The Blur Between Spending and Taxes

While Congress is getting back to work, and deficit reduction is a high priority, there’s a lot of rhetoric being bandied about. Spending cuts and tax cuts are a big focus. But what does it really mean? The NY Times tries to deep dive to see what the big difference really is.

From NYTimes.com:

Should the government cut spending or raise taxes to deal with its long-term fiscal imbalance? As President Obama’s deficit commission rolls out its final report in the coming weeks, this issue will most likely divide the political right and left. But, in many ways, the question is the wrong one. The distinction between spending and taxation is often murky and sometimes meaningless.

Imagine that there is some activity — say, snipe hunting — that members of Congress want to encourage. Senator Porkbelly proposes a government subsidy. “America needs more snipe hunters,” he says. “I propose that every time an American bags a snipe, the federal government should pay him or her $100.”

“No, no,” says Congressman Blowhard. “The Porkbelly plan would increase the size of an already bloated government. Let’s instead reduce the burden of taxation. I propose that every time an American tracks down a snipe, the hunter should get a $100 credit to reduce his or her tax liabilities.”

To be sure, government accountants may treat the Porkbelly and Blowhard plans differently. They would likely deem the subsidy to be a spending increase and the credit to be a tax cut. Moreover, the rhetoric of the two politicians about spending and taxes may appeal to different political bases.

But it hardly takes an economic genius to see how little difference there is between the two plans. Both policies enrich the nation’s snipe hunters. And because the government must balance its books, at least in the long run, the gains of the snipe hunters must come at the cost of higher taxes or lower government benefits for the rest of us.

California's Unemployment Fund has Deficit of $10.3 Billion

California businesses already pay some of the highest unemployment taxes in the country – and the tab is likely to increase.

The recession and the Legislature's decision years ago to raise benefits have drained the state unemployment insurance fund, which now has a estimated $10.3 billion deficit.

The nonpartisan Legislative Analyst's Office, in a recent report titled "California's Other Budget Deficit," said the state will probably need to raise unemployment taxes on employers as well as reduce benefits to bring the fund back in balance.

Raising the tax would require a two-thirds vote in both houses of the Legislature and might be politically impossible. Gov.-elect Jerry Brown has promised not to raise taxes without voter approval.

But pressure is growing on Sacramento to fix the system soon – whether it wants to or not. California has borrowed about $8.5 billion from the federal government to keep benefits flowing, and the repayment obligations are coming due.

"The longer we go without a fix, the bigger the hole becomes," said Loree Levy, a spokeswoman for the Employment Development Department, which doles out the benefits.

Key Tax Breaks at Risk as Panel Looks at Cuts

In just a few weeks a deficit commission is planning to submit recommendations for balancing the federal budget by 2015. Experts predict that they will recommend getting rid of a handful of popular tax breaks including the mortgage interest deduction. Although they are popular among American taxpayers, the tax incentives reportedly cost the government about $1 trillion a year.

The Wall Street Journal reports

At stake, in addition to the mortgage-interest deductions are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending. It is unclear if the 18-member panel will be able to reach an agreement on any of the items by a Dec. 1 deadline.

Even if they do reach an agreement, any curbs on current tax breaks would likely face tough sledding in Congress. The banking and real-estate lobbies have fiercely rebuffed efforts to rescind the mortgage-interest deduction in the past.

Read more here

Bankrupt, USA: Why Our Cities Aren't Too Big to Fail

Although President Obama and Congress have assured taxpayers that financial giants will no longer receive bailouts, many economists are worrying that local governments may be in need of federal funds. Cities across the country, including Harrisburg PA, Central Falls RI are facing serious financial troubles.

According to CNN Money, Harrisburg’s city government was scheduled to default on a $3.3 million bond payment. Fortunately Pennsylvania's governor, Ed Rendell, pledged $4.4 million in state funds to help the struggling city.

This gives Harrisburg a chance to fight again another day. But its problems are far from over, and that's bad news for investors in the $2.8 trillion muni-bond market.

States from California to Illinois have been in deep crisis since the recession began, hammered by drastic cuts in tax revenue and inflexible spending demands for things like health care, debt service and pension plans. Forty-eight states grappled with fiscal shortfalls in their 2010 fiscal budgets. Totaling $200 billion, or 30% of state budgets, this fiscal shortfall is the largest gap on record, according to the DC-based Center on Budget and Policy Priorities, which sees at least 46 states facing shortfalls this fiscal year.

Some cities are in even worse shape than Harrisburg. Central Falls, Rhode Island, recently went into receivership when it couldn't pay its bills. San Diego is said to be considering bankruptcy to get out from under its pension obligations. Miami's city council, hoping to avoid Harrisburg's fate, recently used emergency powers to slash city salaries and pensions and is now instituting hefty traffic fines and garbage fees. This year, ratings agencies have cut the debt in several cities -- including Littlefield, Tex., Detroit, Mich. and Bell, Calif. -- to junk.

Continue reading at CNN.com…

California Finances Plummet Less than Three Months after Budget Passage

From WSWS.org:

California finance officials have announced that the state has a current budget deficit of $1.1 billion. News of the shortfall comes less than 10 weeks after a balanced budget deal was reached by Republican Governor Arnold Schwarzenegger and the State Legislature.

An October report released by State Controller John Chiang announced that the latest budget deficit was mainly due to a large drop in third quarter income tax collection; revenues were 11 percent lower than initially projected.

The California Department of Finance is also expecting a deficit of $7.4 billion at the start of fiscal year 2010-2011, which begins next July. This could climb to as high as $20 billion by the start of fiscal year 2011-2012.

Loss of tax revenue due to the economic crisis and widespread unemployment and wage reductions is not the only component of the budget deficit. The state’s fiscal health is also largely dependent upon the willingness of outside investors to purchase its municipal bonds and other securities.

As recently as last summer, the state’s credit rating was lowered by all three of the largest agencies, Fitch, Moody’s and Standard & Poor’s, to the lowest in the nation. The state effectively became insolvent at that time and was reduced to handing out IOU’s instead of actual cash payments to vendors, tax refund recipients and others.

Obama Raises 2010 Deficit Estimate to $1.5 Trillion Obama Raises 2010 Deficit Estimate to $1.5 Trillion

According to Bloomberg.com, the unemployment rate is expected to surge to 10 percent, while the budget deficit is predicted to be a staggering $1.5 trillion. These numbers are both much higher than the Obama administration had predicted, and the announcement has many wondering if the recession will last longer then we had all hoped.

The Office of Management and Budget forecasts a weaker economic recovery than it saw in May as the gross domestic product shrinks 2.8 percent this year before expanding 2 percent next year, according to the administration’s mid-year economic review issued today. The Congressional Budget Office, in a separate assessment, forecast the economy will grow 2.8 percent next year. Both see the GDP expanding 3.8 percent in 2011.

“While the danger of the economy immediately falling into a deep recession has receded, the American economy is still in the midst of a serious economic downturn,” the White House report said. “The long-term deficit outlook remains daunting.”

The budget shortfall for 2010 would mark the second straight year of trillion-dollar deficits. Along with the unemployment numbers, the deficit may complicate President Barack Obama’s drive for his top domestic priority, overhauling the U.S. health care system.

“It throws a wrench in health-care reforms,” Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, said in an interview. “No matter the specific numbers, they’re a constant reminder that we’re in bad, bad shape.”

US Government Has Record Breaking Collections In April

According to the Treasury Department the government collected a total of $1.505 trillion so far in 2007. This represents an increase of 11.2% over the same period last year. Included is $383.6 billion that was collected in April, the largest single month tax collection ever. In the beginning of the year government spending was at an all time high, but the total spending of $1.585 billion was only up 3.2% from last year. The Congressional Budget Office said it expects the total deficit for 2007 to total between $150 and $200 billion. This would be a significant decrease from last year's deficit of $248.2 billion.
Source: CBS News