Rasing taxes in a Recession

Most everyone agrees that the last thing to do in a massive recession is to raise taxes. That, plus too-little stimulus and protectionism, was a key ingredient in the Great Depression. Thus, the Obama team here has been extremely careful to point out that its tax hike on folks with incomes over $250,000 won't kick in until 2011, at which point the recovery will, in theory, be underway.

But such restraint is seemingly not possible at the State and local levels, where budgets have to be balanced, and where government incomes have collapsed. Across the nation, frantic efforts are underway to mend gaping holes in state and local operating budgets, and every rock that might generate new revenue is being overturned. Not State better illustrates this than New York, epicenter of the financial meltdown, and the scene of frenzied efforts to keep New York City's mass transit system semi-solvent, and to keep the State's budget from near-collapse. The solution (in large part)? Raise taxes! And, btw, don't forget to keep spending on really stupid things (and cut spending on vital ones) along the way:

State Leaders Outline Deal on a Budget

The plan would take steps toward a $16 billion deficit with billions of dollars in new taxes, financing from the federal stimulus and a substantial slowdown in the growth of health care spending.

....despite the enormous fiscal pressure the state faces, the budget contains $170 million in financing for pet projects — an amount unchanged from last year — suggesting that Albany’s appetite for with what critics call pork-barrel spending appeared to be undiminished. Listed in the budget were grants to gun clubs, an upstate museum dedicated to bricks and brick-making, the Soccer Hall of Fame in Oneonta and an organization known as the Urban Yoga Foundation.

....A major part of the tax portion will come from a plan to temporarily raise taxes on New York’s highest earners, starting with single filers who earn more than $200,000 and married and joint filers who make more than $300,000. New Yorkers will also pay new or increased fees to obtain a driver’s license, operate a boat, hunt and fish, rent a car, and buy wine, beer and cigars. The deal would also raise $557 million in taxes on utilities.

Note that New York's tax increases are across the board - hit up the wealthy, sure, but also hit up all those folks who drive, and drink beer and are also doing really well economically (haha)....

Now, New York is famously disfunctional at the State level, as evidenced by that brick museum, etc. But expect measures such as these to multiplied in almost every other state, and in thousands and thousands of municipalities all over the country. Governments are bleeding red ink everywhere you look.

Of course, this is going to put further downward pressures on consumer spending, thus further deepening and lengthening the Recession. Especially look out for the rich to be extra-stingy; they're getting hammered left and right with equity losses, and are gearing up for an era of much higher tax bills...

Negative feedback loops, anyone? Reduced consumer spending results in reduced government revenues and lower corporate profits, creating rising unemployement, further increasing consumer savings, further hurting the economy in the near term, etc, etc ad nauseum. We've seen this movie before.

Here's a Google News search result under 'tax hikes': Results 1 – 10 of about 11,904 for tax hikes. A few of the hits:

Smokers brace for huge tobacco tax hikes
stimulus funds won't save state from tax hikes
Cigarette, fuel tax hikes in RI budget plan
State faces higher income tax, more cuts
New York's high-income earners facing big tax increase
Cigarette tax hike has many fuming
Vt. lawmakers to consider gas tax hike today
County projects may usher in bigger tax hike
Your taxes are going up this week

This is yet another of the myriad reasons that the Federal stimulus is far too small. Local governments need revenues, but in their desperate search for them are further poisoning the economic well. The feds can keep printing money, and should be. The crisis is worsening.