How Will Muni Markets React to States Raising Taxes, Cutting Costs?

by: Surly Trader

Who suggested that politicians could not take action when staring down a gun barrel? Illinois passed a 67% increase on household income taxes which temporarily raises individual income taxes from 3% to 5% and corporate income taxes from 4.8% to 7%. We know that nothing is certain but death and taxes and I am almost certain that a temporary tax almost always becomes a permanent tax. In fact, income taxes in general were supposed to be temporary when first introduced and were only to be used to pay debts from wars. We are lucky that our politicians figured out that it is easier to prolong and increase a temporary tax than introduce a permanent tax.

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Illinois can continue to overspend!

In addition to good credit news from Illinois, Bill Gross states that he firmly disagrees with Meredith Whitney’s prediction of mass municipal defaults. He believes that defaults will be less prolific and that states are showing signs of fiscal discipline with Illinois’ tax increase and Gov. Jerry Brown’s strong cost cutting proposals for California. Now we get to see how the muni market reacts positively or if signs of responsibility are thrown by the wayside much like Ireland’s own hints of austerity. The sad news on the front is that tax increases will always be a part of the situation whereas budget cuts or conservative spending will always be distant second choices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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