I read a short article in Planet Money that reminded me why I tend not to pay attention to official government inflation statistics. The government estimates it could generate $200B in extra revenues over a decade by making the switch. This reminds me that the folks generating the index essentially have a vested interest in the numbers themselves or at least can face political pressures to calculate and/or interpret them in ways favorable to policy.
See “The Wonky Inflation Tweak Worth Over $200 Billion” for more.
Unfunded pensions are a growing problem around the country for local and state governments. The Atlanta-Journal Constitution reports that the city of Atlanta in Georgia has set up a Pension Reform Panel to figure out how to solve its own funding gap. This panel is considering increasing property and/or sales taxes as part of the solution.
Atlanta faces a very large problem:
“More than 20 percent of city spending is devoted to pensions. The city is spending nearly as much money on pensions as it does for its police department. At its current pace, the mayor told reporters Monday, it will be tougher for the city to provide services such as fixing sidewalks and adding more parks and greenspace…
…The amount of money Atlanta spends on pensions has more than doubled since 2001. That year, the city spent $55 million; it is expected to spend about $125 million on pensions in the 12-month period that ends June 30. By 2015, the annual cost to the city is estimated at $160 million.”
Like so many local and state governments, Atlanta increased pensions during times of relative prosperity with no real plan for funding in the future and optimistic assumptions about returns for investments.
“Atlanta’s three pension plans covering police, firefighters and general employees have long been underfunded. In 2001 and 2005, the City Council approved several changes to increase retirement benefits. Those changes, however, were made without determining a way to pay for them.
Meanwhile, the three pension funds have not earned as much as anticipated. As a result, the plans are about 53 percent funded…The city has an unfunded liability of about $1.5 billion…In 2001, the unfunded liability was $321 million.”
The Phoenix City Council has voted to tax food again after ending a similar tax in the mid-80s. The City Council is looking for ways to fix a large budget shortfall. The association which represents police in Phoenix claims that the 2% tax is not sufficient to pay for police and fire services and has requested an increase to 4%.
Mesa and Surprise are the last two cities in the Phoenix, Arizona area that have no tax on food.
Employing workers will get even more expensive in 2010. The National Association of State Workforce Agencies (NASWA) reports that at least 33 states will raise payroll taxes next year to shore up depleted unemployment insurance funds. Click here for complete story….
“Gwinnett County officials Friday unveiled plans to set a 2009 mill levy that would increase its portion of property taxes by about 21 percent. The proposal would generate $52.6 million in additional revenue to help restore emergency services, parks, recreation and other operations pared by budget cuts earlier this year. The increase, if passed, would add slightly more than $13 a month in county property taxes on a $200,000 house, or about $160 a year.”
This is the second time County Commissioners have proposed an increase in property taxes. Anti-tax activists defeated the earlier proposal, and the county responded with drastic cuts in services. This time around, the tax is likely to pass given that Debbie Dooley, the grass-roots coordinator for Freedomworks, will not oppose the plan:
“‘They explained in detail what this mill rate would fund. It’s what we’ve wanted all along. People just want accountability from their elected officials.’ Dooley said she has issues with some of the restorations in parks and recreation, and while she will not support the budget increase, she will not lead a drive to oppose it. She encouraged county residents to attend the public meeting Thursday to see a presentation on the plan and make up their own minds.”
The on-going tensions between government revenues and household budgets become most intense during recessionary economic conditions. Property taxes are a particularly hot topic because they drive up the cost of owning a home in ways that many struggling families are not prepared to handle. On the other hand, when deprived of these revenues, local governments can sometimes struggle to provide even the most basic services that these same families come to expect.
No matter where your sympathies reside, higher property taxes are inflationary for existing homeowners and are likely inflationary for aspirational homeowners (unless offset by federal tax credits, homebuilder discounts, etc…)