HS Dent | There Is Simply Less Money To Go Around - But No One Seems To Notice

HS Dent | There Is Simply Less Money To Go Around - But No One Seems To Notice
Reading the news is an exercise in dis-jointed thought. One of the biggest stories is of course the pending overhaul of healthcare to a system where we mandate coverage for all. Just yesterday the Director of the Congressional Budget Office reported that his analysis contradicted the reports of the White House and those sponsoring the current legislation in as much as the cost will be much greater than forecast. That means that the cost will be even more than the $1 trillion+ we have been asked to believe.

The way to pay for it…taxes, of course. On those pesky rich people. But wait a second, there are already people lining up to tax those pesky rich people. And it’s not working.

A couple of pages further into the news you find that states are reporting the largest drop in revenue in history - a fall of 11.7% year over year in the first three months of 2009. This is the percentage change, so this is comparing apples to apples in terms of historic significance.

The main culprits are corporate income tax (down 18.8%) and personal income tax (down 17.5%). Sales tax was down 8.3%.



So the exact source of revenue that we are told will serve as the piggy bank to fix what ails us at the federal level is already wreaking havoc on state finances. And it gets worse. Among the states that have reported revenue for April & May, the numbers are running at -20% year over year. As the Rockefeller Institute report so eloquently put it, “Such extraordinary weakness in revenue, along with continued if more moderate growth in expenditures, make widespread budget shortfalls highly likely this year.”

Yep. That seems about right. Keep spending a lot more than you are making and you will have a budget shortfall. But no matter. Keep spending.

That’s what the states are doing. Look no further than Illinois, where the state has agreed on a “budget”. I put budget in parentheses because the state borrowed money to fund its pensions obligations, and readily acknowledges that they will have a multi-billion dollar shortfall by mid year. That is not a budget.

As you move to the back of the paper, at least in the WSJ, there is an editorial on something we have discussed several times. Even if you try to tax this dwindling group of high earners, nothing says that they will stand still and take it. Why would they? Why would anyone, if there are reasonable, legal ways to avoid increased taxation? By the Journal’s calculation, by adding the surtaxes that are being contemplated to fund healthcare and then considering state tax rates, high income residents in much of the US will find themselves taxed higher than socialized countries like France. Unless of course they choose to arrange their finances in such a way as to avoid these taxes.

In which case we will see even more declines in tax revenue, even though expenditures continue to rise. And the possibility of these tax dollars materializing to pay for health care? Not good. The possibility that high income earners spend more time working on ways to pare their tax bill? Now THAT seems highly likely!