Questions: High Unemployment Rate and Tax Revenue Impact (accounting, foreclosure, property taxes)

[LauraC]

Question 1: I noticed in today's headlines that Nevada has a 13% unemployment rate and California has an 11% unemployment rate. Nevada has no state income tax, right? So, is California in worse shape than Nevada because Nevada is not dependent on income tax for revenue? In other words, are states that have an income tax hit harder by a high unemployment rate than ones that don't have a state income tax and get their tax revenue in other ways?

Question 2: At what point in time are states who derive their main source of tax revenue from income tax, impacted by high unemployment rates? Is it immediately or is there a time lag from a few months to a year or more? How about the federal government that also gets revenue from income tax? When do federal programs feel the pinch of less income tax revenue as a result of high unemployment and shouldn't they be drastically decreasing (as opposed to sustaining or increasing) their budgets right now? I know some federal agencies are hiring? Isn't that the opposite of what they should be doing?

[drshang]

LauraC,

To answer question 1, it depends. The major reason why California has budget issues is not necessarily because of the income tax (it is a reason), but because of their reliance on capital gains tax. Unlike the Feds, California charges a full income tax for capital gains, which result from selling houses, stocks, bonds or some kind of investment. In a good market/good economy, obviously you see tons of capital gains tax being paid. Consequently, in a recession, you see less of that type of tax. Income tends to vary too, but less than capital gains. Property taxes will obviously tend to vary less than other types of tax. States like Nevada, however, are very reliant on property tax revenue and business tax revenue form one industry (gambling), so since their state is so undiversified and reliant on two very specific industry sectors, it can cause a budget headache, even without a traditional income tax. What a lot of states did is during the housing boom in 2005-2006, they projected out infinite home price increases and adjusted spending accordingly. They were not prepared for decreasing property tax revenue as the result of foreclosures and declining house prices. California has Prop 13 and fairly low property taxes so they weren't impacted quite as much by this as Nevada.

Question 2 I would say there is generally a lag because budgets tend to plan out cash in advance to a certain degree and they can use short term accounting tricks before there is a lot of practical impact. But yes, states with more unemployment will lose business revenue and its associated taxes, as well as income tax from unemployed people. Also people on unemployment will be more likely to use various forms of public assistance. It impacts the Feds too but it tends to impact states more because there is a lot of outmigration from high tax states to low tax states, and more inmigration to the US than outmigration. The federal government is hiring because they are racking up a huge deficit - they are making less and spending more. Whether or not they should be doing that depends on your view of economics. There are reasonable arguments for both sides, and you could write an entire book in pursuit of that question.