Wednesday, November 26, 2008

The Tax Man Cometh

While Mr. Obama campaigned on cutting middle class taxes, the reality of our economy just won't let that happen. Already, Congress is talking about raising Federal gasoline tax from the current 18 cents a gallon to 40 cents. Not a big number, but it will effect the bottom lines of people who have to drive a lot for their jobs. Also, it will be reflected in the cost of almost everything we buy because trucking and shipping costs will be affected and increased across the board. Granted, we are better off than we were when oil was at $147 a barrel but, given the tough economic times, every dollar of savings may help save jobs.

I would expect that Congress and our new President will raise taxes across the board. We already had a deficit and all this "bailout money" is just making that hole in the governments wallet a whole lot bigger. The only way to close that hole is to reduce spending and/or to raise taxes. For those guys in Congress (and the White House), it has always been much easier to raise taxes than make the hard decision to cut spending.

The biggest taxes to come will be on the state and local level. At least 40 states are now projected to be in deficit trouble next year. We've already heard from California with Arnold's request for a few billion dollars in a Federal loan. However, the biggest states are all in trouble like New York, Illinois, Pennsylvania, and New Jersey. This is where the wrath of the tax man will be seen the most. States that have income taxes will all probably raise them. States that don't have income taxes will probably look at starting them. Sales taxes will go up because, in a recession, tax revenues on sales will be falling. Expect real estate and "sin" taxes on tobacco and liquor sales to increase. I would also bet that many heavily traveled roads will start "toll collections" to help pay for repair and other infrastructure rebuilding.

The problem with all these taxes is that they will ultimately be inflationary at a time when our economy can least afford higher prices. In many ways, the recovery of the economy could be stalled by a lot of new taxation. By the way, don't expect any of those new taxes to be rolled back when the economy gets better.

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