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Trust Department Quarterly Newsletter 1st Quarter 2007
Taxes, Taxes – Who Pays the Most Taxes As the 2006 income filing period comes to an end we thought it may be interesting (or depressing) to look at how Minnesota taxpayers rate with other states when we look at all state and local taxes. Our state congressmen are proposing additional taxes. A bill will probably be presented to Governor Pawlenty to increase the gasoline tax from 22 cents per gallon to 32 cents. Wisconsin is already at 32.9 cents. The federal gas tax is 18.4 and the average combined state and federal gasoline tax is 45.5 cents. Governor Pawlenty has stated he will veto the bill, the dollars from which would be used to improve roads and public transportation. Compared to European countries our tax is very low. European countries use gasoline tax as a source to finance many of their social programs such as nationalized healthcare. As an example, Amsterdam collects the equivalent of $4.20 per gallon in tax. The state legislature also wants to create a higher bracket for Minnesota taxpayers making more than $400,000 per year. These dollars are to be targeted to benefit local school districts and to benefit students who attend Minnesota state colleges where costs have been escalating. Again, Governor Pawlenty has stated his intention to veto the increase. Cigarette fees in Minnesota (remember they aren’t “taxes”) were raised last year to $1.49 per pack. The highest tax at the state level is $2.48 per pack and South Carolina collects only 7 cents per pack. The tax only affects approximately one-fourth of the population that uses the product. So the bottom line is how do we rate in Minnesota? The average combined rate for all state and local taxes of the 50 states in 2006 was 10.6%. Minnesota’s average was 11.9%, which makes us the fourth highest state. Wisconsin is close behind at 11.6% overall. When you add in the federal tax bills Minnesotans on average pay 33.6% in combined taxes, which rank us fifth in the country. Where Does Washington Spend the Tax Dollars The cost of defense (including the projected cost of the war in Iraq) represents 20.8% of the requested budget for fiscal 2008. Forty years ago defense consumed 46% of the U.S. budget. In 1968 entitlement programs (Social Security, Medicare, Medicaid, unemployment compensation, food stamps, etc.) were 29.2% of the budget. Those items in the requested 2008 budget constitute 56.8%. The Stock Market For the seventh year in a row large cap growth stocks performed at the bottom of the indexes, after performing at or near the top of the markets for the six years (1994-1999) previous. For the last three years the best performing area has been foreign stocks, followed by small and large cap value stocks. During the first three months of 2007 the Dow and S & P were up over 2% year-to-date before falling to over a 3% negative return and then finishing less than 1% down (Dow - .87%) or up (S & P + .18%) for the quarter. Because of the uncertainty in the equity markets, we see little change in the second quarter of 2007. We still are looking for a 7% to 9% total return by year end. The Bond Market Interest rates declined slightly during the first quarter of 2007. The Federal Reserve for the second three-month period in a row did not move the discount rate. The next move by the Fed will probably be a reduction. Like our projection for the stock market, the reduction (if it takes place) will probably be in the last half of the year. Big news in the fixed income area is the concern with the default in the sub prime lending area. Although there will be real estate foreclosures because the rates of adjustable rate mortgages are increasing, the situation may not become a huge problem. Congress, both federal and state, and the financial organizations are working on what is being referred to as “some kind of forbearance”. Thought For the Day Freedom is hammered out on the anvil of discussion, dissent and debate. - Hubert Humphrey |
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