Two reports highlight the pincer-like pressures that will wrack state and local government finances as economic conditions worsen. In "Housing Slump Pinches States in Pocketbook," the New York Times details the broad-based shortfall in tax revenues that has accompanied the bursting residential real estate bubble.
State tax revenues around the country are growing far more slowly this year and in some cases falling below projections, a result of the housing market slowdown that has curbed voracious spending on real estate, building materials, furniture and other items.
Nowhere is the downturn more apparent than in Florida, where tax revenue is projected to drop this year for the first time since the energy crisis of the 1970s.
But other states, especially those where housing prices soared in recent years, are also seeing their collections slow, especially in the sales and real estate transfer tax categories. While the economy remains generally strong and it is too early to predict whether the housing slump will have long-term effects, some states will have to adjust their wish lists.
For example, New Jersey could face a $2.5 billion shortfall by mid-2008, Gov. Jon S. Corzine has said, and may lease its turnpike or its lottery to a private company to raise money. In California, where income tax receipts in January were $1 billion less than forecast, a nonpartisan legislative analyst has urged budget cuts and warned that the state could have about $2 billion less in revenue this year and next than Gov. Arnold Schwarzenegger has projected.
“It’s the year of the housing hangover,” said Sean M. Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.
New home sales nationally fell in February to the lowest rate in seven years, and homeowners who tapped into plentiful home equity and spent extravagantly during the real estate boom have started to cut back.
Those events not only threaten revenue streams for things like building materials and labor, but also affect spending on big-ticket items like cars and furniture, which many homeowners financed with home equity lines of credit.
Chris McCarty, survey research director at the Bureau of Economic and Business Research at the University of Florida, said it would be foolish to “underestimate the effect that the inability to extract equity from homes is going to have.”
In one hint of how much Floridians were relying on property wealth during the real estate boom, 16 percent of new car purchases here were being made with home equity loans in 2006, compared with 7 percent nationally, according to CNW Marketing Research, an automotive research firm in Bandon, Ore. In California, the percentage was even higher — about 30 percent, said Art Spinella, the firm’s president.
During the last few years, families in much of the country have relied on the cash from mortgage refinancing, made possible by rising house values, low interest rates and a bevy of creative new loans, to make up for stagnant wages. From 2001 to 2005, even as the economy was growing at a healthy clip over all, the pay of most workers failed to keep pace with inflation.
Historically, one might have expected that municipal authorities would already have set in motion plans to boost rates to cover the deficiencies. However, a report from the Tax Foundation, "Nation's State-Local Tax Burden at Record High," suggests they might not have much room to maneuver.
In a year when the nationwide burden of state-local taxes hit an all-time high of 11 percent of income, Vermont's taxpayers are bearing the heaviest load in 2007, according to the annual study of state and local taxes by the Tax Foundation.
With 14.1 percent of income going to pay all state and local taxes, Vermont ekes out Maine (14.0) and New York (13.8) to take the top spot.
Falling significantly behind the leaders were Rhode Island and Ohio. Hawaii rounded out the top six as the rainbow state continues to fall in the rankings.
Not much has changed at the bottom where Alaska has retained the lowest tax burden every year this decade. New Hampshire, Tennessee, Delaware and Alabama complete the list of the five lowest tax burdens—no changes from last year.
Since 2000, five states have experienced double-digit drops in their tax burden rankings. New Mexico has dropped 29 places, Idaho 23 places, and Utah 19 places. Georgia and North Dakota have dropped 15 and 10 places, respectively.
New Jersey has seen the highest increase since 2000, jumping from twenty-fourth to tenth. Arkansas and Indiana have both risen ten places.
Overall, state and local tax burdens will fully consume 11 percent of the nation's income in 2007—a new record. The previous high occurred in 2005 at 10.9 percent.
"Due to the booming economy, people are paying more taxes—particularly those in states with graduated income tax rates," says the author of the study, Curtis Dubay. "Property tax is also a significant source of revenue. As property values rise, so do tax collections."
Once the economy starts rolling over in earnest, however, there is likely to be growing pressure to cap or even cut back on property and sales tax rates, which will leave state and local government finances in increasingly bad shape. For more than a few municipalities, bankruptcy will ultimately be the only way out.
The tax burden is indeed high here in VT -- we have very little industry now. Farms and residences mostly.
Posted by: Edward Charles Ponzi Jr | April 12, 2007 at 11:28 PM