Foreclosures Are Forcing States to Make Budget Cuts

Foreclosures in combination with the general slump in the economy are forcing states to make budget cuts to make up for yawning gaps between income and expenditure. Without cutting down on expenditure the gap cannot be closed. The government runs on the revenue that is collected. But due to foreclosures sale and purchase of property and land is grinding to a halt resulting in drastic fall in revenue collection.

Senator Steve Panagiotakos predicts that within the next two years there will be another loss of 125,000 jobs in Massachusetts. The fall in the real estate market triggered off the recession – the worst sine the Great Depression. The worst affected by foreclosures were those who had taken sub-prime mortgages with teaser rates. When the rates went up millions defaulted and fell into foreclosure. Nearly 11.7 million citizens are now underwater – their houses are worth less than the loan amount. Banks and financial bodies could not face up to the foreclosure onslaught and big names like Lehman Brothers collapsed. In September it reported a loss of $4 billion creating a record.

The result is that banks are not lending freely. Consumers are not spending causing business to grin to a halt.

In the last few years Massachusetts had come to rely too much on capital gains. Capital gains are taxes levied on profits from the sale of assets (stocks as well as bonds). Massachusetts was ranked third in 2006 for the relative importance of capital gains in its budget plans. In 2000 fiscal year the capital gains collected had reached an all time high record of $1.16 billion. But with the real estate market having undergone a sea change, fall is imminent. Panagiotkos said, “There is no doubt that capital gains will fall and fall dramatically.”

Meanwhile there is no hint of the recession being over. The economy continues to be depressed fueled by more unemployment and increasing number of foreclosures. In general recession continues for about ten months. Panagiotakos bemoaned, “We are already over the average. We’re thirteen months into this, and counting.”

Many ideas are coming forth so as to make municipalities less dependent on property tax collection. There are plans to impose taxes on hotels, local meals etc. Governor Patrick is planning a measure that will close a gap in telecommunication tax collections. Another controversial area is plans to reduce the negotiating power of unions in matters relating to municipal health insurance. Despite strong opposition from unions, the legislators feel that it will save millions for towns and cities.