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Governor Christie has launched a historic budget for New Jersey. With any great undertaking there is always room for improvement and thus the subject for this month’s newsletter. We are under economic siege and any great battle is won when we citizens come together and share sacrifice. Following are a few suggestions to fine tune the goal of resurrecting the dilapidated state that is the economy of New Jersey.

New Jersey is not just broke, we are dead broke. The state’s stated unemployment rate is 10.1 percent but that does not begin to reflect the economic suffering that is occurring in New Jersey. An additional 10 percent of the workforce reflects citizens who have either given up, or have chosen to remain in their job that has been downsized to part time from full time or those who can’t find full time employment and settle for part time status.

Further the unemployment rate does not reflect employees who have taken 10, 20 and 30 percent pay reductions in order to remain employed. Business revenue has dropped dramatically, and thousands of businesses that once were profitable are now struggling to survive.

This coming year’s budget contains an $11 billion deficit. There are no reserves to steal from, no more one shot source of federal government stimulus or tax amnesty programs to plunder.

I have a very straightforward approach to balance the budget. Cut spending 20% across the board (or $6 billion), eliminate the numerous authorities which serve only as patronage pits ($1–$3 billion), and form a State bank to pay off the state’s debt ($6 billion in debt service savings).

If this crisis is not addressed immediately and fixed, the result will be massive layoffs and cutbacks in all of the necessary services we have come to enjoy and expect. Teachers, policemen, firemen and every other essential service are all threatened.

One area targeted for elimination should be school superintendents. New York City with a population of 8 million people has one school superintendent, New Jersey has a population of 9 million, yet we have 611 school superintendents. These positions are the tip of an iceberg of fiscal waste so great that it makes the iceberg that the Titanic hit look like a popsicle.

Over the next three years we should phase out 585 school superintendents leaving one per county. The estimated savings is $250 million from this act. The problem is we do not have three years; we barely have three months.

The first step after the governor and legislature immediately reduce their pay 20%, will be to recommend that all state employees also take a 20 percent pay reduction, effective July 1. Unfortunately, these pay reductions will not be sufficient to eliminate the deficit.

Therefore, all local governments need to reduce the wages of employees by 20 percent, including those working in education. Anyone who receives a paycheck that is funded by taxpayer money will be asked to take a 20 percent pay reduction. That means teachers, administrators, policemen, firemen, anyone who draws a check from taxpayer money will need to take a pay cut.

By taking these wage sacrifices, the state will be able to avert massive firings and continue the fine level of civil and educational service New Jerseyans have come to expect. Now, this pay reduction cannot be imposed at the local level. However, the governor could use the leverage of withholding future funding increases for those towns who chose not to participate in the state wide sacrifice.

Further, all state delivered benefits will also be reduced by 20 percent. Simply anyone who receives benefits or compensation from taxpayer funds will need to take less. These cuts are not a judgment about the compensation one earns or the value of benefits delivered. They simply reflect all the State of New Jersey can afford to pay. The smoke has blown away and the mirrors are cracked.

Bringing our house under sound fiscal management is a first step, but it will not be enough to entice businesses to stay, or to attract new businesses to set up shop in New Jersey. The regulations imposed on anyone trying to operate in this state are what has caused so many to flee.

There is no better example than the COAH (Council On Affordable Housing) regulations passed to help create more affordable housing. A Carnegie Mellon University study on the impact of the COAH rules found that since 2005, when the latest regulations were passed, our state’s housing starts declined more than 300 percent when compared to neighboring New York, and fell 20 percent compared to Pennsylvania.

These declines mean that millions and millions of dollars in business revenue, wages, and state income were lost due to inept and counter productive government regulations. The result of the COAH regulations was to add citizens to those eligible for low income housing recipients.

These regulations, that have created a tide of businesses fleeing New Jersey, need to be aggressively eliminated.

Finally, the New Jersey needs to form a State Bank for the purpose paying off whopping $51 billion debt while eliminating the mammoth $6 billion in annual debt payments.

While there are regulatory issues to work out concerning the types of capital needed to capitalize a State Bank, the crucial point is that such a bank would enable us to pay off our mammoth debt.

The working people of New Jersey have been and continue to make sacrifices in this economic downturn. The solutions offered are what businesses and families are doing to survive, it is long overdue that our government initiate those same sacrifices.

1)  Everyone Gets a Pay Cut — All employees who derive their income from taxpayer money need to take a 20 percent pay cut.

2)  Consolidate School Superintendent Positions — Eliminate 585 school superintendent positions to one per county saving $250 million.

3)  Consolidate Authorities — They are nothing more than patronage pits.

4) Form a State Bank — Capitalize bank to pay off State’s $51 billion debt and thereby eliminate $6 billion in annual debt service.

Brian Greenberg and Associates is a Marlton, NJ CPA firm providing tax and financial planning services. We specialize in helping small business owners retire on their own terms. Follow this link for more on how we can help you.

Brian C. Greenberg & Assocs
1 Eves Drive, Suite 111
Marlton, NJ 08053
856-596-7800

Tax Tip #1

You can’t keep every dime you make

The biggest mistake that a self-employed person can make is to forget that you have some interested, silent partners. These partners consist of the IRS, the state government where you live, the state government where you earn your income, and possibly the local town and/or county that you work and/or reside in, as well. All of these municipalities have a vested interest in your business. Until all your expenses are calculated it’s hard to figure how much you owe. As a rule of thumb for someone starting out assume a federal tax rate of 20%, about 13% for social security taxes (both are paid with your 1040 return) and 7% for state and local taxes. If you don’t share your profits with these interested partners, they won’t stay silent for long!

Financial tip: Put 40% of every dollar you earn into a separate bank account, which you will need to pay your taxes. This will help you to keep your silent partners silent!

Sam is a businessman who built his enterprise the right way. He found a product that consumers needed. He identified and located his business in a prime location. He was among the first to fill this consumer need and his business flourished growing in revenues, employees and accumulating wealth. He reinvested his profits by expanding to more locations which in turn created more jobs, more wealth.

Having been raised by Depression era parents he abhorred debt, his expansion came from profits. The last thing he wanted to do was borrow money to grow his business because should he be wrong, he would have the burden and pressure about repaying a loan while his business struggled.

This conservative fiscal approach slowed his business’s growth. He couldn’t open a new location until he had accumulated enough cash but that was ok as he wanted to be sure that if that location failed he wouldn’t owe anyone and he could walk away.

Soon, Sam had competition as they also discovered the opportunities to have a thriving business as well. He understood and accepted that and continued to focus his energies on servicing his customers. His competition took a different path to growth. Not wanting to wait for their profits to expand, they found bankers willing to lend them the funds for expansion.

Back when I was in college and going through career selection, it was a known fact that those who could not teach gym, went into banking. You see in banking, bankers rush in to lend when the money has already been made and become risk adverse only after they discover their loans have turn to dust.

Now it is bad enough that bankers lack the basic business acumen of a toad, but what compounds and magnifies their impact on the economy is the money spigot that the Federal Reserve sits on. If each bank did not have the Federal Reserve and in turn the American taxpayer to bail out their failures they would be more cautious in their lending decisions.

But that is not how the game is played. It is the Federal Reserve guided by current Chairman Bernanke and his group of five merry men who make decisions as to how much everyone pays to borrow money, how much money is available to lend and who qualifies to get loans.

Six people determine the prosperity for hundreds of millions of people. Not in the light of day are these decisions made, but behind closed doors are billions upon billions of dollars dolled out. Any effort to expose this process, let alone challenge their power, is met with threats of catastrophe for the economy from this autocratic regime.

Back to Sam. This easy money system resulted in not just two more competitors opening up which would have met demand, but instead six opened up. Two were self-funded but the other four competitors only existed because the bankers had all this money to lend and these four businesses had these nice business plans which showed how much money would be made.

One nice by product of all of this excessive expansion, government coffers benefited by increased tax revenues. Unlike Sam, rather than earmarking these extra revenues for a rainy day, politicians the land over instead used these funds to expand government services and employees with wage and benefits exploding.

One direct impact of government involvement was soaring health care costs. Sam operates his business in New Jersey where the legislature has imposed 42 mandates on the health insurers. These mandates are required procedures that must be covered. The impact of all of these guarantees of services, was to drive premiums ever higher.

Sam had no choice but to shift the cost of health insurance to his employees. Public employees don’t share that burden as they enjoy Lamborghini level of benefits where everything is covered including dental benefits. Any thought of a municipal employee having premium co-pay in his bargaining agreement is dropped faster than a Lamborghini goes from 0 to 60 miles per hour.

Moreover, the economic realities had Sam eliminate his pension plan and institute a 401k plan. Let’s not even discuss the pensions offered to government employees after as little as 25 years of service.

All good things must come to an end and two of Sam’s competitors closed their doors. Bankers horrified at the prospect of losing money, began restricting the amount of money they had lent Sam’s other four competitors. Sales fell off as those still employed cut back their spending habits, worried their job is no longer secure.

It can be argued the banks have a case in their new found faith in fiscal prudence. Lending money will not bring back customers, will not improve their financial health, rather it will be throwing good money after bad.

Sam has different issues. He sees opportunity to expand his business because of the demise of his competitors. However, there is great uncertainty of costs in his business. The major cost of running his business is employees. Both House and Senate versions of “health care reform” included tax increases for either businesses or individuals.

Worse, Sam’s business is in New Jersey. Should he decide to build or develop a commercial property and employ at least 16 people, he is then obligated to pay $100,000 to the low income housing fund (COAH) .

Now Sam is up in years and at some point in the next ten years he might want to sell his business. Another problem deterring investing his money is Obama wants to raise the taxes on capital gains. It makes no sense to risk good money in this economy when there is less reward down the line.

To further alert Sam that the government has him in their sights is President Obama’s budget and the many statements he has made on raising taxes for those who make over $250,000 a year.

President Obama’s argument is that he’s only raising rates back to where they were during the Clinton years. A half truth was never better said. Sam lives in New Jersey, during the Clinton years his State tax rate was 3 percent, and today it is nearly 11 percent. Property taxes are 200 – 300 percent higher as well.

How can such an educated man as Obama be so ignorant of economic history? In 1937, just as this nation was clawing itself out of the Great Depression, President Roosevelt raised income taxes which served to drop economic activity and bring about an immediate return of the Depression.

Given we are clearly in the worst economy since the Great Depression and the thought of taking more money out of pockets like Sam is beyond insane. Besides having to contend with higher employee costs, lower revenues, Sam now has the real prospect that next year he will fork over more of his income to the government.

What incentive is there for Sam to expand and grow his business in this environment so that new jobs can be created?

The answer is none and so today we are witnessing the Death of a Capitalist. Sam has a profitable business that is in decline, hamstrung by government policy that rewards failure of the big banks, big auto and big insurance.

All Sam and successful businessmen like him get is the bill for these failures. So Sam hunkers down and waits for a day when an enlightened government will reward risk, allow small businessmen to keep more of their profits so they can grow their businesses once again. Let’s hope that transformation occurs before Sam’s demise.

1)  Be Cautious About Making New Investments — If the economy turns down will the same level of demand exist for your products or services?

2)  Pay Down Debt — In this economy, your goal outside of your mortgage should be to be debt free.

3)  Don’t make emotional financial decisions — Don’t quit your job no matter how much you hate your boss. A bad boss is better than no boss.

Remember the ’60s (if you can — I know for many folks who lived then it is a blur): in response to growing poverty in the cities, the Johnson Administration commenced a “War on Poverty”. Our nation was going to fix it once and for all. Affordable, quality housing was made a priority. The government began building high rises in the most impoverished areas so our poor people could have decent shelter. These high rises quickly developed an affectionate nickname “The Projects,” which translates to housing hell.

With quiet capitulation, these projects have been returned to rubble… a failed policy costing in the hundreds of billions. Unfortunately, we lost the “War” years ago, but that hasn’t stopped the government from interfering in the marketplace to the point of creating the largest bubble in history — rather like England in World War I, which continually sent its young men into the breach, resulting not only in a lost generation but in the death knell of its empire.

Why was the War on Poverty lost? The government ignored Bill Clinton’s axiom “It’s the Economy Stupid”. Lacking the basic common sense that it is a good, adequately-paying job that drives affordable housing, the government invested tax dollars on the result — adequate housing. One could get into a McMansion, but if he didn’t have a job, he couldn’t stay.

The government ignored the outflow of manufacturing in our cities and the jobs that went with them, failing to provide incentives for businesses to stay and prosper. So after transferring the poor to the projects, there were no jobs to pursue. The blue collar jobs had long dried up.

Now, continuing its policy of history be damned and there is nothing to learn from it, we have the government’s response to the popped housing bubble. Again, ignoring basic economics that someone who makes $50k a year cannot afford to live in a $400k home, the government stubbornly puts out incentives in the hopes of sustaining and even increasing the price of housing when it clearly is priced beyond what people can afford.

Not only is it a failure, but it continues to take savings from the people who could have invested in creating a better job growth environment. And that is the real cost of all these horrendous government programs.

And so with that introduction, I bring you the new and NOT improved Housing Credits program that now applies to existing home buyers as well as first time buyers. If you plan to buy a home in the next few months, I hope you enjoy the bailout. At least you’re getting something for the trillions that have been squandered and wasted.

Highlights

1. Extension of $8,000 homeowners credit

1. New rules on properties that qualify

1. Now, current home owners are eligible if the house sold is less than $800K.

1. Fraud crackdown — the IRS wants proof: demands HUD form, must be at least age 18 to qualify

1. Price Tag and Impact

I. Extension of $8,000 homeowners’ credit

1. First-time home buyers’ credit deadline was set to expire on Nov. 30, now extended to May 1, 2010

1. The legislation defines “first-time home buyers” as anyone who has not owned a principal residence in the three years prior to making the purchase.

II. New rules on properties that qualify

1. Home buyers must have a signed sales contract before May 1, 2010, but they have until the end of June to actually close the transaction.

1. New law raises the annual income limits from $75,000 to $125,000 for singles and from $150,000 to $225,000 for married couples.

III. Current home owners eligible, if

1. Primary residence purchased for less than $800,000

1. They lived in their home for five consecutive years over the previous eight

1. Home was purchased between November 7 and the end of April 2010

1. They signed the sales contract on a home before May 1, 2010, although they have until the end of June to close the sale

1. Income limits for current homeowners are the same as those for first-time home buyers

1. If they use the property as their primary residence for three or more years after the purchase, buyers don’t have to pay the tax credit back

1. Tax credit allowed of up to $6,500 when they purchase their next primary residence.

IV. Fraud crackdown

1. Current Fraud — Treasury Department has identified hundreds of millions of dollars in questionable claims
   1. Taxpayers who claimed the first-time home buyer credit even though they had previously owned residential property within the past three years
   1. Taxpayers who claimed the credit before actually purchasing the home
   1. Hundreds of taxpayers younger than 18 years old — and at least one who was just four — also claimed the credit.

1. New IRS cracks down
   1. Proof of Sale required: copy of HUD-1 Settlement Statement must be submitted to prove that the sale has closed.
   1. No one younger than 18 years can claim the credit.

V. Price Tag and Impact

1. Priceless [?] The cost of the current program is something like $10 billion as of August 22 and the new program is expected to cost another $10 billion.

1. Eligible homeowners include more than two-thirds of current homeowners and nearly all first-time buyers, or 70 percent of current homeowners.

1. Is it the best use of the money? The financial blog Calculated Risk estimates that the February first-time home buyer tax credit cost the government roughly $43,000 for every additional home sale it generated.

1) Don’t buy just because the Prez says so — It’s nice to have $8k if you qualify, but be careful about taking on new debt.

2) First Time home buyers new purchase rules — Signed sales contract on a home before May 1, 2010, but have until the end of June to close the sale.

3) Current home owners can play too, get Tax credit up to $6,500 if — residence purchased for less than $800,000 , lived in their home for five consecutive years over the previous eight, used the property as their primary residence for three or more years after the purchase.