MuniLand

Are teachers a protected class?

State and local employees have not been as hard hit as the general economy. At 19 million strong, this workforce comprises about 14.6 percent of total U.S. non-farm employment. It looks as if education workers are particularly being shielded from job cuts.

Chris Mauro, Head of U.S. Municipals Strategy at RBC Capital Markets wrote today in a privately circulated research note (emphasis mine):

[O]n a percentage basis, the state general government (non-education) sector has seen the largest decline in employment since December 2007. As of October 2011, it is down almost 6% from its recent peak.

Similarly, local education employment is currently down about 3% from the peak and has now also declined by a greater percentage than in any of the prior three recessions.

State education employment, which has historically been very recession resistant, has been growing at a moderate rate since December 2007 but, here again, the growth rate has been slower than in any of the previous three recessions.

State taxes on fire

State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?

Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.

But it’s the personal income tax (PIT) that’s really driving the show. In the state of New York the PIT makes up about 60 percent of total tax revenues. In Oregon the PIT is an astonishing 72 percent of the state’s tax haul. Although the national employment level improved slowly the PIT was up on average 11.4 percent across the country year over year, according to Rockefeller. This contrasts sharply with the 4.6 percent national increase in state sales tax collections, especially given that 21 states cut their PIT tax rate while only 12 states cut their sales tax rates.

An army of corporate lobbyists in the halls of Congress

Now that the Senate failed to pass President Obama’s jobs legislation last night, various pieces of his plan and other pet projects are likely to be introduced separately. It’s unclear whether an extension of the payroll tax reduction or additional unemployment benefits — two key planks of the President’s plan — will get floor time. But corporate interests are getting plenty of attention from members of the Senate. In particular, an army of corporate lobbyists has been vigorously promoting a tax holiday for U.S. multinationals.

Politico says the senior New York US Senator, Democrat Chuck Schumer:

has been quietly courting some Senate Republicans and Democrats to see whether there is any appetite for merging a GOP-backed idea — a tax holiday for corporations to bring home their overseas profits — with a Democratic-supported plan of creating a national infrastructure bank.

There is no evidence that giving multinational corporations a big tax break on profits earned overseas will create jobs or stimulate the economy. But some, like former director of the Congressional Budget Office Douglas Holtz-Eakin, believe that a tax holiday will actually create economic growth. Holtz-Eakin writes in Bloomberg:

When national and state data diverge

In our turbulent times, middle-income households are falling behind and national data depicts an economy that’s stagnating. But tax revenue data for many states hints that some earners have had substantial increases in their incomes.

Let’s start with the national numbers. There has been a lot of reporting this week about median personal income dropping since the official end of the recession in June 2009. Robert Pear wrote in the New York Times:

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.

Muniland Absurdity of the Year Award

The small town of Collingswood, New Jersey is facing some rough sledding in the next 90 days as it attempts to raise cash to pay off loan guarantees it made on behalf of a local condo and commercial development.

The private project, The Lumberyards, originated in 2006 with funding from TICIC, a consortium of New Jersey banks that provided $18,000,000 in construction loans to Lumberyard Condominiums. After completing about one third of the project the developers encountered weak demand when the housing market and economy softened following the 2008 financial crisis. The developers are now broke and have turned to the town of Collingswood, their municipal guarantor, to repay the loan to TICIC.

Moody’s downgraded the town six notches due to its weak financial position and the difficulty it will face in repaying the loan to TICIC. Moody’s picks up the tale:

The ebb and flow of tax collections


The Rockefeller Institute of Government publishes some useful statistics on the collection of state taxes, and I’ve been puzzling over them for a few weeks. What I was trying to reconcile was the difference between the states’ aggregate tax collections and the official economic pronouncements that dated that the recession’s end at June 2009. When the NBER Business Cycle Dating Committee, the official scorekeepers of the business cycle, made its pronouncement, The Economist sketched out some of the reactions to it:

The response to this announcement, already echoing through the blogosphere, is that hey, it doesn’t feel like the recession is over! The dating committee realises this:

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.

Who are the “job creators?”

As the congressional supercommittee begins its budget-cutting efforts, state and local governments are worried about looming cuts to their federal grants. From Bloomberg:

In statehouses across the U.S., a budget-cutting congressional supercommittee and the sputtering economy threaten a fledgling recovery from the worst fiscal crisis in more than 70 years.

To create a more balanced approach that includes revenue increases as well as spending cuts, President Obama has proposed to raise taxes on the highest earners by reducing their tax exclusions and deductions (of which the municipal bond tax exclusion is a relatively small part).

Thumbs down on Obama’s muni tax

Thumbs down on Obama’s muni tax

Unsurprisingly, the Treasurer of California and Bloomberg’s editorial board are pushing back on the Obama administration’s proposals to reduce the municipal bond tax exemption for those earning more than $200,000 per year. I wrote previously how the Republicans are cool to the proposal. The California Treasurer says that the increased tax would raise municipal borrowing costs and estimates that over time the act could add $2.7 billion to $7.7 billion to statewide borrowing costs. Bloomberg’s editorial board goes further and suggests that any changes to municipal bond taxation should be done as part of a broader tax reform effort. From Bloomberg:

How disruptive would this new tax, which the administration estimates will bring in $30 billion a year, be for the muni market? A report from Morgan Stanley Research saw little impact, pointing out that the premiums investors demand to hold munis over Treasuries “have little direct relationship with tax rates historically.” A report from Citigroup Global Markets, by contrast, argued that curbing the exemption would “increase state and local borrowing costs significantly.”

On balance, we suspect the impact on interest rates will be relatively small initially. (Certainly the proposal has had little effect on the market since the announcement, according to Bloomberg pricing data.) Of course, that could change rapidly if historically low Treasury yields rise and munis start to look less attractive.

Municipals are a small part of the American Jobs Act

President Obama held a ceremony on Monday in the Rose Garden, complete with a backdrop of teachers and law enforcement officers, to promote his American Jobs Act. The President has insisted that his proposal would be fully paid for by tax increases on the wealthy. What was less reported was that the $447 billion of proposed tax increases, Section 401 in the legislation (page 134), would not occur until 2013 and would stretch over 10 years. So under the President’s proposal there would need to be tax increases of approximately $47 billion a year from 2013 through 2023.

It’s been reported that Republicans are cool to the President’s proposal and it’s likely that they will object to paying for new stimulus programs with revenue generated in the next decade. In addition, the President’s proposal for $447 billion in tax increases will have to be added to the $1.5 trillion of savings that the Congressional super-committee will be looking for. So if the President’s proposal is embraced, the super-committee will need to find $2 trillion of savings from the federal budget over the next 10 years.

The bulk of the proposed tax increases in the President’s plan will come from adjustments in the deductions allowed for municipal interest and itemized deductions for individuals earning over $200,000 per year. This would account for about $400 billion of tax increases over ten years.

Obama proposals could shift municipal bond buyers

Obama would pay for jobs bill with 2013 muniland tax changes

The White House released draft legislation yesterday for the $447 billion American Jobs Act of 2011 which outlined proposed changes in the tax code to offset its major component — the extension of the payroll-tax reduction. The President’s proposal would raise income taxes on the wealthy by limiting income that can be excluded from taxation, mainly by limiting this exclusion for interest earned on municipal bonds.

This income tax increase for the more well-to-do would come into effect for taxable years beginning on or after Jan. 1, 2013. Generally, municipal bond ownership is concentrated in the higher tax brackets. From the Bond Buyer:

Internal Revenue Service data from 2009 shows that 58% of all of the tax-exempt interest reported to the IRS was from individuals with incomes of $200,000 or higher, Fabian said.

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