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Taxing Times • The Economy • Business Costs

Taxing times: Get ready for higher state taxes
The Economy: Service sector up, construction down
Business costs: Metal costs are headed down.

Taxing times
Get ready to pay more in state taxes. The hike mix will vary from state to state. But all of them are hunting for more revenue.
States know the good times won’t last. Looming just over the horizon is a fiscal mess, brought on by ever-rising health-care costs, underfunded pensions, and outsize benefit plans for state workers getting ready to retire.

Expect states to focus on sales taxes.
They’ll target service industries...everything from accounting to beauty salons ... many of which aren’t taxed at all right now.
Billions in revenue are at stake. States could collect $42 billion more each year by taxing all services. Few will go that far, but most will tax a lot more than they do now. Service taxes can help make up for revenue lost from Web sales … $9 billion a year and growing. And the switch reflects changes in the economy, with services making up an ever-greater share.
The Frost Belt will see bigger hikes in service taxes than most other regions. Illinois, Indiana, Michigan, New Jersey, New York, Ohio, and Pennsylvania are all headed in that direction. But others are, too: Arizona, Louisiana, Maryland, Montana, North Dakota, Utah, Wisconsin, and Virginia.
They’ll hit a wide swath of industries: Utilities...from power to water. Nevada, for example, may apply its 6.5% sales tax to natural gas.
Business assistance, including advertising, printing, accounting, janitorial services, debt collection, telemarketing, crating, and moving.
Also: Carpentry, construction, plumbing, painting, landscaping, deliveries, car repairs, equipment leasing, and sporting event tickets. Maine, Michigan, and Illinois are looking to add a sales tax to temp agency help, telephone answering, appliance repair, health clubs, and lawn mowing.

Most states will move slowly so that businesses and consumers don’t head to neighboring states to dodge new taxes. They’ll start with services that aren’t portable, such as construction. It’s more than a coincidence that the only state that already has a tax on all services is one where going next door isn’t possible: Hawaii.
Not all is bleak on the local tax horizon. Real estate rates will be capped or reduced in more than a dozen states, including Arkansas, Florida, Idaho, Illinois, Indiana, Montana, New Jersey, and Vermont.

The economy
Don’t fret over the Feb. employment report. Sure, the job gain of 97,000 marked the most meager performance since Jan. 2005. But it is heavily skewed by 62,000 jobs shed in the construction sector. Weather played a big part in that by delaying building projects.
Service industries, the heart of the job market, are humming. Feb.’s gain of 168,000 service jobs actually trumped Jan.’s by 48,000. We see a total of 1.5 million jobs added this year, buoying consumers.
The bad news: Wages continue to rise quickly and unemployment is a very low 4.5%. Firms will probably see more upward pressure on pay.

Business costs
Lower costs for metals will cheer up builders and manufacturers. They can look forward to reduced prices for wiring, tubing, tools, and many more items … a help for profit margins as economic growth slows.
One major benefit: Cheaper stainless steel as the tab for nickel, a main ingredient in this widely used steel, drops about 30% this year. We see stainless at $3,000 a ton by year end, down $1,000 a ton from now. Weaker demand, especially from the auto sector, will also factor in.
Copper is headed for a 6% decline to about $2.50 a pound. Its price is at the point where substitute products made from plastic and aluminum are competitive, notably for use in electrical products.
Mixed news on metals for battery makers: They use a lot of zinc, which is likely to hold steady around its current price of $1.70 a pound. This follows a doubling in the price of zinc over the past two years. But lead, used in smaller quantities in batteries, will fall about 25% in response to stepped-up output by mining companies in the past year.

Figure on airfares rising 5% between now and year end, with business class averaging a bit more and economy tickets a bit less.
But fare cuts are possible on a few routes as some major carriers use newfound financial cushions to take on lower-priced competitors. In Denver, for example, United may challenge Southwest and Frontier. US Airways could square off against Southwest on Philadelphia routes.
Competition on transatlantic routes could heat up by fall, thanks to a pending “open skies” agreement with the European Union. Though previous such deals have foundered, this one is a good bet.

Increases in legal fees show no sign of slowing in coming years. Average fees will rise at about one and a half times the inflation rate.
Blame more corporate compliance regs, heavy corporate deal-making, and plain old economic growth for brisk demand for legal services. The legal supply side ... newly minted lawyers ... is far from keeping up.