Seeking Alpha
written by Joseph L. Shaefer
Monday January 11, 2010
Using California and Texas as examples, California, which has the nation's highest personal tax rate of 10.55% (state only -- New York state and City together are even higher), has drastically cut back on the basic services citizens have a right to expect in exchange for their tax levies but raised taxes across the board.
Texas, on the other hand, enjoyed a balanced budget in 2009, even as it cut taxes for 40,000 small businesses. (In 2008, Texas created more jobs than the other 49 states combined.) Think New York is home to the most Fortune 500 companies? Not any more. Capital goes where it is welcomed and well-treated. Think that means California is #1 in this department? Could have been, but they blew it. It’s Texas that is home to 58 Fortune 500 companies.
It’s also low-tax Texas that ranks #1 as the state people relocate to most. It’s now Texas that is home to America's highest-volume port, not Long Beach, New York or the Port of LA. Of course, Texas shares one additional quality with my home state of Nevada – besides being a haven for wealthy Californians who are deserting the state in droves, leaving behind those who need the most social services, welfare, etc., both Nevada and Texas only allow their state legislature to meet every other year. "No man’s life, liberty, or property are safe while the Legislature is in session.” (Erroneously attributed to lots of famous Americans; in fact it began with an obscure New York court decision in 1866.)
Of course, there are hundreds of “taxes” that are called something else and when states don’t want to be seen as “raising taxes” they simply increase their license and fee structure. Last year’s $25 hunting or fishing license might be $400 this year. But they didn’t raise taxes!
A parking ticket in San Francisco last year? $25. This year? $54 if paid within 30 days, with $25 added every month and turned over to an expensive-to-the-taxpayers outside collection agency if not paid in 2 months. Radar detectors are now illegal in California and the state as well as many municipalities are ticketing for even a couple miles over the speed limit. They don’t call any of these things taxes – but in fact they are a tax on those living or traveling in the state.
If you own bonds issued by municipalities in high-tax states, remember: capital goes where it is welcomed and well-treated.
In a jointly-issued report, the Rockefeller Institute for Government and the Brookings recently estimated that the funding shortfall in state and local governments will exceed $50 billion in another year. The states with the highest taxes also have some of the worst budget problems – no shock to anyone who understands the difference between individual entrepreneurialism and state-sponsored nanny-ism as practiced in high-tax, high-nanny-factor California, Vermont, Michigan, Oregon, Illinois, New York, and New Jersey. All of these states have already begun slashing revenue-sharing with their local governments.
That leaves a lot of local governing bodies that get their own revenue from property taxes, licenses and fees with declining revenue sources. What do I suggest?
First, if you insist upon holding munis, I suggest you ONLY own investment grade bonds (AAA, AA, A or, only for the gamblers out there, BBB.)
Second, research on your own via the ‘net or ask your broker what kind of cash reserves the issuer of your bonds maintains. Anything less than 18 months to two years...sell the bond while you can.
Third, buy “pre-refunded” or “escrowed to maturity” bonds. You’ll earn less with this money-in-the-bank-to-pay-at maturity kind of bond, but you should be every bit as concerned this year about the return OF your principal, not just the return ON your principal.
Finally, for those who aren’t long bonds and are willing to short municipals, here is a list of a few municipal bond ETFs (there are plenty more organized as closed-end muni bond funds, some of which are selling at premiums) that I think may be worth shorting. I have bolded and highlighted those that are, in my opinion, the two dumbest states whose problems are entirely of their own making and which, in my opinion, are hiding their heads in the sand (or somewhere): California and New York.
No comments:
Post a Comment