Scary Solutions, Scary Consequences

States have only four choices when it comes to their budgets:  raise taxes, lower services and benefits, borrow money, or some combination of the three.

67% Increase in Taxes!?

Big states like New York, New Jersey and California are contemplating large tax increases.  Illinois just proposed and passed a 67 percent income tax increase!  Most states don’t have the courage to do that. They pass sin taxes instead.  These are taxes on soda, sweets and snacks.  Taxes are being proposed on beer and wine.  Cigarettes are an obvious one.  Not so obvious options include taxing plastic shopping bags, fees on casinos and fees for tanning.  Even marijuana is being considered for legalization to harness more revenue for the states.

Bankruptcy for States?

Another option being considered by the federal government in lieu of a bailout is allowing the states to file for bankruptcy.  This would have a huge impact.  It would create leverage for the states in their negotiations with public employees unions and the huge holes in public retirement systems.  There will be dramatic shifts in public policy.  Who will have more power: taxpayers or bondholders? Have you ever truly thought of that question?  If not, you need to.

What happens to the promises made to public employees?  Nassau County in New York and Vallejo in California have already begun dramatic changes in their budgets with pension and health care reductions.  Employee reductions, tax increases, and finally borrowing, borrowing, borrowing.

This will have huge implications for our country.  Coupled with the federal government’s budget problems, in the short term calamity awaits the American people with higher taxes, lower benefits, serious inflation and ever-increasing volatility.  Ask yourself if you have a strategy for these issues.

We’re not the only one’s talking

Please, don’t just take our word for it.  We’d highly recommend you read some of these articles:

Title: Raise Taxes? Some States See the Value (Higher Taxes Wouldn’t End Some Deficits)

www.nytimes.com (The New York Times, January 20, 2011; front page)

Title: Illinois Lawmakers Pass Massive Income Tax Increase

www.cnbc.com (CNBC.com, January 12, 2011)

Title: States eye ‘sin’ taxation as salvation for budgets

www.washingtontimes.com (The Washington Times, January 24, 2011; page 12)

Title: Will Congress Create “State” Bankruptcy Law?

www.thenewamerican.com (New American, January 21, 2011)

Title: A Path Is Sought for States To Escape Debt Burdens

www.nytimes.com (The New York Times, January 20, 2011)

Title: Mayors See No End to Hard Choices for Cities, Including Bankruptcy

www.nytimes.com (The New York Times, January 22, 2011; section A, page 10)

Title: Defaults by Cities Looming as U.S. Mayors Say Deficits Hinder Debt Payment

www.bloomberg.com (Bloomberg, January 19, 2011)

Title: Strained States Turning To Laws To Curb Unions

www.nytimes.com (The New York Times, January 4, 2011; front page)

Title: City Drafts Bankruptcy Exit

www.wsj.com (The Wall Street Journal, January 18, 2011; section A, page 6)

Title: New York State Seizes Finances of Nassau County

www.nytimes.com (The New York Times, January 26, 2011)

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

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