Wasn't It Fred Thompson Who Said Recession Isn't In The Cards?

What an Idiot.

State sales taxes flash recession warning

Thu Oct 11, 2007 12:25pm EDT

By Joan Gralla - Analysis

NEW YORK (Reuters) - About half of all states are collecting less from their sales taxes than expected, which could signal a recession lies ahead as the home market fades.

The receding housing boom could then reveal the underlying economic weakness it had camouflaged, according to Philippa Dunne, a co-editor with the New York-based Liscio Report, published by an economic research firm.

To Dunne, the recession warning light is flashing yellow.

"There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels," she said, adding about 25 states are seeing disappointing sales tax revenues.

It's not just jobs in construction, lending and real estate that are at risk. Less demand for materials, from cement to carpets, could cause malls and manufacturers to slash workers.

Despite Midwest growth pockets, such as Chicago, surrounding areas that never tapped the housing boom could get hit if credit-wary consumers buy fewer clothes or services.

The Northeast's economy now is imperiled because banks and brokerages have been cutting jobs since this summer when the subprime mortgage sector morphed into a profit-eating ogre.

Florida, once a paradise for speculating "home flippers," has already tipped into a recession, some economists say.

Even the Northwest, despite still vibrant employers in the high-tech and aircraft sectors, could suffer because housing-related employment was so overblown, said Mark McMullen, a Portland, Oregon-based senior economist with Economy.com.

He puts the likelihood of a U.S. recession in the next couple of years at 40 percent, mainly due to the broad reach of the housing market's slide.

How sales taxes perform is one of the most useful ways to judge a region's economy because the data are released fairly promptly and reveal trends in consumer spending that otherwise are hard to discern, Goldman Sachs noted in a July report.

These revenues are often one of the biggest sources of funds for states because sales taxes are applied so broadly.

Cars, clothes and restaurant meals are all usually taxed, along with all the materials, from wood to drapes, needed to build or renovate homes or commercial buildings.

WORST PERFORMERS WERE HOUSING HIGH-FLIERS

It's no coincidence that some of the states whose sales taxes are the worst performers are also on the list of those whose housing markets once soared the fastest and highest.

For example, Florida's sales tax revenues missed their target by 2.6 percent in August -- and by 50 percent in the year to date, according to the state Department of Revenue.

"Households aren't using their homes as cash machines anymore," McMullen said, explaining people now were more leery about taking money out with mortgages or home equity loans.

Home prices in Tampa alone fell 8.8 percent over the past year, a drop only surpassed by Detroit, where values plunged 9.7 percent, according to a July report by Standard & Poor's/Case Shiller, which tracks 20 major cities.

Plummeting sales tax revenue is a major problem in a state with no income tax like Florida. This levy makes up about 56 percent of Florida's tax revenue, Dunne estimated.

Detroit has long hoped its carmakers, dented by foreign competition, would finally rebound, but both GM (GM.N: Quote, Profile, Research) and Chrysler have now been hit by late summer strikes.

Michigan just dodged a government shutdown over a $1.75 billion deficit in early October by raising the income tax rate and extending sales taxes to services, such as landscaping.

But Michigan says its sales tax revenues were down nearly 12 percent through August, the 11th month of its fiscal year.

A few lucky states, including New York and California, have bucked the trend toward weaker sales taxes -- but not by much.

Though home prices in southern California slid to 15-year lows in August, it got an extra $60 million from sales taxes that month. Still, personal income tax revenues missed their target by $242 million, suggesting some job market weakness.

In New York, sales taxes in August 2007 produced just $47 million more than a year ago.

In contrast, the Texas economy shines, partly due to rising energy prices, though its technology companies have also done well, easing its reliance on oil and gas producers.

Fiona Sigalla, an economist with the Federal Reserve Bank of Dallas, said: "We're seeing very little evidence of a slowdown in housing and mortgage lending."

This partly reflects an unusual advantage Texas builders enjoy: the ability to quickly adjust to shifts in demand.

"While we had quite a building boom, they do not appear to have gotten as far ahead of demand as they did in other parts of the country," she said.

Texas' sales tax revenues in August leaped nearly 13 percent over the year-ago period, the comptroller said.

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