The Illinois Tax Increase: Why Investors Around the Country Should Care

| About: BlackRock Municipal (BFK)

Are you thinking about the markets, or do you have a fixation on politics?

The politics versus investing theme is familiar to readers of this site. Why do I keep beating this drum? Because it is so important.

A Small Digression

I enjoyed Josh Brown's wonderful advice on blogging:

If your visitor clicks a link, hits your page and is greeted with a wall of text, that visitor is gone. No one wants to read something that looks like homework, no matter how well written it is. Your first paragraph should never be more than one or two sentences. Each paragraph thereafter should be 3 to 4 sentences maximum. If you're over 500 words for the whole post, you better be writing something important or brilliant, otherwise just stop. The markets are moving and people won't even give your post a chance if it looks unconquerable.

Josh has a finger on the pulse of the market, and I am also enjoying his TV stints. We accord him our highest office honor by taking the TV off of mute and backing up TIVO when he is on!

With respect to my blog, it is pretty obvious that I regularly fail to take his advice. The Old Prof cannot seem to do anything in 500 words! I also do not follow his other advice, although I agree that it is very wise.

I plan to think about this more -- perhaps by doing a few more brief pieces. Many of my topics require more extensive analysis -- -Meanwhile

If you cannot spend two minutes reading an article, you may not be a good candidate for my material! Put another way, if you have at least two minutes to spend, you might gain an edge over investors with ADD!

End of Digression

Illinois raised its income tax from 3% to 5% on a temprorary basis, with an eventual 3.5% rate. There are few deductions, so this is bigger than it seems. What does the Illinois story really mean?

The Illinois decision reflects what I expect to happen around the country, and at a national level. I have watched the Illinois debate very closely for years. I have many roles -- as a taxpayer, a voter, a member of the Citizens Financial Advisory Committee for a major school district, and as a former Public Finance Professor at a major university. I have had a front-row seat. I voted for Governors of both parties, including those who are now in prison.

The last Governor of Illinois who was loved by everyone, and who could have won the election had he run, made it clear that the deficit problems could not be solved without a tax increase. In the context of last year's election, a tax increase was off of the table. This was typical of national politics.

The tax increase was enacted by the lame-duck legislature. While the Democrats will have a majority next year, it will be less powerful. Some question the legitimacy of this decision.

Separating Investing from Politics

There is one conclusion that should be crystal clear for investors: The Illinois decision is bullish. Increasing taxes helps the credit rating for the state, Illinois cities, school districts, and other taxing districts. It makes Illinois debt in all forms more attractive than it was yesterday, and it also should reduce the national concern about municipal defaults.

I expect other states to follow this approach.

I note that some observers who predicted widespread state and local defaults have now shifted gears. They complain that Illinois should have cut spending.

This is what I mean about confusing politics and investing -- something that seems commonplace in 2011. [I note that I am, once again, over 500 words.]

We are all familiar with the taxing versus spending debate. No matter what the formula, a state that makes good on its obligations is doing the right thing.

Investment Implications: Bullish for Muni Bonds, suitable for some of my clients, and a general market positive.