State Tax Revenues Plunge

The fact that state tax revenues are falling should not be a surprise given that we have been in a recession. Nor, should it be surprising that income taxes have fallen far more than sales taxes or property taxes. Historically, the bulk of income tax revenues come from higher income folks whose income is far more volatile. This is all predictable, but I imagine this predictable outcome is still quite a shock to the powers that be in our state capitols:

Source: Nelson A. Rockefeller Institute

My prediction? We will see a lot of interest on the part of politicians for additional sales taxes such as the value-added tax (VAT) as used in Europe. This would not be so bad if it replaced an existing tax, but that will almost certainly not be the case. The VAT will be increasingly touted as a way to ’solve’ the state funding or Federal funding shortfall.

Hat tip: Barry Ritholtz

Comments

[traineeinve...:]

Not only was this predictable, it was predicted by a lot of people. The same thing will happen to federal taxes for much the same reasons.

Increasing the tax burden is likely to make matters worse - more migration out of high tax states, less business investment etc. The only solution is to reduce spending significantly. Whether this is achievable politically is another matter.

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Nov 11 04:15 AM

[User 353732:]

The highest taxed states are the ones with the greatest government deficits so, naturally, the benighted and self obsessed elites in those states will raise taxes further. This will accelerate the flight of the most productive citizens and of risk capital to states that have the elementary sense and basic economic literacy to not raise taxes or even take the subversive step of lowering them.

The higher state tax rates and the greater tax scope the faster state deficits will increase and the sooner state debt defaults will arrive.

States such as California, New York, Michigan and Illinois that believe the antidote to arsenic is more arsenic will poison themselves into an economic coma : the rest of the world will little note and hardly care.

Nov 11 07:12 AM

[enigmaman:]

VAT tax will impact the middle and lower class much more so then the upper income earners, so the effect will be opposite the theory DC will be selling. Other higher taxes will result in the rich legally sheltering more of their income and assets, cause migration from higher tax states to lower with the end result leaving those left behind to carry the tax burden, falling squarely on the shoulders of the upper and lower middle class, effectively wiping out a large segment of same, it happened during the GD for the same reasons it will today, The book " The Forgotten Man" could have been called " Been there done that" or "Seen this Movie" as soon as people feel the effects of DC policy on their pocket books DC could see serious backlash and then maybe "daylight"

Nov 11 07:38 AM

[Leftfield:]

Dishonesty is at the root of the problem. Overtaxing, overborrowing, phony accounting, all to make overpromising for entitlements now stretched beyond the bounds of reality, plausible. Through the next election. A shell game based on OPM.
Connecticut politicians claimed the income tax they got in '91 would be more stable than the sales tax. Called it tax "reform," modernization. Isn't VAT a virulent sales tax? They'll make any claim to get their hands on your money.

Nov 11 07:48 AM

[kgeechee:]

Yeah, it was predictable to a point. In the State of Floored (FL) we increaed the number of tax credits for businesses to the point of have little or no postive income flow even in a growing economy.

As G.H.W. Bush and MANY economist have said since then: "voodo economics."

Nov 11 09:27 AM

[The Geoffster:]

Politicians exist to spend money. It is the source of their power. They promise funding to get elected and they look for new ways to spend money to stay elected. They are like drug pushers and we are their junkies. The recession is starving us of our fix and just like junkies, we must find new victims to mug.

Nov 11 09:53 AM

[Mr. G:]

The crisis currently experienced in state govt reveals how fragile the economy is during high unemployment periods. The "good years" led to excess spending initiatives that are now causing huge deficits.

I think a vat would be of little consequence in high unemployment periods. If we can not put the consumer back to work, Govt has no choice but to scale back. I love the saying that govt should only do for its citizens those things they cannot do form themselves.

IT is a good thing that California cannot print its own money, otherwise our politicians will never learn fiscal discipline.GI

Nov 11 10:06 AM

[ryanclarke:]

The states have a revenue problem ... which is why the rest of the stimulus money in 2010 will be spent on propping up state budgets in 2010. The states in turn will use the money to keep the "education factories" open another year ... and don't get me wrong ... I have no problem with knowledge or learning ... just a problem with giving the money to a middle school teacher who is supposed to teach computer science or math or chemistry or physics ... when their education degree was in health or marketing ... which is why kids have to learn such matter on their own ... like I did.

Nov 11 02:26 PM