2009Apr16 Hiking Taxes

2009Apr16 Hiking Taxes

Retail sales were down in March, falling 1.1% from February and 9% year-over-year. Auto sales were the biggest offender, down 23% from March 2008, though the weakness was spread across virtually all sectors. Total retail sales excluding autos were down nearly 7%—a figure that would have been unthinkable just a few short months ago. 

Given the horrid state of the retail economy, we were not at all surprised to see this headline in the Wall Street Journal:
 
April 15, 2009
 
According to the Journal, “State and local sales-tax revenue fell more sharply in the fourth quarter of 2008 than at any time in the past half century.”  [Emphasis added]
 
A large decline in sales means a commensurate decline in sales taxes—which is very bad news for cash-strapped state and local governments who made large spending commitments during the boom years. Sales tax receipts were down 6.1% compared to a 1.1% fall in income taxes, and it’s getting worse. As the Journal continues, “The declines have continued through the beginning of this year. In the first two months of 2009, the 41 states that have reported tax revenue saw total receipts decline 12.8% versus the same period a year ago.”  [Emphasis added]
 
The problem is, unlike the Federal Government, state and local governments generally cannot run sustained budget deficits. Many are constitutionally committed to balancing their budgets. As a result, state and local governments have had to scramble to cut costs (i.e. the services they provide you) while simultaneously raising taxes (i.e. the price you pay for those services).
 
Solutions to the budget shortfall have ranged from the now infamous “fat tax” proposed in New York to the stop light cameras that have become ubiquitous (and deeply unpopular) in many American cities.
 
Tobacco taxes—another popular stand by—have also been raised in many areas, but the state of Oregon has now outdone them all with their plan to raise the tax on beer by an almost unbelievable 1,900%!
 
According to the Wall Street Journal (“This Tax Is for You”), “Even without the tax increase, taxes are the single most expensive ingredient in a glass of beer….” Now, after the tax, “…every time a worker steps up to the bar and orders a cold one, his tab will rise by an extra $1.25 to $1.50 per pint.” 
 
This means that $3.00 beer would now cost $4.50…a 50% price increase!
 
States are truly desperate. No politician would support a tax increase of this magnitude and suffer the popular backlash unless they saw no other way to pay the bills (or unless they viewed further budget cuts as being even more politically unpopular than the tax).
 
Unfortunately, we do not see this situation making significant improvements any time soon. The year-over year declines will eventually slow down, but that does not mean that a recovery will be imminent. “Failing to get worse” does not mean “getting better.”
 
With the Baby Boomers now passing their peak spending years, consumer spending—and by proxy sales tax revenues—will likely be depressed for years to come.