2010 will probably be a tough year

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By John Barnhart

    The recession ended in the United States in the third quarter of this year. Locally, the city of Bedford noted that its sales tax revenue began to turn around in the fourth quarter, in November.

    That doesn’t mean we are out of the woods. Unemployment has continued to rise and, not being an economist, I wouldn’t hazard a guess when that will stop, although the rate at which jobless figures have been rising began decelerating before the middle of the year.

    I think even economists aren’t sure what to expect. They expect our economy to grow in the new year, although there is disagreement on how fast. Some are expecting fairly robust growth. Others think we will see a very pallid recovery in 2010 with an economy that is growing slowly, or just barely growing.

    A lot of comparisons have been made between the current recession and the Great Depression. They’re not really valid. Unemployment was more than double our current unemployment rate. The collapse of economic activity looks like a canyon when plotted on graphs. About the only similarity between the Depression and our current recession is that it was global with all the world’s developed economies swimming in the same toilet bowl that ours was.

    One thing about the current recession that looks grim is that, unlike previous economic downturns,debt is a big factor. We’re all up to our eyeballs in debt and some Europeans, the British in particular, are in even worse shape than we are in that area. Most of us can’t take on more and most people are trying to reduce their debt loads. This means that consumers aren’t likely to increase their spending by much in 2010. They just aren’t going to have the money to do it and deleveraging will most likely dominate people’s financial thinking in the new year.

    Virginia’s General Assembly needs to consider this as they develop the budget for the next biennium. Local governments also need to consider this as they get down in the pit with the fiscal bear and set their FY 2010-2011 budgets.

    This is not a good time for tax increases. Taking more money out of taxpayers pockets will not help them deleverage. It will just draw out the agony as they will have less money available to pay down debt, as well as less money to spend on everything else.

    There may be room for changes in how taxes are levied, replacing one tax with another, for example. Governor Tim Kaine has suggested replacing the car tax with a 1 percent income tax surcharge with 100 percent of the revenue going to local governments. The car tax, especially if car tax relief for the first $20,000 in a vehicle’s value is completely eliminated, most surely will have a chilling effect on new car sales in a time when everybody’s finances are tight. The tax on even a modestly priced car represents a heavy hit on most people’s budget and will be a factor on most folks’ decision on whether to get a new vehicle or keep that 10-year-old car. Maybe taking money via an income tax surcharge will have less of an impact on consumer spending.

    Or, maybe not.

    Whatever the General Assembly, or local governments do, they must tread carefully before deciding to raise any tax or fee, or replace an existing tax or fee with another. They can’t simply think about how much revenue it will bring in and what allegedly vital services the revenue will preserve. They must make sure they fully understand what impact the tax will have on all those taxpayers who spend money and make the economy work.

    It’s going to be a tough year for everybody and I certainly hope our state and local elected officials don’t make decisions that just make matters worse.