NY Times: State Revenues Buffeted by Downturn — Turning a Blind Eye to Tax Collection

EDITOR’S NOTE: It might seem unrelated, but the foreclosure crisis is very much related to BOTH the state budget problems and solutions.
While Wall Street tinkered with real property in each state, making unrecorded transfers at huge profits, state Treasurers and county revenue departments have sat idly by watching tens of billions of dollars in uncollected income taxes, recording fees, fines and penalties go uncollected.  A simple look at the transactions shows that virtually ALL securitized loans were in fact securities transactions commencing with a transaction deceptively sold and executed within the borders of the state and involving real property within the state.
Huge profits were realized and sent off-shore to structured investment vehicles, mostly in the Cayman Islands. Those profits resulted from transfers of interests in real property — the mortgage and note that was signed in a state-based transaction by a borrower who did not know he or she was actually executing a document that would be part of the issuance of unregulated securities in an unregulated environment to unwary investors. These intermediaries who pocketed unconscionable profits (sometimes exceeding the amount of the funding the loan) never registered to do business within the state, never reported their income and never paid taxes, recording fees, registration fees etc., and never registered thus avoiding direct regulation by state agencies over lending and banking within the state’s borders.
The collection seems daunting but it isn’t. The assumption is that states will have to go to the Cayman Islands. Wrong. They need only assess the tax based upon a plausible forensic audit and attach or foreclose on the note and mortgage, not the property and not the accounts in the Cayman Islands. The State becomes the owner of the mortgage and note.
Utilizing the extensive network of community banks and credit unions in each state, the homeowner could be offered an opportunity to buy the tax deed from state with funding on a new mortgage 80% loan-to-value — thus paying the state, the county, and putting some change in the pocket of the homeowner plus 20% equity. Maybe even some investor money could be returned as well if they have not already been bought out by the Feds, insurance or counterparty swaps. For those ideologues who don’t like helping these victims think of it this way: if the states DON’T do this, the homeowners are going to do it and instead of getting 20% equity they will have the whole house (100%).
June 5, 2009

State Revenues Buffeted by Downturn

DENVER — The carnage in state budgets is getting worse, a report said Thursday, with places like Arizona being hurt by falling revenue on multiple fronts, like personal income and sales taxes. Other states are having mixed experiences, with some tax categories stable, or even rising, even as others fall off the map.

The report, by the National Conference of State Legislatures, also provided a scorecard for how well drafters of state budgets read the recession’s economic tea-leaves — and the short answer is, not very well.

Thirty-one states said estimates about personal income taxes had been overly optimistic, and 25 said that all three major tax categories — sales taxes, personal income taxes and corporate taxes — were not keeping up with projections.

Even gloomy-Gus states that saw the recession coming and low-balled their tax estimates had little room for celebration, the report said. “The handful of states that have weathered the economic decline reasonably well are starting to report adverse revenue developments,” it said. “The news is alarming.”

Three states, for example — Alabama, Colorado and North Dakota — said personal income taxes were coming in higher than expected. But they said they had seen declines in other tax categories, like corporate taxes (down 33 percent in North Dakota), severance taxes from oil and gas (down 51.8 percent in Colorado) or sales tax (down 8.5 percent in Alabama.)

Hardest hit on the income tax collection front was New York, where revenues were off 48.9 percent compared with the last fiscal year. Corporate income taxes plummeted most in Oregon, down 44 percent, while sales taxes fell most in Washington, down 14.1 percent.

There were some winners, at least by comparison. Sales taxes were running ahead of last year in nine states, led by North Dakota, where they were up 18 percent. North Dakota was also the strongest among the three states — Alabama and Kansas are the others — that saw year-over-year increases in personal income tax collections.

Arizona was among 29 states that suffered revenue losses in every major tax category.

“What this report really underscores is that the states are facing revenue-based problems,” said Todd Haggerty, a research analyst at the conference, a nonpartisan group based in Denver. “If there’s been an increased demand for state services — as there has in many states — it’s putting them into a really tough situation.”

A report issued by the group in April said that spending increases related to the recession, from more people seeking state services, were compounding the impact of a decline in tax revenue. Sixteen states were facing higher-than-anticipated costs for health care, seven were spending more on public safety and four were seeing cost overruns on programs for the poor like food stamps.

Worse is yet to come. The total collective budget gap that the states will have to resolve in the fiscal year that starts, in most states, next month, is $121 billion, compared with 102.4 billion for the year approaching its end, the report said. Measures on the table to fill those holes, or already in place, range from the macro (a cut of 25 percent in grants to local governments in Minnesota) to the micro (elimination of staffing at metal detectors in local courthouses in Maine).

Two of the gloomiest state capitals next year, the group said, might be found in Alaska and Nevada, with each state anticipating a gap of more 30 percent between what it hopes to collect and what will need to spend.

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