President Bush delivered a guns-and-butter speech Tuesday to the Economic Club of Chicago.
The guns came as no surprise. Bush vowed to spend whatever it takes to wage war in Iraq and on terror. He worried aloud about North Korea, too. No surprises there.
Butter is where things get more complicated.
The president plans to spread butter among the upper crust of the American electorate with his $674 billion economic plan. The rich pay the taxes, so when it comes time to cut taxes, the rich benefit the most.
Even the Democrats’ tax-rebate program–a boiled-down, but still warmed-over copy from President Bush’s first year in office–benefits the rich more than the poor. That’s what happens in a country where people making at least $82,000 a year pay 81 percent of the taxes. It’s impossible to cut taxes without inordinately benefiting the rich.
The complications come a bit deeper in the president’s economic program. In fact, they come partly from a tab of butter that got left out. The one that was supposed to help the states.
A widely expected $10 billion federal grant to the states did not materialize. States will have to fill more than $50 billion in budget gaps on their own.
This is an obvious blow to the states. But it could cause trouble for taxpaying investors, too. They’re the ones who ultimately could be forced to plug the big state budget holes, like Illinois’ nearly $3 billion shortfall.
If that happens, the president’s economic stimulus package may lose much of its oomph.
The White House says a state budget bailout wouldn’t help the economy. “One government to another government was a tax transfer,” spokesman Ari Fleisher explained. “It did not have a stimulative effect.”
But killing the state budget help transfers something else. It transfers the full burden of budget balancing back to the states.
The states will turn to their taxpayers. And the new state taxes in turn may hurt local economies and slow any recovery.
States have run out of quick budgetary fixes in this third year of the economic slowdown. Their stream of tobacco money is spoken for. Other neat tricks are tapped out. Programs are cut way back.
For many states, tax hikes seem certain to follow. Don’t forget: All but one of the 50 states are legally required to balance their budgets.
The Bush plan does more than withhold help. It might actually make the jobs of states and local governments more difficult.
This added difficulty will arise largely as a result of Bush’s plan to eliminate taxes on common-stock dividends. What’s good for individual investors could prove problematic for the states.
The tax-exempt status of municipal bonds always has been an advantage over corporate stocks and bonds. That advantage over stocks will disappear if President Bush succeeds in granting tax-exempt status to dividends.
Suddenly, munis’ tax-exempt status will be no big deal at a time when competition for investment dollars could grow more heated in other ways.
Companies such as Microsoft, Cisco Systems and Oracle may start issuing dividends once double taxation is dead, making their shares more attractive. The entire stock market could get a 10 percent bounce, or more, from the president’s dividend tax cut alone. Meanwhile, the federal government will be selling bonds to finance the biggest budget deficits in years.
The only way muni issuers can increase their competitive advantage: Raise the interest rates they offer. But this would only increase their costs, which would further add to state and local budget shortfalls down the road.
Ted Neild, managing director of Chicago-based muni giant Nuveen Investments, says the muni market and the states will fare just fine. They’ll benefit from investors’ increased focus on tax avoidance. And state finances will improve if the economy recovers.
“If you can get the economy growing again, you can increase capital investment, which creates jobs, which creates tax income for the states,” Neild figures.
Perhaps it could turn out just so. But at first blush, the president’s guns-and-butter program seems likely to turn the states’ budgets to toast.
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Contact dgreising@tribune.com.
