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Tuesday, October 30, 2007

Michigan Service Tax - Calm Before The Storm

SEARCH BLOG: MICHIGAN TAXES

It's been strangely quiet since the lines have been drawn: expanding government on one side; shrinking economy on the other. A few editorials here and some baffling noises from politicians there. But I'd say that this is just the calm before the tax storm hits in Michigan.

Michigan's Democrat Governor Jennifer Granholm [who just endorsed Mrs. Clinton for president] and Democrat legislators have gotten their way and passed a tax on services in order to erase a budget deficit of about 5%. There is talk of some budget cuts [after the increase], but that's just talk so far.

Meanwhile, Michigan residents are tightening their belts. Some are trying desperately to get out of Michigan by selling their homes at 1990 prices. Others are simply walking away from what they can no longer afford. Business are folding their tents.

But Michigan Democrats are wringing their hands about a budget that is only expanding by a couple billion dollars. As I wrote on October 1:

It's difficult to find how the 2008 budget bottom line actually compares with the 2007 budgeted/actual spending [strangely, the budget numbers seem hard to find]. It looks as if the 2008 budget is $43.4 billion, but that could be changing minute-to-minute. Compare that with the $41.7 billion approved for the 10/2006 - 10/2007 period.
That works out to a year-to-year state budget increase of almost 4.1%.
Well, I'm going out on a limb here, but I'm predicting that 1) the Democrats will do everything they can to make sure the service tax sticks and 2) the service tax revenues will be far less than the Democrats predict which will bring them back to the trough for increases in other taxes. [It should be noted that the income tax is increasing, too].
The turnip is drying up and the Democrats are still trying to squeeze it.
Well, it's just a tax on business... not on people.
And what runs those businesses and what do those businesses employ and from what does the state receive income and profit taxes now?
It's time government does what businesses do when faced with very difficult situations: cut back... significantly.
There have been enough examples of waste identified and processes so inefficient and unresponsive that a flat 5% cut... across the board for every single program... should be enacted.
Sure, the reaction is "We can't do that. [Fill in the blank] can't survive with a 5% cut in the [fill in the blank] program."
Yes [fill in the blank] can survive with 5% less state involvement. Has anyone wondered how much Ford, GM and Chrysler's budgets have been cut over the past few years so that they can survive?
That still leaves 95%... which is still higher than many people can budget for themselves versus a year or two ago.
And about all of those new programs... to give away those service tax dollars....
What do you think will happen when the expanding Democrat government comes back for more taxes to balance their expanding budget?
Don't stand in front of the fan.
..

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There is always an easy solution to every human problem—neat, plausible, and wrong.
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“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
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Tracking Interest Rates

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FEDERAL RESERVE & HOUSING

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February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)