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April 12, 2010


As we previously reported, state budgets continue to deteriorate as the economy improves.  In 2009, states collectively ran a deficit of $68 billion.  This number was propped up by billions in funding provided by the Obama stimulus.  However, that stimulus bill simply kicked the can down the road.  State deficits in 2010 are projected to be $115 billion.  In many states, the budget situation is expected to get worse in 2011 and beyond. 
Some states, like New Jersey, have decided to directly address the problem by cutting spending.  However, many states have decided not to get tough on spending, but to take the more cowardly (and considered easy) way out and raise taxes.  Raising taxes during any time in the economic cycle increases the costs to consumers and businesses.  Let’s examine some popular tax increases coming in the pipeline as a result of state budget recklessness and how it’s going to affect the rest of us.
RAISING THE UNEMPLOYMENT TAX: According to the National Association of State Workforce Agencies and CNN Money, at least 35 states are increasing their unemployment insurance taxes in 2011 by an average of 27%.  Hawaii, the biggest loser in the deal, will see a six-fold (that’s 600%) increase in its unemployment insurance tax.
How is this going to create jobs?  The tax is directly derived on the employment levels of companies.  Companies who were planning to hire later in 2010 may wait until the tax hikes go into place and examine whether or not the new costs will support hiring.  This stalls the job recovery for 2010 and casts further doubt and uncertainty into 2011 and beyond. 
START THE PROPAGANDA MACHINE: Various state leaders are lying to their citizens about the current tax situation and their future tax burden.
In Ohio, state leaders are running around (the treasurer recently appeared on national television) and proclaiming the state’s tax situation is one of the best in the country.  However, as the Tax Foundation points out in an article,
State officials in Ohio have steadily engaged in a propaganda effort to claim that the state's tax system is non-distortionary and the burden on its taxpayers is low. But this conclusion is based upon misuse of the data provided by organizations like the FTA whose own data sources warn against their methodology.  To earn such bragging rights, state officials need to acknowledge the position they are in and work for lower tax burdens and a sounder tax system that does not distort economic decisions."
As you can see in the below video, Gov. Ed Rendell of Pennsylvania acknowledges my point about increasing deficits.  He also talks about how they are going to lower sales taxes, and raise a “limited amount of taxes.”  He even adds “most consumers are going to do well by this.”  Really?  Then, how the hell do you plan raising money if nobody is going to be paying for it?  He also adds that the state is going to have at least two trust funds set up to pay for future deficits.  The readership should understand that the government is not good at trust fund management, just look at Social Security.
TAXES GOING UP? THANK A PUBLIC UNION WORKER: As described in today’s videos, state pension costs are going to be out of control by 2012.  In addition, thanks to many legal pension agreements, these ballooning fixed costs will not be able to be cut or controlled.
Ed Rendell and others admitted in today’s videos that pension costs are “horrible.”  Is this what happens when government makes future promises without considering who is going to fund those promises.  The establishment of public unions and explosion in government workers has created a huge cost burden that no taxpayer can afford to cover in the coming years.  The states with the highest pension and public union presence happen to be the states with the most budget problems.  Do you smell a connection?
SOLUTION: Common Sense
Just because we cannot cut the benefits for current government employees does not mean we cannot cut the benefits of future employees.  That’s right, it’s time for someone to start making sacrifices for our mistakes and if the Boomer generation is to “entitled” to do so, then it needs to be us.  Besides, government jobs are not meant to be well-paying.  They are mostly inefficient and unproductive.  Should your DMV employee get paid more than you and get a six-figure annual pension when they retire?  Maybe, if the taxpayer is willing to pay for it.
You can read more about state taxation and how your state compares with others in terms of taxes at the Tax Foundation’s website.

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