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Archive for the ‘Tax Revenue’ Category

Big states with dismal budget short falls like California and New York have been making the news for the last couple of years.  Yet the problems with state budget deficits go beyond the big and mighty.  The banking system has been stabilized at a very high cost to average Americans but state budget deficits reflect a deeper underlying problem.  States generate revenue through a variety of taxes; these show up through payroll taxes, sales taxes, property taxes, and other fees.  As a metric for the economy, these are a good way of measuring the health of economic activity.  Looking at current massive budget deficits states are mired in expenses with revenues falling.  For the next fiscal year of 2011 states will face a combined $112 billion in budget short falls.  California’s current budget deficit is $19 billion (current plus next fiscal year).  But things can and may get worse.

A recent survey compares this recession with the previous recession:

Source:  CBPP

As of this year we are facing a deeply painful year for states.  This will be the worst on record if 2011 doesn’t come in close contention.  How is it that the rhetoric has shifted to recovery while states are facing deep and pervasive gaps in their funding?  A large part of the so-called recovery has been directed to the banking sector.  That is clear.  Unemployment and underemployment is pervasively high and when we look at the top job sectors, 9 out of 10 are in low paying service sector jobs.  Last month we added over 400,000 jobs but the vast majority were temporary Census positions.  This is not a true recovery and state budgets reflect this.

Why is the above gap occurring?  Take for example the collapse in housing prices.  States adjusted revenue projections to assume higher assessments and thus believed that bubble level prices were the new norm.  Take for example in California where property taxes can range from 1 to 1.5 percent of the assessed value of a home.  We’ll use a $500,000 home as an example.  Initially, this home would bring the state $5,000 per year at the low end in revenue.  The bubble pops and that home now sells for $250,000.  Only $2,500 comes into state coffers yet the state was expecting that funding to come in at a much higher level.  That is one facet of the problem.  Then you throw in pervasive unemployment that is taxing the system and you can see why state budget gaps are so wide and profound.

The state budget gaps are largely a reflection of a struggling working and middle class.  Sales taxes have fallen in many states as people have cut back and started applying a level of austerity to their lives.  Less spending obviously means less money coming in.  To show how widespread this problem is, all but four states with small populations have budget gaps:

Now I know some will only see the gaps and talk about closing them at any cost.  Yet some forget what this will mean to the overall economy and the so-called recovery.  At this point, take for example the mortgage market, 95+ percent of all mortgages originated are government backed.  The last month of employment gains were largely all (90+ percent) from government hiring.  The current economy is largely supported by massive government spending.  The problem is how we allocated the money.  We have funneled too much money to the banking sector with little tangible results outside of Wall Street.  As states cut deeper into their budgets, federal support is lagging and focusing more on helping out Wall Street.  What this will mean is larger cuts and a drag on the overall economy going forward.

Going forward we know that there are only two ways to balance the gaps.  More cuts or higher taxes and both hurt the economy.  The issue so far is that states have gone after low hanging fruit.  There are hundreds of state workers making high six-figures with fantastic pension plans and lifelong employment with little economic yield and these are not the people losing their jobs.  They are going after janitors, repair workers, young teachers, and other easy targets that do little to balance the bigger line items.  Penny wise but absolutely pound foolish.  Below is from the CBPP:

“Expenditure cuts are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.

Tax increases also remove demand from the economy by reducing the amount of money people have to spend — though to the extent these increases are on upper-income residents, that effect is minimized because much of the money comes from savings and so does not diminish economic activity. At the state level, a balanced approach to closing deficits — raising taxes along with enacting budget cuts — is needed to close state budget gaps in order to maintain important services while minimizing harmful effects on the economy.”

Even after the Recovery Act, large budget deficits will remain:

So combining budget gaps for 2011 and 2012 will result in budget shortfalls of $260 billion combined.  This is an incredible amount of money.  Even a modest recovery will have a hard time making that up and we have yet to see a recovery for working and middle class Americans.  The recovery to many is largely lost in the trillions of dollars funneled to a banking sector that is merely concerned about shoring up their balance sheets.

If we look at a map of state tax collections, 34 states saw declines in the first quarter of 2010:

Source:  Rockefeller Institute of Government

What this means is there are two recoveries going on.  A real one for Wall Street and the investment banks and a phantom one for working and middle class Americans.  I wouldn’t even call it a recovery for the investment banks since they are simply stealing taxpayer money and calling it turning a profit.  State budget gaps are merely a reflection of what we already know and that is the economy has yet to actually recover.

My Budget360

Readers of FedUpUSA knew what the rest of America is about to find out:  Health Care was NEVER about health.  It was always about tax revenues.

Is the US Facing a Cash Crunch?

By Gordon T. Long

The US cash-management challenge is significant, and any surprises or further delays in economic rebound will likely trigger serious market reactions.

Editor’s Note: Gordon Long is a former senior group executive with IBM and Motorola, a principal in a high tech public start-up, and founder of a private venture capital fund. He is presently involved in private equity placements internationally along with proprietary trading involving the development and application of Chaos Theory and Mandelbrot Generator algorithms. For the full version of this article, click here.

The US government is caught in a cash vise and is being squeezed between too slow a rebound in tax revenues and the limitations on how quickly it can realistically take its funding requirements to the US Treasury auction. The US Treasury was saved in March by what the government reports as “proprietary receipts.” Those receipts require an explanation that isn’t well publicized since it begs the question of what happens next month without the $117 billion journal entry.

The March cash management numbers from the US Treasury’s Financial Management Service are alarming and in my estimation have become perilous. The economy is simply taking much too long to recover, which is affecting urgently required tax receipts.

If the US Treasury issues even higher debt supply to the market too fast, it threatens driving up interest rates prematurely and thereby elevating already strained government financing costs despite already increased supply. Since the US government has steadily reduced maturity duration over the last few years to obfuscate a growing debt problem, the issue is compounded by the rapidly increasing levels of rollover funding now additionally being required.

It’s a tricky balance between gauging how fast tax receipts will return and what supply the monthly Treasury auction is able to absorb. Cash flow is the primary reason small businesses fail unexpectedly. This is also why sovereign governments fail abruptly.

We witnessed in Greece what happens when investors get nervous. Yields not only spike but typically move to even higher levels than most originally thought possible.

US Treasury Cash Requirements

On April 14 the Financial Management Service, a bureau of the US Department of the Treasury, released its Monthly Treasury Statement for March 2010. I was waiting for it because of what I saw in February: The gap between receipts and outlays was widening disturbingly.

I knew the US Treasury was going to have to pull a rabbit out of a hat, or we might see a similar scare in the US Treasury auction, with a spike in treasury yields that occurred in Greece. What was reported was a mystery and for those that read Extend & Pretend: Gaming the US Tax Payer, I’ll call this Suspicious Clue #8.

Suspicious Clue #8

The report shows US Treasury receipts were down disturbingly and almost all government outlays were up. I personally have had Profit & Loss responsibility on numerous occasions during my career and I would have been apprehensive facing the auditors or board of directors with such a blatant example of mismanagement. Absolutely no cuts in expenses, with falling revenues, all made to marginally appear better than the February report by a single line item called “other.” Executives get fired for such a report but governments just carry on until the inevitable crisis event finally occurs. Then the traditional blame game begins, blame is assigned and belated and poorly formulated policy responses are enacted.

So what is this “other”? When you examine the Outlay Ledger of the Department of the Treasury for March 2010 (below), you see it to be a one-time item classified as a negative outlay. For the non accountants, this is a government receipt that is placed in the outlays as a negative amount, thereby showing government outlays to be smaller than they otherwise would have been. Though this is acceptable accounting, it would lead to the wrong conclusions, unless you read the details buried in the back pages. This “other” is referred to as a “Proprietary Receipt from the Public.”

An IRS document explains just what that means in an accounting context (source: 04-13-10 The Incredible Shrinking Deficit Salon.com):
 

Proprietary Receipts from the Public are collections from outside the Government that are deposited in receipt accounts that arise as a result of the Government’s business-type or market-oriented activities. Among these are interest received, proceeds from the sale of property and products, charges for non-regulatory services, and rents and royalties.

This is a $117.3 billion amount! The total 2010 US tax receipts for US corporations is only budgeted to be $157 billion!

My investigations suggest that it’s likely TARP (Troubled Asset Relief Program) money being returned to the US Treasury, along with a slowdown in TARP issuance versus budget. Assuming this is the case, and not simply an aircraft carrier or two we’ve sold and are now leasing back like California is doing with all state-owned buildings, we still have a major problem. What happens next month? The TARP fund returns will stop or we will run out of aircraft carriers. Is unemployment going to surge or are corporate tax receipts going to expand by over $117 billion next month?

Timothy Geithner and the US Treasury somehow dodged the bullet because of “other” this month. How does it look for next month for cash management? Let’s consider tax receipts to see if there is a possible rabbit in the hat there.

Tax Receipts

You personally met your April 15 tax filing deadline and you likely took some consolation in your tax frustrations by knowing you weren’t alone. The quiet truth is you’re becoming more alone each year if you haven’t understood the new realities of the US tax game. Forty-seven percent of Americans (source: Nearly Half of US Households Escape Fed Income Tax – AP) and two-thirds of US corporations (source: 04-11-04 Most US Firms Paid No Income Taxes in ’90s – Boston Globe) will pay no taxes in 2010. Where do you fit? These are pretty startling revelations to most of us and don’t bode well to fixing the monthly Treasury cash requirements quickly, especially with unemployment still stubbornly elevated.

Personal Income Tax

The Associated Press reported on April 7, 2010:

About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That’s according to projections by the Tax Policy Center, a Washington research organization.

In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

Tax cuts enacted in the past decade have been generous to wealthy taxpayers, too, making them a target for President Barack Obama and Democrats in Congress. Less noticed were tax cuts for low- and middle-income families, which were expanded when Obama signed the massive economic recovery package last year.

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners — households making an average of $366,400 in 2006 — paid about 73 percent of the income taxes collected by the federal government.

Example

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769. With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly. The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

With the government presently talking about once again extending unemployment benefits, it appears we have more downside than upside on the income tax revenue receipt line item going forward.

Corporate Tax

The Center for American Progress reported in 2004, while fighting President George W Bush’s further cuts in corporate taxation:
 

The news that more than 60 percent of US corporations failed to pay any federal taxes from 1996 through 2000 when corporate profits were soaring and that corporate tax receipts had fallen to just 7.4 percent of overall federal tax revenue in 2003 — the lowest since 1983 and the second-lowest rate since 1934 — is an outrage. But it should come as no surprise to anyone who has been paying attention to national tax policy over the past few years. The General Accounting Office (GAO) report also found that an astonishing 94 percent of corporations reported tax liability of less than 5 percent of their total income during the same time period.

The last special General Accounting Office (GAO) study concerning corporate taxation was in 2004 and it showed:

The corporate income tax rate is ostensibly 35 percent, but companies are able to reduce their effective burden by claiming various deductions and credits. US companies paid an average of $11.88 (1.19 percent) in corporate taxes for every $1,000 in gross receipts, the study said.

Foreign-owned companies fared better in some respects than their US-based competitors. The report found that 71 percent of foreign-controlled corporations paid no taxes on their US income, while 89 percent had liabilities of less than 5 percent of their income.

The GAO didn’t attempt to determine why so many companies were able to avoid paying taxes. It said possible explanations included legitimate deductions for current-year operating losses, losses carried forward from previous years, and sufficient credits to offset any tax liabilities. In addition, it said improper pricing of transactions between US and foreign operations could contribute to tax avoidance.

The percentage of federal tax collections paid by corporations has tumbled from a high of 39.8 percent in 1943 to a low of 7.4 percent last year. It ranged from 10 percent to 11 percent in 1996-2000, the period studied by the GAO. (Boston Globe 04-11-04)

In 2005 the GAO issued another report. The Washington Post’s analysis in “Many Firms Didn’t Pay Taxes” highlighted:
 

About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005. In 2005, after collectively making $2.5 trillion in sales, corporations gave a variety of reasons on their tax returns to account for the absence of taxable revenue. The most frequently listed included the cost of producing their goods, salary expenses and interest payments on their debt, the report said. The GAO did not analyze whether the firms had profits that should have been taxed.

Sen. Byron L. Dorgan (D-N.D.) called the findings “a shocking indictment of the current tax system.”

“It’s shameful that so many corporations make big profits and pay nothing to support our country,” he said. “The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls.”

Eric Toder, a senior fellow at the Urban Institute, said the vast majority of corporations are small businesses and start-ups that have adopted a corporate structure that allows them to lower their tax bills.

“I’m not trying to imply that there aren’t tax-compliance issues among small corporations,” he said. “But when you are talking about businesses that size, I would suspect the norm would be to not pay taxes, and there’s nothing nefarious about that.” Toder had not yet seen the GAO study.

A greater proportion of large corporations pay taxes, according to the GAO. In 2005, about 28 percent of large corporations paid no taxes. Of the 1.3 million corporations included in the study, 998 were categorized as “large.”

Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using “transfer pricing” to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates.

The GAO said data on transfer pricing were scarce. Instead, it compared the percentages of foreign- and U.S.-controlled corporations that are paying taxes.

In general, the GAO found that slightly more foreign firms paid no taxes. From 1998 to 2005, 68 percent of foreign-controlled corporations sent nothing to the Internal Revenue Service, compared with 66 percent of U.S. companies. The report noted in an opening paragraph, however, that the GAO did not study whether the foreign companies were using transfer pricing.

Still, Levin said: “This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

It’s only become worse, with President George W. Bush tax cuts and corporate-friendly tax policy. President Barack Obama has been too preoccupied with spending to consider revenue receipts as a priority.

Additionally, offshore tax accounting is completely un-policed and highly secretive with approximately 30 countries serving as tax havens to help corporations avoid taxes. The addition of $605 trillion derivatives market now makes it almost impossible to police global corporations from tax avoidance.

Below is the current Federal Reserve’s Tax Receipts on Corporate Income where I have added the budget expectation for 2010 of $156.7B. As you have already seen, we are presently falling behind last year’s rate of tax receipts.

When we compare corporate tax receipts to Nominal GDP we see huge disparities that are now built into the US Corporate Taxation policy. When GDP was growing, US Taxation wasn’t. The effective rates after loopholes and offshore accounting created the following results.

A Horrific Chart

This alarming chart suggests one or more of three possibilities:

1. There’s no relationship between corporate taxes and GDP.

2. Corporate pretax profits have seen near exponential growth over the last 30 years without being reflected in US taxes receipts.

3. Pretax corporate profits have become more and more an offshore phenomenon.
 

In an analysis of taxes paid by 275 of the largest U.S. corporations, the liberal watchdog group Citizens for Tax Justice found that effective corporate tax rates have fallen by 20 percent since 2001, even as pretax profits jumped 26 percent. Between 2001 and 2003, the 275 companies paid taxes totaling 18.4 percent on their total profits, about half the 35 percent corporate income tax rate. Of the 275, 82 either paid no taxes or received large refunds in at least one of the past three years. (The Washington Post 12-26-04)

Investors are operating under the notion that an improvement in the economy and employment will alleviate the pressures on the Treasury auction. This notion I believe is misplaced. Though I’m skeptical about significant improvements in either the economy or employment, this view is moot in comparison to what will actually be required to make a material difference to tax receipts. The problems described above are intractable without major congressional policy initiatives. Congress is presently doing nothing to address them. In fact they’re headed in absolutely the opposite direction.

Corporate and personal taxes aren’t going to materially fix the US cash crunch short-term.

So the question is even more difficult to answer. Where will tax receipts come from to keep the US Treasury from being forced to place accelerating supply on the monthly Treasury auction?

Debt Issuance

I know many of you are saying we’ll just be forced to place more supply on the Treasury auction and accept higher rates. As I mentioned earlier, the US has already moved down the duration curve steadily over the last few years to make increasing debt levels less onerous. It obviously comes with huge risk, considering interest rates are at all-time historic lows.

If we were forced to refinance the national debt at 5.5% versus the present average maturity of just over 2%, we’d have a serious problem. We need to place corporate tax receipts versus interest payment rate charges in perspective.

This is too far out to be critical to our monthly cash management concerns, but is still a major strategic consideration affecting short-term US Treasury auction options. Closer in however, the US Treasury is obviously caught in a vise about not pushing rates up any faster than absolutely necessary for concern that in the not-too-distant future the very existence of the US and its ability to service its debt may be at stake.

Conclusion

The US cash-management challenge is significant. Taking out this month’s “plug” number, any surprises or further delays in economic rebound will likely trigger serious market reactions.

“This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”
– Moody’s Investor Services

Huge (53%) Tax Increase On SAVERS

Posted by Karl Denninger

Regional Employment Report: Unemployment Rate up in 30 States, Down in 9; Manufacturing States Benefit Most

In a headline trumpeting the wrong thing, Bloomberg is reporting Unemployment Decreased in Nine U.S. States in January.

The unemployment rate decreased in nine U.S. states in January and climbed in 30, signaling the thawing of the labor market is not broad-based.

The jobless rate in Michigan showed the biggest drop, falling to 14.3 percent, still the highest in the nation, from 14.5 percent in December, according to figures issued today by the Labor Department in Washington. New York and New Jersey were among eight states where unemployment decreased by a tenth of a point.

A national unemployment projected to average 9.8 percent this year signals state budgets will be strained by decreases in tax revenue and rising jobless insurance payments. The loss of 8.4 million jobs since the recession began in December 2007 means the labor market in the world’s largest economy will take years to rebound.

“This is a recovery that’s really kind of concentrated,” said Steven Cochrane, director of regional economics at Moody’s Economy.com in West Chester, Pennsylvania. “It still portends weakness in income-tax revenue and sales-tax revenue into fiscal year 2011.”

Unemployment in the Detroit area, home to General Motors Co. and Ford Motor Co., dropped to 15.3 percent from 16 percent in December, contributing to the decrease in Michigan’s jobless rate.

States showing the most improvement in coming months will probably be those with a large manufacturing base, said Moody’s Economy.com’s Cochrane. The need to rebuild inventories and growing exports is propelling a factory rebound that will help some parts of the country over others, he said.

Unemployment in California, Florida, Georgia, North and South Carolina and the District of Columbia climbed to the highest levels since records began in 1976.

Regional and State Report

With that backdrop let’s take a look at the actual data from the BLS Regional and State Employment and Unemployment Report for January 2010.

Thirty states and the District of Columbia recorded over-the-month unemployment rate increases, 9 states registered rate decreases, and 11 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia. The national unemployment rate fell from 10.0 percent in December to 9.7 percent in January, but was up from 7.7 percent a year earlier.

In January, nonfarm payroll employment increased in 31 states and the District of Columbia, decreased in 18 states, and remained unchanged in 1 state. The largest over-the-month increase in employment occurred in California (+32,500), followed by Illinois (+26,000), New York (+25,500), Washington (+18,900), and Minnesota (+15,600).

State Unemployment (Seasonally Adjusted)

Michigan again recorded the highest unemployment rate among the states, 14.3 percent in January. The states with the next highest rates were Nevada, 13.0 percent; Rhode Island, 12.7 percent; South Carolina, 12.6 percent; and California, 12.5 percent. North Dakota continued to register the lowest jobless rate, 4.2 percent in January, followed by Nebraska and South Dakota, 4.6 and 4.8 percent, respectively. The rates in California and South Carolina set new series highs, as did the rates in three other states: Florida (11.9 percent), Georgia (10.4 percent), and North Carolina (11.1 percent). The rate in the District of Columbia (12.0 percent) also set a new series high.

Six states reported statistically significant over-the-month unemployment rate increases in January. New Mexico experienced the largest of these (+0.3 percentage point), followed by California, Florida, Idaho, and Utah (+0.2 point each) and Maryland (+0.1 point). The remaining 44 states and the District of Columbia registered jobless rates that were not appreciably different from those of a month earlier, though some had changes that were at least as large numerically as the significant changes.

West Virginia and Nevada recorded the largest jobless rate increases from January 2009 (+3.5 and +3.4 percentage points, respectively). Six other states reported rate increases of 3.0 percentage points or more: Florida, Illinois, and Wyoming (+3.2 points each), Rhode Island (+3.1 points), and Alabama and Michigan (+3.0 points each). The District of Columbia also registered a large over-the-year unemployment rate increase (+3.6 percentage points). Thirty-five additional states had smaller, but also statistically significant, rate increases. The remaining seven states reported jobless rates that were not appreciably different from those of a year earlier.

Unemployment Rates By State

click on chart for sharper image

Percentage Change Year Over Year

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Things are improving a bit in Michigan while climbing to new highs in California, Florida, Georgia, North and South Carolina and the District of Columbia.

Note that California was the state adding the most jobs. Employment just did not increase by enough relative to those seeking jobs.

These numbers show how shaky the “recovery” is, especially with huge budget concerns and layoffs coming in most states.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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February 2010 Federal Tax Withholdings Plunge To Multiyear Low

Submitted by Tyler Durden

February was not an auspicious start to Obama’s record budget deficit-busting plans. The Daily Treasury Statement for the full month of February was just released, and it disclosed that while corporate tax withholdings, net of refunds, actually climbed marginally to $3.4 billion from $(3.4) billion in February 2009, individual tax withholdings plunged to a multi-year low of $30.7 billion. Combined, the two items also posted a multi low of $34 billion, less than the previous recent low from February 2009 when the first leg of the Greater Depression was allegedly at its zenith (see chart below). We can’t wait to hear how the “recession is over” brigade will paint this particular data point.

On a rolling twelve month basis, the government has to plug an LTM hole of about $250 billion in annual tax withholdings. The LTM individual tax withholdings have dropped to an unprecedented low of $1.275 trillion, compared to the $1.43 trillion as of September 2008 when the recession was about to start. If the government is unable to resurrect tax withholdings to historical levels before the interest rate on the $7.9 tillion in marketable debt starts climbing (even as the $7.9 is set to become about $10 trillion in just over a year), call it a ballgame.