William Baldwin, Forbes Staff
I write about investment strategies.
TAXES | 11/25/2012 @ 8:13AM |200,733 views
Do You Live In A Death Spiral State?
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Don’t buy a house in a state where private sector workers are outnumbered by folks dependent on government.
Thinking about buying a house? Or a municipal bond? Be careful where you put your capital. Don’t put it in a state at high risk of a fiscal tailspin.
Eleven states make our list of danger spots for investors. They can look forward to a rising tax burden, deteriorating state finances and an exodus of employers. The list includes California, New York, Illinois and Ohio, along with some smaller states like New Mexico and Hawaii.
If your career takes you to Los Angeles or Chicago, don’t buy a house. Rent.
If you have money in municipal bonds, clean up the portfolio. Sell holdings from the sick states and reinvest where you’re less likely to get clipped. Nebraska and Virginia are unlikely to give their bondholders a Greek haircut. California and New York are comparatively risky.
Two factors determine whether a state makes this elite list of fiscal hellholes. The first is whether it has more takers than makers. A taker is someone who draws money from the government, as an employee, pensioner or welfare recipient. A maker is someone gainfully employed in the private sector.
Let us give those takers the benefit of our sympathy and assume that every single one of them is a deserving soul. This person is either genuinely needy or a dedicated public servant or the recipient of a well-earned pension.
But what happens when these needy types outnumber the providers? Taxes get too high. Prosperous citizens decamp. Employers decamp. That just makes matters worse for the taxpayers left behind.
Let’s say you are a software entrepreneur with 100 on your payroll. If you stay in San Francisco, your crew will support 139 takers. In Texas, they would support only 82. Austin looks very attractive.
Ranked on the taker/maker ratio, our 11 death spiral states range from New Mexico, with 1.53 takers for every maker, down to Ohio, with a 1-to-1 ratio.
The taker count is the number of state and local government workers plus the number of people on Medicaid plus 1 for each $100,000 of unfunded pension liabilities. Sources: the Bureau of Labor Statistics, the Kaiser Commission on Medicaid and a study of state worker pensions done in 2009 by two academics, Joshua Rauh and Rovert Novy-Marx. Professor Rauh estimates that the shortage in pension funding is on average a third higher today.
The second element in the death spiral list is a scorecard of state credit-worthiness done by Conning & Co., a money manager known for its measures of risk in insurance company portfolios. Conning’s analysis focuses more on dollars than body counts. Its formula downgrades states for large debts, an uncompetitive business climate, weak home prices and bad trends in employment.
Conning rates North Dakota the safest state to lend money to, Connecticut the most hazardous. A state qualifies for the Forbes death spiral list if its taker/maker ratio exceeds 1.0 and it resides in the bottom half of Conning’s ranking.
It’s easy to see how California got on our list. It has pampered a large army of civil servants while using every imaginable trick to chase private-sector jobs away, the latest being a quixotic scheme to reduce the globe’s atmospheric carbon. A City Journal essay by Victor Davis Hanson notes that the state spends $10 billion a year on entitlements for illegal aliens.
Illinois is especially known for its dishonesty, whether among officeholders (future license plate motto: Land of Corruption) or in the habit of under-accounting for promises to government employees. The Rauh study counted $66 billion in the till to cover pension obligations of $233 billion.
see photosGeorge Rose/Getty Images
Click for full photo gallery: Death Spiral States
To lend money to California, Illinois or the other nine states perched on the precipice requires a leap of faith. So does buying a house in those locales. Don’t count on a property tax limit to protect your home’s value. If other taxes are high enough, there won’t be any buyers.
Originally posted by sasquatch672Do us a favor, and get off this "relying on the government" mantra. The vast majority of people on welfare and food stamps don't want to be there. Most of them are people who've held down jobs for years, but don't have jobs anymore, because the economy still sucks, or they've been outsourced overseas. Find something else to whine about!
William Baldwin, Forbes Staff
I write about investment strategies.
TAXES | 11/25/2012 @ 8:13AM |200,733 views
Do You Live In A Death Spiral State?
SHARE:
Don’t buy a house in a state where private sector workers are outnumbered by folks dependent on government.
Thinking about buying a house? Or a municipal bond? Be careful where you put you ...[text shortened]... x limit to protect your home’s value. If other taxes are high enough, there won’t be any buyers.
Originally posted by bill718For these purposes, does it matter whether they "want to" be there?
Do us a favor, and get off this "relying on the government" mantra. The vast majority of people on welfare and food stamps don't want to be there. Most of them are people who've held down jobs for years, but don't have jobs anymore, because the economy still sucks, or they've been outsourced overseas. Find something else to whine about!
Originally posted by sh76I agree with Bill 718. I have been out of work now for 16 months
For these purposes, does it matter whether they "want to" be there?
for precisely the reasons he has quoted and he's right.
I don't want to be on welfare. I am 51 and I have been working
since I turned 18. I have many talents and I want to put them to
good use in society for a fair weeks wages.
I will even take a job which others declare is beneath them
just to get off welfare.
Originally posted by johnnylongwoodyNo doubt. But if the issue is whether a company is better off being in an area where few are on welfare as opposed to where many are on welfare, whether the people want to be on welfare is really not the salient point. Either way, the company is going to have to indirectly support them.
I agree with Bill 718. I have been out of work now for 16 months
for precisely the reasons he has quoted and he's right.
I don't want to be on welfare. I am 51 and I have been working
since I turned 18. I have many talents and I want to put them to
good use in society for a fair weeks wages.
I will even take a job which others declare is beneath them
just to get off welfare.
The kind of analysis in the OP doesn't even get you past ECO 101. For instance, it is a given that a nationalized health care industry is more efficient than a private health care, yet people employed in a nationalized health care system would be "takers" even though they are producing health care services more efficiently than the "givers". Is a teacher in high school really a burden on society? Also, what about people working in semi-public institutions, are they givers or takers? And what about, say, construction workers in a private company who are working on a government-funded infrastructure project?
It looks like California and New York in order to pay down their debt will soon have to impose a exit tax on any state citizen looking to move to another state. Early estimates for California given their deficit and population, an individual moving from California would be assessed a fee of $15,000 per person. Coming to your Democratic State soon.
Oh by the way, this was a favorite tactic of the Nazis in Germany and Communists in Russia during their hey days.
Originally posted by my2sonsI don't know where you got this information of if you are serious (though when you compare something to the Nazis or Communists, it generally ought to at least be based on something actual), but such a tax would be blatantly unconstitutional for a variety of reasons, not the least of which is that it is a violation of the fundamental right to travel between states.
It looks like California and New York in order to pay down their debt will soon have to impose a exit tax on any state citizen looking to move to another state. Early estimates for California given their deficit and population, an individual moving from California would be assessed a fee of $15,000 per person. Coming to your Democratic State soon.
Oh by ...[text shortened]... is was a favorite tactic of the Nazis in Germany and Communists in Russia during their hey days.
Originally posted by my2sonsYou've been listening too much to 80s action movie villains.
It looks like California and New York in order to pay down their debt will soon have to impose a exit tax on any state citizen looking to move to another state. Early estimates for California given their deficit and population, an individual moving from California would be assessed a fee of $15,000 per person. Coming to your Democratic State soon.
Oh by ...[text shortened]... is was a favorite tactic of the Nazis in Germany and Communists in Russia during their hey days.
Originally posted by bill718I assure you you have my sympathy. I wish you luck, and success. I know the strain - not when I had a family to support, so I can't claim to know that.
Do us a favor, and get off this "relying on the government" mantra. The vast majority of people on welfare and food stamps don't want to be there. Most of them are people who've held down jobs for years, but don't have jobs anymore, because the economy still sucks, or they've been outsourced overseas. Find something else to whine about!
I wish you well, and I wish you and yours a happy and safe holiday season.
Originally posted by my2sonsBy the way, Einstein, we're still waiting for your predicted stock market crash.
It looks like California and New York in order to pay down their debt will soon have to impose a exit tax on any state citizen looking to move to another state. Early estimates for California given their deficit and population, an individual moving from California would be assessed a fee of $15,000 per person. Coming to your Democratic State soon.
Oh by ...[text shortened]... is was a favorite tactic of the Nazis in Germany and Communists in Russia during their hey days.
Originally posted by sh76My2sons pulls his information from a place where the sun doesn't shine.
I don't know where you got this information of if you are serious (though when you compare something to the Nazis or Communists, it generally ought to at least be based on something actual), but such a tax would be blatantly unconstitutional for a variety of reasons, not the least of which is that it is a violation of the fundamental right to travel between states.
Originally posted by my2sonsYou have been watching too many episodes of the Simpsons.
It looks like California and New York in order to pay down their debt will soon have to impose a exit tax on any state citizen looking to move to another state. Early estimates for California given their deficit and population, an individual moving from California would be assessed a fee of $15,000 per person. Coming to your Democratic State soon.
Oh by ...[text shortened]... is was a favorite tactic of the Nazis in Germany and Communists in Russia during their hey days.
Especially the episode where Mayor Joe Quimby
had his special leaving town tax.
Sorry to break the bad news to you, but it already exists in New Jersey where if you sell your house and relocate within New Jersey there is no tax, but if you move out of state, you have to pay the New Jersey exit tax - up to 1% of the sell price. They of course gave it a fancy name of Realty Transfer Fee.