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Coming soon: A tax revolt like no other
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And third, I think there's less faith in the country as a whole that taxes are fair. Unfortunately, there's good evidence that they aren't. The latest data -- from 2001, I'm sorry to say -- shows that as much as $353 billion in income taxes, about 16% of the total owed, went unpaid. If all taxes owed were collected, the Economic Policy Institute calculates, it would be enough to eliminate most of the projected federal deficit over the next 10 years. However, given that the federal budget has starved the enforcement efforts of the Internal Revenue System for years, I'd say the odds of this happening are slim to none.
In addition, the first property-tax revolt made property taxes, never particularly fair to begin with, even less fair. In California, the most notorious example, Proposition 13 froze the assessed value of your home at its value in 1975-76. That assessed value could only rise when the house is sold. The result is that owners of houses in the same neighborhood may pay wildly different taxes only because one was sold more recently than the other.
But it gets worse. Business properties often change hands in a way that doesn't constitute a public sale and doesn't trigger a new assessment of the property. In the years since Proposition 13, homeowners have gradually assumed a larger share of the property tax burden from businesses.
Big effects on the economy
The current wave of tax revolts, if successful on anything like the scale of the earlier model -- and I think they will be, because our time provides more fuel for tax revolts than the 1970s and 1980s -- will have intended and unintended effects that ripple through the economy.
Intended: If state tax revolts succeed in capping property-tax increases, they are likely to prolong the current real-estate boom. Lower taxes, after all, make it easier to carry a bigger mortgage. And lower taxes will act to delay the day of reckoning in the most-heated housing markets since, with lower property taxes, financially stretched home buyers will have a little more stretch left in them if times turn sour.
Unintended: If state tax revolts cap state revenues in the current good times, it will make it that much harder for state governments to fix their current pension shortfalls. The deficits that many states have run -- often plugged by borrowing and gimmicks in cases where state constitutions require a balanced budget -- have left them with huge unfunded pension obligations. The gap is $30 billion in New Jersey, for example. Now the states should be running surpluses that can be used to fill those gaps. Capping state revenues now will make that harder.
Intended: If a national tax revolt results in the repeal of the AMT, it would be equal to a huge tax cut for the middle class. How big? The Center on Budget and Policy Priorities calculates that revenue from the AMT at $1.2 trillion over the next ten years. Putting that money into consumer pockets would be a huge boost to consumer spending over the decade.
Unintended: If the AMT is repealed without a successful effort to find additional revenue to make up that lost by repeal, the federal debt would more than double over the next 10 years. Federal debt -- the total the government owes as a result of all its accumulated annual deficits -- is projected by the Center on Budget and Policy Priorities at $4.7 trillion at the end of 2005. Add the extra $1.2 trillion from repeal of the AMT to the center's projection of $3.7 trillion in accumulated annual deficits over the period, and you more than double the federal debt to $9.6 trillion in 10 years. I do believe the globe is awash in cash -- which is why the yield on 10-year U.S. Treasury notes is at 4% -- but I do find it hard to believe that the United States could force another $4.9 trillion down the throats of overseas investors in just a decade without paying them higher rates of interest. Higher interest rates would work against the economic stimulus of an AMT cut.
Unintended: Fortunately, President Bush has told the Advisory Panel on Federal Tax Reform, due to report later this summer, that it should include proposals for reforming the AMT but that these proposals must be revenue neutral. Unfortunately, you're guess is as good as mine where the committee might conjure up $1.2 trillion. If the proposed additional revenue is sleight of hand, we'll risk the higher interest-rate scenario above. If the proposed additional revenue is in the form of higher taxes, we lose the economic boost from doing away with the AMT.
The greatest likelihood, for AMT reform and the property tax revolt too, is that we'll wake up in 10 years wondering why the tax revolt of 2005 didn't produce the outcome wed hoped for.
Changes to Jubak's Picks
Sell Companhia Vale Do Rio
When a short-term trade doesn't work, there's no point in sticking around -- especially when I think there's a better place to put my cash. So I'm selling Companhia Vale Do Rio (RIO, news, msgs). When I added the stock to Jubak's Picks on May 20, 2005, I was looking for a short-term pop as the market temporarily got over its worries about slowing economic growth in China. The buy hasn't worked as well as I hoped, however, since worries about China's growth have resurfaced sooner than I expected and as a lingering corruption scandal in Brazil has depressed stock prices in Companhia Vale Do Rio's home market. I'm selling these shares with a 3% profit.
Buy Marathon Oil
I'm adding Marathon Oil (MRO, news, msgs) to Jubak's Picks to give the portfolio exposure to the refining segment of the oil industry. As tight as global oil supply is, global refining capacity is even tighter. That will push refining margins in North America to a projected $6.65 a barrel in 2005, according to Morgan Stanley. The second quarter of 2005 may be the peak in the cycle with refining margins in North America climbing to $9.60 a barrel, again according to Morgan Stanley, before new refining capacity starts to come on line and starts to cut into margins. (For comparison, the refining margin in the second quarter of 2003 was just $3.89 a barrel.) That is enough to give Marathon a good chance of producing an earnings surprise in the current quarter. Wall Street analysts have raised their estimates to $1.37 a share for the second quarter from $1.02 90 days ago, and that still may turn out to be low. Marathon has a good longer-term story, too. After years to running a truly mediocre exploration and discovery effort that resulted in the company replacing just 61% of production with new discoveries in the decade that ended in 2003, Marathon has got its act together. In 2004, the company replaced 180% of production and Bear Stearns projects production replacement of 100% in 2005. It won't hurt earnings either that the cost of these new reserves -- $4.62 per barrel in 2005 -- is among the lowest of major oil companies. I'm adding Marathon Oil to Jubak's Picks with a target price of $66 a share by February 2006. I'd set a stop-loss at $45. (Full disclosure: I will be buying shares of Marathon Oil three days after this column is posted.)
New developments on past columns
5 ways to play currency swings
Danone Group (DA, news, msgs) continues to sell slower growing, non-core businesses so it can concentrate on its faster growing fresh-dairy, biscuits and bottled-water units. The latest move took place on June 20 when Danone Group sold its HP Foods and Lea & Perrins sauce divisions to H.J. Heinz (HNZ, news, msgs) for $852 million. The next step for Danone Group will be the sale of its Amoy Asian sauces business that produces sales of about $85 million annually.
12 global growth stars you've never heard of
Talisman Energy (TLM, news, msgs) has hit my $39-a-share price target, but I think it's too early to sell. The company should demonstrate high production rates from several new fields when it reports this quarter in late July or early August. For example, the company's Angostura project off Trinidad was not expected to hit full production until May and the South Angsi project off Malaysia and Vietnam was not scheduled for first production until July. Actual production should convince Wall Street analysts that Talisman Energy's 2004 performance -- a 179% proved reserve replacement rate -- was no fluke and push the shares to a premium to other oil companies that are generating lower rates of reserve replacement. (I also continue to believe that as one of the few independents with both a record of exploration success and sizeable reserves in Asia, Talisman Energy is a good acquisition target for Asian oil companies.) As of June 24, I'm raising my target price to $45 a share by October 2005. I'd set a stop loss at $35. (Full disclosure: I own shares of Talisman Energy).
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Talisman Energy. He does not own short positions in any stock mentioned in this column.
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