Sunday, October 02, 2005

Tax Effects of Katrina

Via TaxProf, there is a link to an article by Martin A. Sullivan, Katrina's Stealth Impact on the Budget.

The central thesis of the article is that Katrina is likely to have tax and economic effects for all years going forward and that these effects have not been fully appreciated. Sullivan calculates, for instance, that if Katrina causes a mere 0.5% reduction in GDP growth for one year, it will result in a loss of tax revenues of about $165 Billion over ten years. This assumes, however, that the economy does not rebound in subsequent years in an amount equal to the reduction in GDP growth in the first year.

To take account of the rebound effect, Sullivan uses a poll that surveyed 56 economists. In essence, their collective prediction was for that the significant negative impact of Katrina in 2005 would only be partially offset by a "minutely positive" rebound in 2006. Applying these concensus estimates, Sullivan calculated that the revenue loss to the Federal government would be in excess of $100 Billion over 10 years. As a result "future deficits will be larger than advertised."

Sullivan does not examine the effects on the three states that suffered the most from Katrina. It is reasonable to conclude that, over the next 10 years, the revenue loss to these states and the local governmental untis within them will be nothing less than devastating.

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