State Government Taxes Get Creative

Municipal governments are finding all sorts of “creative” ways to close budget gaps. You’d do well to pay attention to this trend emerging in a city near you:

  • The city of Wichita will soon begin imposing a “false alarm fee,” for which the city government will fine homeowners whose residential security alarms go off accidentally
  • The San Francisco legislature has proposed to end its service of euthanizing pets free of charge. The city wants to institute a $25 tax to give your dog or cat the needle, and another $20 charge if you want them to “dispose” of it
  • It will now cost Washington, D.C., residents $51 a month to keep the streetlights on at night
  • Las Vegas will be taxing amateur sports. City fees will double for all youth an adult sports leagues and summer camps
  • Smokers in New York will have to fork over an additional $1.60 per pack, the proceeds of which will flow directly into state coffers
  • We’ve honestly lost track of how many states are imposing new fees and regulations on strip clubs.

Even here in “Charm City,” Baltimore city legislators are about to pass a “beverage tax,” or “REVENGE TAX,” as the local Pepsi plant likes to proclaim.

The new tax comes on a wave of morality suddenly sweeping City Hall… You shouldn’t drink soda or beer, they say, so an extra 2 cent tax per bottle is fair. No word on why the new tax applies to bottled water too.

Still, a word of caution for investors. Even though it looks like there’s a bubble growing in municipal bonds…despite what looks like so many American cities on the brink of implosion…betting against municipal bonds is generally a lousy proposition.

“Shorting municipal bonds, or funds of muni bonds, is a bad idea for most investors,” we advised in the latest beta issue of Apogee Advisory. “Muni pure plays most often pay monthly or quarterly dividends. Short sellers would have to cover them while they wait for their bet to pan out. And the muni breakdown could be months away, if not years.

“Also, when muni funds do suffer, the fallout may not be as dramatic as the housing bust. Take an ETF of Californian muni bonds (CMF). You’d think it would have suffered terribly over the last few years. But it never fell more than 20% during the worst of the credit crisis.

“Even if you manage to pick the right municipal bond to short, and manage to not wither away paying dividends, there’s a perfectly good chance you still won’t get paid. It’s an all-too-common practice for cities and states to rescue failing projects (with taxpayer money) to prevent the repercussions of a bond default. It’s this odd ‘moral commitment’ that set the stage for the famous ratings war between MBIA and short seller Bill Ackman. This is also the reason residents of Jefferson County, Ala., pay $64 a month for the privilege of flushing their toilets.

“In essence, betting against muni bonds directly is expensive, with a small potential payout. Don’t bother.”

Ian Mathias
for The Daily Reckoning

The Daily Reckoning