State Deficits – Wars

On NY’s Spending

NY State’s new Governor Andy Cuomo came out with his 2011 budget. The Gov. referred to it as an austerity budget. Amazing what austerity looks like these days.

The total austerity spending in the plan comes to a tidy 133 billion. A very big number these days. But really it is much worse for those long suffering New Yorkers. They also have to pay city, town and county taxes. The 2011 budgets for a few of the other big spenders:

Nassau county….$2.8

On top of this you have hundreds of other smaller cities, towns, villages that also are collecting taxes and spending money. The numbers I’ve provided for 2011 equal more than $205b. The total is at least $225b.

The census put NYS GDP at 1.09 trillion in 2009. It will be higher than that in 11’. Call it 1.2T (generous). The conclusion is that NY State’s aggregate public sector spending to GDP is 19%. But, of course, it’s worse than that.

NY’s citizens also pay federal taxes and share in the federal budget. What is NY’s share of that? Total federal spending will come in at around 3.3 Trillion and GDP around 15T. Federal spending is 22% of total GDP. Does this mean that the combined (state/federal) spending to GDP is ~40%? No, there are some double counts as some federal money actually goes back to NYS. But the number is certainly not less than 30%. It is at least one-third of state GDP.

Unsustainable is the word that comes to mind. And this is an austerity plan.

State Wars

The BLUE/RED state politics are interesting to watch. The Reds killed the Blues over BABS. The impact on the Muni market has already been felt. The Blues are at it again. The issue this time? Deductibility of state income and local property taxes (“SALT”) for IRS calculations.

This is a big deal. It will hit those Blue states very hard. Total SALT taxes were $700b in the last fiscal year. Using a federal rate of 25% you get total deductions of federal taxes of $175B. Which state’s residents will be whacked on the head with this plan? Blue states, of course.

State sales taxes can also offset IRS liabilities. They have fallen into the category of “other taxes paid”. Therefore it would be “logical” to eliminate the deductibility of sales taxes as well. It would be a huge “stealth” tax increase. But we might not get a logical outcome. Once again, the Reds are trying to screw the Blues. Congressman Kevin Brady (R., the very Red State of Tx.) has proposed that the deduction for state sales tax be made permanent.

Something along these lines is in the works. There will be limitations on the deductibility of SALT. Sales taxes will be fully deductible. For Texans who pay large sales taxes but pay no income taxes it results in a big win over the poor slobs in NY, CA, and IL who will have to foot the bill. In 2007 the 19 big blue states levied property taxes of $241b. This came to 65% of the US total. In 2011 both the raw numbers and the percentages are higher. Meaning a loss of property tax deductions hits the blue states disproportionately large.

So the Reds will “win” again. This is about politics, not sound tax policy. This is about the next election.

There is going to be a big conflict between Red and Blue states. There already is the basis for a war. What the Reds keep forgetting is that a substantial portion of federal revenue comes from the Blue states. So it is really not clear who is holding the best cards. A possible outcome could be that California, NY and Illinois band together and invade Texas. Texas will prove to be the balance of power as the “beggar my neighbor’s state” policies unfold.

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About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

Visit: Bruce Krasting's Blog

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