States Continue Profligate Spending

Despite an inability to print money like the federal government, combined spending by all 50 states is expected to increase significantly next year.

"Governors' recommended budgets called for a 3.6% increase in spending - the first after a record two years of declines, according to the report, which was conducted with the National Association of State Budget Officers."

This proposed spending increase is scheduled to occur in the face of spiraling budget deficits and anemic tax receipts.

"Tax revenues are expected to climb to $495.8 billion in fiscal 2011, up from $477.4 billion the previous year but down from the $541.5 billion collected in fiscal 2008."

This compares to combined state spending that is over $635 billion, which points to massive deficits at the state level that will have to be repaid by future generations. All in all, a typical immoral act that should be blamed not just on legislators, but also, and more appropriately, the people that voted them into office to vote this way.

As the budget deficits increase, states should consider selling assets off to repay the debt, and will hopefully learn a very valuable lesson in the process. Any bids on Yosemite National Park?

State Tax Hikes Are a Zero Sum Game

The New York Times reports that more and more states are eyeing sales taxes on services as a means to bring in more tax revenue. Currently, most states exempt services from sales tax.

The article makes a fair historical point about how the US economy has changed since the time that the sales tax was originally introduced long ago.

"In the 1930s, with property tax revenues shrinking because of the Great Depression, states began taxing the sales of items. It was simple, and at the time, the tax matched an economy largely based on goods.

But as the nation's economy shifted to one focused more on services, the tax system mostly did not budge. And so, in 2009, states raised $230 billion in sales taxes; had they taxed all services, too, according to Joseph Henchman of the Tax Foundation, a nonpartisan research group, they might have raised twice that."

The dubious point being made in the article is that by taxing services, states would be able to generate a whole lot more tax revenue, much more than they're able to bring in by only taxing sales of goods.

The reality however is that household finances can not bear much more in costs, particularly in new taxes. With personal bankruptcies peaking, with mortgage resets looming, the idea that there is a vast untapped pool of capital out there for state governments to absorb in the form of new taxes ludicrous.

Taxpayers that must pay new taxes imposed on services will then have less money to spend on other goods and services, putting even more pressure on local businesses and the amount of income tax they pay.

Tax hikes at the state level are increasingly becoming a zero-sum game, in that increased taxes on one part of the economy will be matched by reduced tax revenues from other parts.

Public Pension Deficit Exceeds $3 Trillion?

An article in the Wall Street Journal written by Andrew Biggs argues that state pension plans are underfunded to the tune of $3 trillion.

"Pension plans for state government employees today report they are underfunded by $450 billion, according to a recent report from the Pew Charitable Trusts. But this vastly underestimates the true shortfall, because public pension accounting wrongly assumes that plans can earn high investment returns without risk. My research indicates that overall underfunding tops $3 trillion.

The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself "fully funded" even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook. Yet public pension plans ignore market risk even as they shift into risky foreign investments, hedge funds and private equity."

Biggs' argument is that the pension plans are assuming unrealistic future investment returns that will meet their mandated, long-term payout amounts.

Politicians are fond of using taxpayer money to buy votes. In this case, they have over promised pension amounts to public workers, and will expect taxpayers to make good on these promises in the coming years.

Taxpayers should keep a close eye on these pension amounts in their states and municipalities, and start taking action now to ensure that politicians are aware that they need to ratchet down these promises in their ongoing negotiations with public unions.

NY To Delay Tax Refunds

In yet another sign that states' budget deficits are increasingly untenable, New York state has announced that it will delay refunding 2009 tax refunds.

"For hundreds of thousands of New Yorkers, the check won't be in the mail -- at least not on time. New York State has stopped paying tax refunds and won't start again until next month.

Message to New Yorkers: don't start spending your tax refund money because it's going to be delayed."

Anyone want to guess how this arrangement would go over if it was the taxpayer who was declining to send money to the state?

This abuse of taxpayers has got to stop. New York state politicians, and politicians from all others states that are just like it, must be given a stinging reminder in November's elections that the taxpayer is the master of the politician, not the other way around.

The days of chronic overspending at the state and federal level must end.

Politicians that use taxpayer's hard-earned money as currency in order to ensure their own reelection must be unceremoniously removed from office.

Signs That States Are Not Cutting Spending

Despite giving lip service to the problem of budget deficits and out-of-control spending, it's becoming clear that some states are not doing much more than that. Washington state in particular seems to be afflicted with this problem.

"There was a lot of talk two months ago about making deep cuts in spending and reducing the size of state government to help close a $2.8 billion budget shortfall.

Yet as the legislative session nears an end, spending is on track to increase. Lawmakers are planning cuts but have apparently set aside efforts to streamline state government that many feel could ease future budget problems."

Politicians of all stripes refuse to make the tough choices that are required of them. As a result, taxpayers will simply have to clean house at the state and federal level in November in order to get the government that they want (and can afford).

States Considering Drastic Tax Hikes?

The economic downturn that we are in the midst of is causing states to consider raising taxes on its citizens. This potential tax hike could be devastating in its size and scope. A recent WebCPA article discusses the situation:

"With no relief in sight and discretionary spending already cut to the bone, the pressure is mounting for state legislatures to stop the revenue drain with heavier taxes."

Although the article is simply trying to foreshadow tax hikes that may be on the horizon, the idea that states have already cut discretionary spending "to the bone" is utterly ridiculous.

One example of 'fiscal austerity' that the article discusses is that the state of Arizona "slashed wages to state employees by 5 percent".

5 percent is considered to be "slashing"?!? Come on. If Arizona had reduced state employee pay by 30% to 40%, then we can talk about "slashing".

How much has pay per state employee in Arizona risen over the past 5 or 10 years? How much are Arizona state employees making, when counting all the benefits (including pensions) they are entitled to? The article does not discuss this issue.

The bottom line is that states such as Arizona should be doing a whole heck of lot more belt-tightening before they head back to voters and ask for more money via increased taxes.