors said at their annual meeting this weekend.

Mayors said they bear the tough task of cutting services and jobs vital to U.S. cities, even with help from the $787 billion in stimulus funds Congress passed in February…

Local governments, struggling to issue debt in a largely stalled municipal bond market, expressed worries that current federal stimulus initiatives — including development grants, infrastructure funding, and the subsidized Recovery Zone and Build America Bonds — while helpful, may not be enough in the financial crisis.

“And it’s important that metropolitan areas get money directly for recovery, and not through the states,” said Los Angeles Mayor Antonio Villaraigosa, who has voiced concerns that states may use stimulus funds to close their own budget deficits, especially in California with its massive $24.3 billion gap.

“Take your stinking paws off our money,
you damn dirty states!”

Source:

“Mayors say cities need direct economic help”
Camille Drummond
Reuters, June 15, 2009

Picture Of The Day

On April 15, 2009, thousands of Americans attended “Tax Day Tea Parties” in more than 800 cities across the country to voice their opposition to out of control spending at all levels of government, among other things.

Sure, the protestors were angry. But this didn’t prevent their creative juices from flowing…

U.S. Budget Deficit Closing In On $1 Trillion

“You cannot keep out of trouble by spending more than you earn.”

-Abraham Lincoln (16th U.S. President. 1809-1865)

More bad news concerning the nation’s finances. From the Associated Press’ Martin Crutsinger today:

The federal budget deficit soared to a record for May of $189.7 billion, pushing the tide of red ink close to $1 trillion with four months left in the budget year.

The rising deficit reflects increased government spending due to the recession, and billions of dollars spent on bailouts for banks and other troubled companies.

The Treasury Department reported Wednesday that the red ink so far this year totals $991.9 billion. The administration is projecting the deficit for the budget year that began Oct. 1, will total an all-time record of $1.84 trillion. That would be more than four times the amount of last year’s record deficit…

The new Treasury report showed government spending totals a record $2.37 trillion through the first eight months of the budget year, 18 percent more than the year-ago period.

At the same time, the economic downturn has cut into tax revenues. The report showed that government receipts total $1.67 trillion through the May, down 18 percent from last year. Rising unemployment and struggling businesses have meant a drop in both income and corporate taxes…

The $991.9 billion deficit so far this budget year is more than triple the amount of red ink incurred during the year-ago period.

Source:

“Budget deficit hits record for May of $189.7B”
Martin Crutsinger
Associated Press, June 10, 2009

Federal Highway Fund To Go Broke By August

It appears urgent action is required to avoid the mother of all potholes. From the Associated Press’ Joan Lowy yesterday:

The Obama administration is warning lawmakers that the trust fund that pays for highway construction will go broke in August unless Congress approves an infusion of as much as $7 billion.

Sen. Barbara Boxer, chairman of the Senate Environment and Public Works Committee, said at a hearing the administration has told senators the Federal Highway Trust Fund will need an estimated $5 billion to $7 billion to keep current construction projects going.

The California Democrat said another $8 billion to $10 billion will be needed to keep the fund solvent through the year ending Sept. 30, 2010…

A decline in driving that began in late 2007 has reduced federal gas tax revenue, the primary source of trust fund dollars…

Congress approved an emergency transfer of $8 billion in general treasury dollars last fall to make up a projected shortfall — the first time in the history of the program that had happened. The fund dates back to creation of the federal interstate highway program in 1956.

“Don’t forget your fishing license”

The odds of a tax hike for transportation projects has grown significantly. Lowy added:

There is a consensus among transportation experts and lawmakers that there will have to be some form of a tax increase — always unpopular, but especially so in a recession — to make up for the lower gas tax revenues and to address a backlog of crumbling and congested highways, bridges and public transit systems.

Two congressionally mandated commissions have called for an immediate increase in the gas tax. The first commission, which issued its report in early 2008, recommended a 40-cent per gallon hike. The second panel, which issued its report earlier this year, recommended the tax be increased 10 cents per gallon for gas and 15 cents per gallon for diesel, and that both be indexed to inflation.

The two panels also said fuel taxes are not a sustainable source of revenue over the long term as drivers shift to more fuel efficient vehicles. Both panels recommended Congress find a new revenue source to pay for highway and transit programs.

Their top recommendation was to tax motorists based on how many miles they drive. That would require equipping cars and trucks with devices that use GPS technology to record not only how many miles the vehicle was driven, but whether the driving took place on interstate highways or secondary roads and whether it was during peak travel periods. The device would calculate the amount of tax owed and the bill could be downloaded.

A mileage-based tax system would take about 10 years to implement.

Source:

“Administration: Highway fund to go broke in August”
Joan Lowy
Associated Press, June 2, 2009

Washington Looks At A National Sales Tax

It’s amazing how the state of New Hampshire has the ability to make U.S. presidential candidates eat their words.

After all, it was here back in February 1988 that Vice President George H.W. Bush first uttered that famous phrase:

“Read my lips: No new taxes!”

We all know how that turned out.

And it was here that Senator Barack Obama made the same pledge— to families making less than $250,000 a year. On September 12, 2008, while campaigning in Dover, the Illinois politician declared:

“I can make a firm pledge… under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes… you will not see any of your taxes increase one single dime.”

Can you figure out where this is going yet?

On April 1, 2009, the Associated Press wrote:

One of President Barack Obama’s campaign pledges on taxes went up in puffs of smoke Wednesday.

The largest increase in tobacco taxes took effect despite Obama’s promise not to raise taxes of any kind on families earning under $250,000 or individuals under $200,000.

This is one tax that disproportionately affects the poor, who are more likely to smoke than the rich.

Change you can believe in? Some things never change. Especially Washington.

And now there’s talk of another tax hike, one that would affect all Americans, and the poor in particular according to some. From UPI yesterday:

Some key U.S. economic advisers have said a federal sales tax should be considered an option to help balance the books and pay for healthcare reform.

An unthinkable political option in years past, a budget deficit projected at $3.1 trillion over this year and next and a trillion dollar extension of national health coverage proposed by President Barack Obama have pushed a so-called value-added tax closer to serious national debate, The Washington Post reported Wednesday.

The chairman of the Senate Budget Committee Kent Conrad, D-N.D. has declared that “a VAT and a high-end income tax have got to be on the table.”

Former Federal Reserve Chairman Paul Volcker has expressed cautious support for a national sales tax. White House Budget Director Peter Orszag has hired Ezekiel Emanuel, a strong proponent of a value-added tax as a consultant on healthcare reform, the Post said.

By the way, if the name Emanuel sounds familiar, it should. Ezekiel is the brother of White House chief of staff Rahm Emanuel— and a VAT advocate.

Source: Zazzle

The Washington Post’s Lori Montgomery also talked about the idea of a national sales tax, and added that, just like the tobacco tax implemented this spring, a value-added tax would disproportionately affect the poor. She wrote yesterday:

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor.

Montgomery also talked about some of the other ideas for raising revenue that are being kicked around. From the piece:

Key lawmakers are considering other ways to pay for health reform, including new taxes on sugary soda, alcohol and employer-provided health insurance. The last proposal could raise a lot of money — nearly $1 trillion over the next five years, according to White House budget documents. But options on the table would raise a fraction of that sum. And while it might pay for health care, it would barely dent deficits projected to total nearly $4 trillion over the next five years and to grow rapidly in the future, as baby boomers draw on Social Security and Medicare.

Yep. The taxman cometh folks. Despite any “pledges” the politicians may make.

Sources:

“Obama tax pledge up in smoke”
Associated Press, April 1, 2009

“National sales tax debate begins to stir”
UPI, May 27, 2009

“Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look”
Lori Montgomery
Washington Post, May 28, 2009

Across The Country, States Governments See Revenues Fall

No surprise here. State revenues are hurting— big time. From the Wall Street Journal’s Conor Dougherty on Wednesday:

State tax collections continued to fall in the first quarter as muted consumption, falling incomes and weak profits plunged states into a deeper financial hole, the Nelson A. Rockefeller Institute of Government at the State University of New York said in a report to be released Wednesday.

The 47 states that have reported first-quarter revenues saw total tax collections fall 12.6% — about $20 billion — compared with the first three months of 2008, the institute said.

The steepest drops were in income taxes: Corporate income taxes declined 16.2% in the latest quarter, reflecting weaker profits. Personal income taxes fell 15.8%. Sales taxes were down 7.6%. Forty-five of the 47 states saw revenues decline.

Robert Ward, deputy director of the institute, said he expects tax collections to fall further in the second quarter, with weak consumer spending, rising unemployment and stock-market turmoil almost certain to reduce income taxes from earners large and small. “We don’t normally use the word plummet but that is the operative word right now,” said Mr. Ward.

Source:

“States’ Revenue Sinks Amid Income Tax Drop-Off”
Conor Dougherty
Wall Street Journal, May 13, 2009

U.S. Risks Losing Triple A Credit Rating

When the former chief accountant of the United States warns that the nation’s credit rating is at risk, Americans might want to listen to what he has to say. David Walker, chief executive of the Peter G. Peterson Foundation and former Comptroller General of the United States, wrote in the Financial Times (UK) this past Tuesday:

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

Walker warned that the nation’s credit rating could be downgraded with the help of two developments. He wrote:

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.

On the topic of health care reform, Walker noted:

There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.

Walker concluded that a new government commission is needed to help get the nation’s finances back on track— or else. From the piece:

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

Source:

“America’s triple A rating is at risk”
David L. Walker
Financial Times (UK), May 12, 2009

Politicians Mull Universal Health Care Options

“America’s health-care system needs fixing, but the administration has got the steps out of sequence, in my view. The president is advocating expanding health-care coverage before we have proven our ability to control health-care costs – and before we make a significant down payment on the federal government’s tens of trillions of dollars in current unfunded health-care promises, notably from Medicare.”

-David M. Walker, president and CEO of the Peter G. Peterson Foundation and former General Comptroller of the United States, February 2009

To be honest, I didn’t expect to be following up so soon on a post I wrote last week about Congress looking at taxing Americans who already have the most expensive health benefits, as provided by their employers, to pay for those Americans without health insurance.

But then I came across the following today from the Associated Press’ Ricardo Alonso-Zaldivar:

The Senate’s top tax writer said Tuesday he is considering limits on the tax-free status of job-based health insurance to help pay for President Barack Obama’s plan to cover all Americans.

Finance Committee Chairman Max Baucus, D-Mont., described his idea as senators began to grapple with how to pay for the costs of the plan, which independent experts put at about $1.5 trillion over 10 years. There are no easy options.

The final package is likely to include a mix of tax increases and spending cuts. Among the possibilities: tax hikes on alcoholic beverages and sugary soft drinks, and restrictions on other health care related tax breaks, such as flexible spending accounts…

The president adamantly opposed such taxes during the campaign, arguing they would undermine job-based coverage. Obama’s aides now say he’s open to considering suggestions from Congress, even if he criticized Republican presidential rival John McCain for proposing a sweeping version of it.

eHealthInsurance – FREE Instant Quotes!

Alonso-Zaldivar talked more about Baucus’ position. He added:

Baucus said he wants to readjust the tax break, not abolish it.

“We are not going to repeal it,” he said.

But Baucus suggested that the benefit could be limited by taxing health care provided to high-income individuals or by taxing the value of extravagant health insurance plans. Baucus did not specify at what income level the tax would kick in.

The New York Times’ Reed Abelson explained last week:

Right now, the amount that an employer spends on a worker’s health insurance is not taxed as income, and employees can pay their share of premiums with before-tax earnings. The proposals being debated in Congress would start considering some part of the value of the health benefit as income and tax it accordingly.

Seeing that tobacco just got hit, I kind of figured it was only a matter of time before a tax hike on alcoholic beverages would be discussed.

Got to find some room in my pad to sock away all that booze…

Sources:

“The coming deficit reckoning”
David M. Walker
CNN Money (Fortune), February 27, 2009

“Senators weigh tax hikes to pay for health care”
Ricardo Alonso-Zaldivar
Associated Press, May 12, 2009

“Taxing Those With Insurance to Pay for Those Without”
Reed Abelson
New York Times, May 8, 2009