President Barack Obama acknowledged today that the nation's economic recovery is fragile, and he says he's considering additional steps to speed it up. "Steps like extending the tax cuts for the middle class, that are set to expire this year," he said. "Redoubling our investment in clean energy and R & D." The president also called on Senate Republicans to stop blocking a package of aid for small businesses that includes tax cuts and $30 billion in funds for community banks to lend. Republicans say the bill is misguided.
Also today, after months of frugality, it appears American consumers are reaching for their wallets again. Due in large part to an increase in people buying cars and trucks, spending in July grew at the fastest rate in four months, according to the Commerce Department. Americans are also continuing to save. The personal savings rate was just below 6 percent, nearly three times higher than it was before the recession began over two years ago.
But the news wasn't good enough for investors who are still worried about the overall direction of the economy. Most of them are focused on Friday when the government releases unemployment figures for August. The Dow lost nearly 141 points to end the day at 10,009. The Nasdaq and S&P both lost 1.5 percent.
An Economic Turnaround?
For some time now, we’ve been hearing about the precarious state of New York’s finances. And New York is not alone. Many other states, especially California and Illinois, are facing declining revenues, even as the need for services has grown. They've taken painful measures, like layoffs of teachers and police, and cuts to essential services. Today, a report from the Nelson Rockefeller Institute of Government at the State University of New York in Albany suggests a turnaround. Researchers found that tax revenue is up more than 2 percent overall in most U.S. states, for the second straight quarter. Bob Ward, an author of the report, explains.
The recovery seems to be stalled in other areas, so why are tax revenues going up?
Well, a couple of points. First of all, it's obviously not a dramatic upswing, it's an upward tick of about 2 percent for all of the states, on average. This does follow five straight quarters of declines, in the last quarter of 2008 and throughout calendar 2009, so we now have two straight quarters of modest growth. A lot of it is driven by tax increases that state legislatures enacted in New York, Connecticut, California. A number of other states have increased income taxes at the upper range, some cigarette taxes, sales taxes and so on, so a piece of this increase is attributable to the economy, and particularly retail sales, as we've just heard, have been relatively stronger in recent months. But states have a long way to go before they are back in a comfortable position.
I suppose one aspect of this modest recovery that is surprising is how relatively quickly it's happening. Mayor Michael Bloomberg, for example, has been warning for a long time of a so-called "long tail" -- that corporations can carry their losses forward for years, and pay lower taxes as a result, even as they're rebounding. Are you surprised at the pace of this recovery?
It's important to keep in mind, I think, that the data we are releasing today really, it only detects revenues. There is a slight uptick in revenues. On the expenditures side, states and New York and other cities still have very big challenges dealing with employee pension and healthcare benefit costs, as well as education, mass transit and other expenditures. So when you look at the overall balance, a little bit of good news on the revenue side, right now, in most places is outweighed by continuing and very large challenges on the expenditures side.
To dig a little deeper, where are we seeing the increase in tax revenue collections -- in personal income tax, or in corporate taxes? Or both?
The two largest categories for New York and most states are the income tax and the sales tax. Nationwide, the sales tax was relatively strong in this year's second quarter, almost a 6 percent gain average for all of the states. The income tax was up a little bit, not quite as much as the sales tax. Corporate taxes were up by a pretty good percentage also, but the corporate tax is a relatively small piece of the revenue pie for most states.
Finally, Bob, what was the most surprising finding to you in this report?
I think the strength of the sales taxes is extremely important. It's the single tax that is important to most of the states, to the greatest number of states. There are a small handful of states that do not have a sales tax, but most of them do, and it's one that very directly reflects immediate goings-on in the economy in terms of retail sales to consumers. So that may be something of a positive sign for the overall economy.
Simplifying the Tax Code
A recent report found that every year, American taxpayers spend more than 7.5 billion hours, and nearly $140 billion to comply with the federal tax laws. From 1987 and 2009, the 1040 instruction book has gone from 14 pages to 44. Those findings are courtesy of a board formed by the Obama administration, which is looking for ways to simplify the tax code. Since the last overhaul of the code in 1986, there have been more than 15,000 changes.