One of my favorite sayings relating to finance/economics is as follows: If your outflow exceeds your income, then your upkeep will be your downfall!
In short, this is the crux of the "debt mess" that is happening right now both across the pond and right here at home in places like California, Texas, Illinois and New York. The problem is simple, really. Countries such as Portugal, Ireland, Greece, Italy, and Spain (aka the PIIGS, or as I prefer to call them, the PIGI'S) spent like drunken sailors when times were good and now that times are bad, they find themselves without the income to support their upkeep. And to make matters worse, the bond markets are making it nearly impossible to borrow the money needed for their upkeep as there seems to be some question about lenders getting their money back.
While we Americans may turn up our noses at the plight of what is often referred to as peripheral European countries, it is sobering to realize that we've got the exact same problem right here in the good ol' USofA. States such as Illinois and California just kept spending during the past decade and now find themselves in a world of hurt from a budget perspective.
In light of the fact that I grew up in and also own a corporation that is domiciled in Illinois, I try to stay up to speed on the trials and tribulations of the current budget problem. In short, the state of Illinois finds itself about $13 billion shy of what it needs for its fiscal year and is rapidly running out of time to fix the problem.
In dramatic fashion and at the 11th hour, the state of Illinois managed to get a solution passed in both the State House and Senate on Tuesday. With a new legislature due to be sworn in at noon on Wednesday, lawmakers worked late hours to get their fix put through.
What was the solution, you ask? They came up win an oldie, but a goodie: Increase taxes – a lot!
The new measure raises the individual income tax rate on individuals by a mind-boggling 67%, taking the rate from the current 3% up to 5%. And given that real estate taxes are already sky high in the Chicago suburbs, this is gonna get noticed.
As one Illinois resident I spoke with today said, "Obama gave us a 2% break on FICA and now the state comes in and takes it right back away from us."
But lawmakers didn't just pick on their constituents. No, the bill also bumps up corporate tax rates to 7% (from 4.8%). Hmmm… maybe it's time to move the corporation to Colorado, then the lift tickets might be deductible! (Did I mention that I know nothing about accounting?)
Proponents of the bill said they had no choice in order for the state to avoid defaults, public layoffs and foreclosures on government buildings. As Democratic Representative Greg Harris put it, "The wolf is at the door, ladies and gentlemen."
As you might expect, Republicans didn't quite see it that way. Rep. Roger Eddy said, "We're saying to the people of Illinois we're making up for our mistakes on your back."
The upside seems to be that Illinois' problems, and the ensuing solutions, will likely provide benefits to states such as Florida and Arizona as the "boomers" decide to seek warmer climates (and lower tax rates). Colin Hitt, who is a director at the Illinois Policy Institute said, "Through a slow drip, we've lost thousands of taxpayers. If this bill passes, it will probably burst the pipes."
Although California has a far better climate; they also have a bigger budget problem. It is estimated that the Terminator's stomping grounds is facing a budget shortfall of about $25 billion. Will an Illini-like solution be on its way west? Stay tuned…