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Bush to state and local governments: DROP DEAD. More sleight of hand from the plutocrats' poolboy:

Budget experts were still reviewing numbers today, but said the provision on dividends [in the Bush administration stimulus package] would cost state and local governments tens of millions of dollars a year in lost revenue.

The states fear they will lose in two ways. Because state income tax laws are tied to the federal law, the states will also stop taxing dividends. In addition, the removal of taxes on dividends makes stocks a more attractive investment vehicle than the traditionally tax-free municipal bonds.

Over all, the officials said the potential losses far exceed the $10 billion in state aid included in Mr. Bush's 10-year plan, much of which is earmarked to help the unemployed.

See the full article by Michael Janofsky in the New York Times. The municipal bond and other angles are addressed by Ted Barlow.

A further dislocation will occur in the equities markets, where dividend-paying stocks will suddenly gain favor over growth stocks that typically do not pay dividends (Microsoft, Cisco, and so on). Capital spending in technology and R&D will slow as companies move money into shareholder dividends to protect their stock prices. The "tech wreck" — the lack of recovery in the technology industry — will continue for another decade. At the moment of this writing, the day after the fabled announcement of the stimulus package, the Dow is down 0.5%, Nasdaq down 1.3%*. Not exactly a hurrah of endorsement from the markets for blue chips or growth stocks.

We don't need an administration speechwriter's book for evidence of a total absence of policy forethought in the White House.

*UPDATE: At close today: Dow Jones down 1.69%, Nasdaq down 2.13%.

{ 10:38 AM }

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