Tea Leaf: Dancing with state lines, and Super Bowl (stock) predictions

Published: Wednesday, Jan. 26 2011 11:48 p.m. MST

Trader Rick Brunetti, right, works on the floor of the New York Stock Exchange Monday, Jan. 3, 2011.

Associated Press

The Illinois Legislature, with the support of the state's Democratic governor, rammed through major tax increases on Illinois residents and businesses on Jan. 11. This took place just hours before newly elected representatives were to take office, with control then shifting to the Republican Party.

The intent? To help address a nearly $14 billion budget deficit. The state's income tax rate will rise from 3 percent to 5 percent, a hike of 67 percent. In addition, the nearly 50 percent boost in the corporate tax rate will now make Illinois one of the most expensive places in the world to conduct business, according to The Wall Street Journal.

Shouts of joy soon followed … from such places as Indiana, Iowa, Missouri and Wisconsin. Economic development people from each of these states will now target Illinois businesses, enticing them to shift their operations to their state where the business climate is friendlier, where taxes are less painful and where state budgets are largely under control.

You cannot tax your way to balanced budgets. You cannot tax your way to economic prosperity.

Out West

It's no secret that California has routinely boosted taxes on high-income individuals and on the business sector to deal with excessive spending and massive budget deficits. The same "move your business here" agenda has been followed successfully in many Western states.

You cannot tax your way to balanced budgets. You cannot tax your way to economic prosperity.

A variety of states passed income tax surcharges on their high-income residents in recent years. These increases — referred to as the "millionaire tax" — in most cases led to fewer tax dollars collected than anticipated. In one example, Maryland had 30 percent fewer "millionaires" file than the year before, with an actual 22 percent drop in high-income tax payments, according to www.walletpop.com.

What happened? People typically make rational decisions about money. High-income earners, in many cases, have the ability to establish "residency" in lower-tax states. Many did just that.

States across the nation will collectively deal with shortfalls in tax revenue in 2011. The problems are most acute in California, Illinois and New York.

More well-managed states in recent years have addressed revenue shortfalls with spending reductions, avoiding the major tax increase "solution." Such states have also made minor changes to address public employee pension funding shortfalls down the road. It is largely these states that will be successful in attracting — and retaining — high-quality employers in coming years.

Stocks up in '11?

It's already in the cards. The Dow Jones industrial average is highly likely to rise in 2011. The reason? Either the Green Bay Packers or the Pittsburgh Steelers will win the Super Bowl.

One of the more unusual — and accurate — predictors of stock market performance involves professional football. On those occasions where a team from the "original" National Football League (one existing before the merger with the American Football League) wins the game, the market goes higher during that year.

This indicator has been accurate following 35 of the 44 Super Bowls, a glossy 79.5 percent rate of accuracy. This year the winner doesn't matter, as both teams are "originals" from the National Football League.

A finance professor at Washington & Lee University in Virginia took it a step further. He indicated that only nine times in the 44-year history of the Super Bowl have two original NFL teams met each other. And all nine times, the market, as measured by the S&P 500, was up that year.

Works for me.

Jeff Thredgold is chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.

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