More States Look to Raise Taxes

As the year progresses we will begin to hear about the potential for massive defaults on state and local government debt. Municipal bonds had a difficult year in 2008 and now offer attractive yields compared to taxable treasuries so some investors are wondering if munis offer opportunity. I would be concerned if I had a significant investment in municipal bonds, especially individual ones. The risk of default in the municipal market has never been greater. Do not make the mistake of thinking your bond is safe because it is insured. The bond insurers are teetering on insolvency themselves. One thing is for certain, state and local services will be cut back greatly in the months and years to come so watch out for those potholes.-Lou

More States Look to Raise Taxes

Wall Street Journal

A free fall in tax revenue is driving more state lawmakers to turn to broad-based tax increases in a bid to close widening budget gaps.

At least 10 states are considering some kind of major increase in sales or income taxes: Arizona, Connecticut, Delaware, Illinois, Massachusetts, Minnesota, New Jersey, Oregon, Washington and Wisconsin. California and New York lawmakers already have agreed on multibillion-dollar tax increases that went into effect earlier this year.

Fiscal experts say more states are likely to try to raise tax revenue in coming months, especially once they tally the latest shortfalls from April 15 income-tax filings, often the biggest single source of funds for the 43 states that levy them.

The squeeze is especially severe in states hit hardest by the recession, such as Arizona, where sales-tax revenue has fallen by 10.5%, income-tax collections are down 15.7% this fiscal year, and the government faces a $3.4 billion budget gap next year. But such shortfalls are likely to be widespread; federal income-tax receipts from individuals have dropped more than 15% in the past six months, according to Congressional Budget Office estimates.

While most states so far have managed to cope with dwindling cash by cutting spending and raising fees on things such as fishing licenses and car registrations, that is unlikely to be enough in the new fiscal years that generally begin July 1, many analysts said.

"Income taxes and sales taxes are the go-to taxes when you really need to raise a lot of money," said Donald J. Boyd, who monitors states' fiscal health for the Rockefeller Institute of Government in Albany, N.Y.
Sales-tax revenue has fallen more sharply than at any time in the past 50 years, Mr. Boyd said.

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