While the private sector continues to claw it’s way back up (after cratering in May, 2009 at 69.06 percent), the current level is still well below the pre-Great Recession level of 74.48 percent in June 2007. With the aging of the baby boomers and Obamacare looming, it’s doubtbul that we will ever get back to pre-recession levels. We will all be poorer as a result of a smaller private sector.

photo credit: Robert Couse-Baker

We all know that Uncle Sam’s trillion plus dollar budget deficits are unsustainable. Debt is now larger than Gross Domestic Product and we are well on our way to Greece-level debt (and that excludes our “off the book debt,” see sidebar for our true debt levels . . . around $77 trillion). Adding insult to injury, the states are running huge debts of their own.

At some point, Uncle Sam is going to have to sober up and face reality. The reality is that the budget deficit needs to eliminated and budget surpluses must become the norm (American households need to listen up as well).  One solution that I recently came across was “The Penny Plan.” They describe the plan as thus:

The One Cent Solution is beautifully simple: If the government cuts one cent out of every dollar of its total spending (excluding interest payments) each year for six years, and then caps overall federal spending at 18 percent of national income from then on, we can:

• Reduce federal spending by $7.5 trillion over 10 years.
• Balance the budget by 2019.

Moreover, instead of using inflated budget “baselines” to claim nonexistent spending “cuts” a common practice in Washington, the One Cent Solution calls for real cuts.  Under the One Cent plan, the sum of all discretionary and entitlement spending will have to go down from one year to the next, by one percent or more.

Another cool feature of the Penny Plan is that it comes with anther great Remy video shown below.

But alas, I fear even this attempt may be too little too late. Even with a balanced budget by 2019, we will still add trillions of dollars to the national debt. Thanks to President Obama’s policies, the national economy will still be struggling to recover over the next few years. This is a recipe for an explosion in our debt-to-GDP ratio. Check out this history of recent debt ceiling increases to see how unsustainable our path already has become.

And if it all becomes too depressing, turn to Remy again for some more amusement with “Raise the Debt Ceiling.”

It was just announced that the winners of the 2011 HGTV Dream Home in Stowe Vermont have put their house up for sale . . . for a cool $3,795,000. However, this clip from the story makes you wonder if property taxes aren’t to blame:

The annual taxes on the home are $27,720, according to town appraiser Tom Vickery.

The town-appraised value of the house is $1,521,000 million; however, that’s based on 2005 selling prices and doesn’t take the furnishings and artwork into account. Vickery is working on a townwide appraisal and expects the home’s value to increase somewhat once the appraisal is completed this summer.

OK, so they are paying $27,720 in property taxes on a $1.5 million valuation. They have the house up for $3.8 million, which means the comps are indicating that the assessed value will “somewhat” increase by at least double! In that case, the property tax bill alone will be a whopping $55,440 per year. And that’s before utilities, maintenance, insurance, etc.

This is why I would advise any winner of these dream homes to take whatever cash you can and run . . . as I mentioned in my previous blog on the 2012 HGTV Dream Home in Midway, Utah.

photo credit: Hammer51012

Another year and another HGTV Dream Home. This year’s HGTV 2012 Dream Home is a river-front home in Midway, Utah. According to the HGTV contest rules, it comes with a home and furnishings (valued at $1,500,000), cash ($500,000) and a 2012 GMC Terrain SLT2 ($38,755, shown above) for a grand package valued at a cool $2,038,755.

If you win the dream home, be prepared for a hefty federal and state income tax bill (this analysis excludes the myriad of other taxes such as any deed or transfer taxes and, most especially, the property tax which you pay year, after year, after year . . . well, you get the picture). Overall, the federal and state income tax bill comes to a whopping $775,586. Even after using the $500,000 in cash, you will still be left with a tax bill of $275,586 . . . maybe the IRS will let you pay on an installment plan?

Fortunately, HGTV does provide an escape hatch by offering $800,000 in lieu of taking possession of the home, plus the $500,000 in cash and vehicle–for a grand total of $1,338,755. If the winner opts for this choice, they will take home $843,169 free-and-clear after paying income taxes of $495,169.

My suggestion would be take this money and run. One could outright buy a very, very nice home with the cash. For example, check out this home in beautiful Hale’s Location, New Hampshire listed for $729,000 and still have enough left over to put into your IRA. Hale’s Location is one of a handful of America’s tax havens left (all in New Hampshire) where there are no state and local income or sales taxes and very low (in some case no) property taxes. In fact, according to the listing, the property taxes are a mere $1,887 per year.

Have a Merry Christmas (am I still allowed to say that?) . . .

Don’t get me wrong, I have nothing but compact fluorescent bulbs in my house because the price of electricity is so high in New Hampshire. Yet, that is my choice. I’m not going to force my neighbor to do the same thing if he doesn’t want to. Anyone in Congress listening?

photo credit: pweiskel08

Just moments ago, the New Hampshire House attempted to override Gov. Lynch’s veto on Right-to-Work. Unfortunately, the veto override failed 240-139, a mere 14 votes shy of the needed two-thirds.

However, the supermajority vote in the Senate and near-supermajority vote in House shows that there is very strong support in New Hampshire for Right-to-Work. New Hampshire is only one supporting Governor away from enacting Right-to-Work which could happen as early as 2013 (New Hampshire’s Governor is on a two-year term and Gov. Lynch has announced he will not run again).

Another thing we should also worry about are the actions of the anti-Right-to-Work forces who stopped at nothing to get their way. Consider these shenanigans as reported by New Hampshire Speaker O’Brien:

That’s why I have become seriously concerned about the coercion, threats and outright intimidation specific to the Right to Work issue that we have learned some of our colleagues have suffered. Here are several examples, some of which have just come to me today:

• One older representative was told that public emergency personnel might not respond in a timely fashion if they learned of a problem at this representative’s home after a vote to support Right to Work.

• Another representative’s daughter attending a public school was told that she would not be an appropriate candidate for a captain of her basketball team should her parent vote in support of Right to Work.

• Yet another representative who has been supporting the veto override was first told by his public employer he had to work tomorrow. Then he was unexpectedly called in by the head of the employing agency and told that he would be allowed to go to Concord to vote, but that, given the presence of the two unions that had members at the agency, he really needs to vote against Right to Work.

• A representative’s spouse was threatened on the job based upon a vote for Right to Work, leaving that spouse with the impression that he might lose his job or suffer worse consequences if that vote was not for the union bosses.

• A representative’s spouse was told in a telephone call from a senior union official that their pension could be in jeopardy if this representative voted in favor of Right to Work.

These are examples that go beyond the pale, yet do not include the numerous other instances in which union bosses have subtly implied veiled threats against representatives on this issue.

How many more instances of intimidation went unreported? These tactics simply do not belong in America.

photo credit: Ewan-M

In a saga that falls into the category, “you just can’t make this stuff up” . . . Illinois policymakers recently enacted one of, if not the largest, tax hike in state history only to find themselves faced with threats of companies leaving the state. The response, give away special tax breaks of course!

Both Sears and the Chicago Mercantile Exchange have threatened to leave Illinois if something isn’t done about their tax burden. So now the legislature is debating SB 397 which would carve out special tax treatments for Sears and CME (pdf).

Included in this discussion is a proposal to increase the state’s Earned Income Tax Credit from to 15 percent from 5 percent of the federal EITC (though the specifics are still in flux). However, the EITC is a deeply flawed policy that hurts the working poor more than it helps. My latest study on the EITC proposal published by the good folks at the Illinois Policy Institute (pdf) finds:

Because taxpayers lose out on the earned income tax credit as their income increases, there is incentive for workers to keep their income under the “phase-out” level. Specifically, the only time during which the government rewards the worker for earning more money is when the worker’s income is moving from zero to $12,750. The federal earned income tax credit only encourages work effort in the phase-in income range where the effective marginal tax rate is negative 40 percent.

The taxpayer is, at best, indifferent during the plateau stage where the effective marginal tax rate is 0 percent. During the phase-out state – $41,000 for a single person and $46,000 for a married couple – the taxpayer is actually penalized with an effective marginal tax rate of 21 percent. Since the income range of the phase-out (21,800 to $46,000) is twice as large as the income range of the phase-in ($0 to $12,750), the federal earned income tax credit is spreading more work disincentive than incentives.

The state earned income tax credit, since it is an add-on to the federal earned income tax credit, only serves to exacerbate the work disincentives. The current state earned income tax credit is worth 5 percent of the federal earned income tax credit, which creates an effective marginal tax rate during the phase-out of 22 percent (versus 21 percent under the federal earned income tax credit alone). When the proposed state earned income tax credit worth 15 percent of the federal earned income tax credit takes effect in 2013, the effective marginal tax rate during the phase-out will increase to 24 percent. Expanding the state earned income tax credit will only serve to further discourage work.

Compounding the work disincentive related to the phase-out of the earned income tax credit are other federal, state and local taxes and other government welfare programs. These other factors increase the effective marginal tax rate faced by people in the earned income tax credit’s phase-out income range. Other taxes add to the tax burden on each additional dollar earned while, at the same time, the money received from other government welfare programs begins to phase out at approximately the same income range that the earned income tax credit begins to phase out.

In fact, a more comprehensive effective marginal tax rate estimate found that the effective marginal tax rate can reach as high as 65 percent! Faced with an effective marginal tax rate that high, many people will find themselves trapped by the earned income tax credit rather than helped by it. Expanding the state earned income tax credit will only dig the hole deeper for those people working desperately to better their economic situation.

Illinois would be better off using this money to lower the personal income tax rate or increase the exemption for all taxpayers, rather than expanding the deeply flawed earned income tax credit.

This was a fun study for me as there was a good deal of nostalgia since it was based on work from one of my first studies that I ever published for the Tax Foundation: “Growth of the Earned Income Tax Credit” (pdf) co-authored with Arthur P. Hall

Additionally, the EITC does nothing for Illinois’s middle class which has gotten clobbered by the recent tax hikes.  Watch the video below from Kristina Rasmussen of the Illinois Policy Institute which explains how “the deal is, they take three months of grocery money in exchange for chips and a sandwich.”  It’s no wonder why taxpayers are fleeing Illinois.

While the trend has been up over the last year (after cratering in May, 2009 at 69.06 percent), the current level is still well below the pre-Great Recession level of 74.48 percent in June 2007. With the aging of the baby boomers and Obamacare looming, it’s doubtbul that we will ever get back to pre-recession levels.