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Searching for a Fix

Submitted by Michael J. Panzner on Thursday, 18 March 20102010-03-18T13:17:07Zl, j F YNo Comment

While the U.S. is not quite there (yet), a growing number of countries have reached the point where their ability to pay for the fallout from the financial crisis and past policy mistakes with loans and funny money is a challenge. So, as the New York Times notes in “Struggling Governments Get Creative to Raise Income,” they are resorting to plan B (or is it plan C, or D, or E?).

PARIS — France, promising to improve the environment, is planning to introduce a carbon tax. In Finland, where the government says it wants to improve diets, taxes are back on candy and soft drinks. Similarly, Denmark added tobacco and some fatty foods to the list.

Britain is taking a different tack, considering a so-called horse tax.

All these taxes may be presented as serving virtuous ends, but they also share something else in common: they help plug budget holes swollen by a severe recession, big bailouts and billions in stimulus spending intended to ease the pain.

But it is not just sovereign states that are playing this game. Since many municipalities were in financial trouble even before the crisis struck, they, too, are being forced to call upon a range of money-grabbingraising talents:

A similar trend is playing out in parts of the United States, where states have been trying to replenish diminished coffers. In 2008, Winter Haven, Florida, started charging “accident response fees” to move the financial burden of tending to accidents directly to at-fault drivers.

This month, Nevada officials drafted an emergency regulation to raise entrance fees and season passes for state parks to help plug a gap in state funds, according to The Associated Press.

Data from the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, show that total state and local revenue as a percentage of personal incomes has been steadily rising since the start of the past decade.

But like a strung-out addict in search of another fix, no small number are finding that efforts to feed their habits are coming up short. As a result, they are having to turn to an old friend, as the Wall Street Journal reports in “States Hope for a Rich Uncle”:

Governors Lobby Washington for More Money as Stimulus Aid Runs Out

Strapped states, facing up to $180 billion in budget deficits in the next fiscal year, are going hat in hand to Washington.

California wants $6.9 billion in federal money for the next fiscal year, and Republican Gov. Arnold Schwarzenegger says he’ll have to eliminate state health and welfare programs without it. Illinois, facing a $13 billion deficit that equals roughly half of the state’s operating budget, has what it dubs a stimulus team and a group in Washington pressing for additional state aid.

Among other things, Illinois is hoping the federal government will keep paying a higher share of Medicaid costs. “That’s $600 million we desperately need,” said Kelly Kraft, a spokeswoman for Democratic Gov. Pat Quinn’s budget office. Those funds already are counted in the governor’s budget proposal.

But in Congress, members are balking at further subsidies amid an election-year outcry over the U.S. deficit and federal involvement in the economy.

That tension sets up fierce battles as states work out budgets for the fiscal year beginning July 1. Because they can’t run deficits, most states face yet more tough choices: raise taxes, cut services, lay off workers or trim employees’ wages and benefits over union opposition.

Not a pretty picture, that’s for sure.

PG
Michael J. Panzner is a 25-year veteran of the global stock, bond, and currency markets who has worked in New York and London for such leading companies as HSBC, Soros Funds, ABN Amro, Dresdner Bank, and J.P. Morgan Chase. He is the author of When Giants Fall: An Economic Roadmap for the End of the American Era, Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, and The New Laws of the Stock Market Jungle: An Insider’s Guide to Successful Investing in a Changing World. He has also been a columnist at TheStreet.com’s RealMoney paid-subscription service and a contributor to AOL’s BloggingStocks.com. Panzner has appeared on or been quoted by CNBC, Bloomberg, The Wall Street Journal, USA Today, Barron's, Reuters, CNN, MarketWatch, BusinessWeek Online, TheStreet.com, Slate, CFO.com, and other print, radio and television outlets. His articles have appeared in Buyside, Stocks, Futures & Options, Management Review, and Business Credit. He is a New York Institute of Finance faculty member specializing in Equities, Trading, Global Capital Markets and Technical Analysis and is a graduate of Columbia University. He regularly speaks to a diverse range of audiences, from small groups of individuals with little specialized knowledge about money matters to gatherings of the world’s top financial professionals, on a variety of economic, business, and investment-related themes.mjpan

Michael J. has blogged 78 posts here.

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