High-income tax states like Massachusetts, New Jersey, California, and New York would appear to be winners if President Biden's "Build Back Better" plan is finally passed by Congress. The Trump-era limit on state and local tax deductions could provide a $200 billion (or more) wind fall for wealthy Americans.

 

As it stands now, congressional Democrats, especially those who represent high tax states, are crafting a change in the SALT deduction cap. Presently American households can only deduct $10,000 of state and local taxes from their federal income taxes. That cap deduction is poised to end by 2026.

 

In a prior column, I explained that in exchange for their votes on Biden's $1.7 trillion plan, high tax state legislatures insisted on lifting the amount of the SALT cap. The House Rules Committee is now working on a change that would raise the $10,000 cap to $72,500 for five years (that would be retroactive to 2021).

 

The largest beneficiaries, according to the Tax Policy Center, would be households earning at least seven figures. They would receive the lion's share of benefits. As for middle-income U.S. households, the average cut in taxes would only amount to roughly $20 per year, while the higher income earners would be saving $23,000 per year. 

 

A full 25 percent of the tax cuts would flow to the top 0.1 percent of taxpayers. For them, the average savings in taxes would be $145,000. Another 57 percent of the benefits would go to the top 1 percent, who would save roughly $33,100 annually.

 

The Committee for a Responsible Federal Budget, a non-partisan, non-profit economic education organization, believes the tax benefit would cost $300 billion over the next four years with $240 billion of that cost accruing to those who make more than $200,000 a year. That would put the price tag for the SALT cap expansion on par with childcare subsidies, and the clean energy tax credits, making it the third costliest element of the overall Biden plan.

 

The legislation puts Democrats between a rock and a hard place. Clearly, most of the benefits would be going to the bluest-of-the-blue coastal states. The fact that it also benefits the wealthiest Americans flies in the face of the progressive side of the party, who have stomped and won their seats railing against income and wealth inequality.

 

In order to pass the Build Back legislation, Democrats need all hands-on deck. But the group of legislators most impacted by the present SALT tax has made it clear that without a SALT deal there would be no deal on the overall Biden plan. 

 

Over in the U.S Senate, key players are backing a different approach. They want to exempt taxpayers from the SALT cap, who make under a certain income level. That level is still being debated.  Achieving a resolution between the House and the Senate will be necessary before Democrats can hope to send a new version of the budget reconciliation package to the White House.   

 

In the middle of the debate sits the president. The framework of President Biden's plan, released last week, did not include a SALT repeal, or change in the present tax cap. In the past, however, the president has indicated he might be open to eliminating the deduction cap altogether. 

 

My own guess is that the Senate approach, which favors an income-based exemption, would be more palatable to a voter base that would not be interested in giving the wealthy another huge tax break.    

 

Rising prices at the gas pump, combined with soaring shopping bills at the supermarket, are having a noticeable impact on the consumer's pocketbook. But what's worse is that higher prices in oil beget higher prices in food in the future. Here's why.

 

Historical economic studies tell us that energy prices have a significant impact on food prices with 64.17 percent of changes in food prices explained by the movement of oil prices. But that only tells half the story. As energy prices climb, inputs to farm production are also impacted. Fertilizers, for example, account for between 33 percent to 44 percent of operating costs. 

 

The production of fertilizer and its inputs (such as nitrogen, phosphate, and potash) requires substantial amounts of energy, which increase the selling costs to farmers. Fertilizer prices are now the highest in decades. To make matters worse, the prices of fertilizer and its inputs continue to see dramatic increases, rising as much as 18 to 26 percent during the last month alone.

 

Obviously, energy in the form of diesel, gasoline, and electricity is also a direct input cost to the agricultural sector. It is critical to running and maintaining the myriad machinery required to plant, grow, harvest, and transport food products to market.

 

In addition, the explosion of greenhouse growing of vegetables has also been hit hard by higher energy costs. That is no surprise, since this is an extremely energy-intensive area. And as energy prices continue to climb, more farmers have shut down their greenhouses, reducing crop production even further.

 

Higher energy prices have also prompted farmers to switch more of their fields from food production to making biofuels. As more and more acreage are switched to soybeans and corn (key inputs in biofuels), there is less acreage devoted to other crops. That leads to less supply and higher prices for everything from wheat to livestock feed.  

 

The United Nations index of food costs has climbed by a third over the past year. This has led to a decade-high jump in global food prices at a time when the world is contending with its worst hunger crisis in 15 years. As readers may be aware, this energy/food issue is being aided and abetted by worker shortages, supply chain issues, and weather calamities such as flooding and drought. This is particularly bad news for poorer nations that are dependent on imports.

 

It is currently harder to buy food on the international market than in almost every year since 1961, which is when the U.N. record keeping began. The only exception was the period 1974-1975. That is no coincidence, since the OPEC-driven oil price spike of 1973 spawned the rapid inflation that impacted food prices.

 

To give you an idea of how food stuffs are climbing throughout the globe, in September 2021, alone, the U.N. food index rose 1.2 percent. Grains jumped 2 percent, driven by wheat, which has been hit by drought in North America and Russia, the world's largest producers. Sugar, a big Brazilian export, also saw big price gains. These price hikes are boosting import bills for buyers around the world. Competition for additional food supplies is also adding upward pressure to prices as well.

 

Most of us here in the United States are at least able to afford the twin increases in fuel and energy for now. However, there is a time lag between the recent price spikes in the oil and agricultural markets and how long it will take to filter through to grocery stores. In the meantime, keep an eye on the oil price as an indication of where your grocery bill will be going into the weeks and months ahead.

 

This week, the Democrats unveiled a new plan to finance President Biden's "Build Back Better" legislation. That proposal, along with a 15 percent corporate minimum tax, has politicians scrambling to line up for or against the idea. Does it have a chance to pass?

 

Credit for the idea goes to the Senate's top tax expert, Finance Chair Ron Wyden, an Oregon Democrat. His plan is to target only people with $1 billion in assets, or who are earning more than $100 million over three consecutive years. This group would be required to pay capital gains taxes each year on the appreciation in the value of their assets. It won't matter whether they sell or hold those assets.

 

The plan would impose a one-time tax on all the gains accumulated before the tax was created. That could mean a huge tax bill for some entrepreneurs that still hold a sizable portion of their company in stocks, bonds, etc. These founders would have five years to pay off their one-time tax. Each year after that capital gains taxes would be levied on the annual appreciation of assets that are easily valued such as publicly traded assets (bonds and stocks). Ownership of private companies and real estate holdings might not be assessed until after they are sold with different tax rules, depending on the nature of the assets.

 

The beauty of this plan for politicians on both sides of the aisle is that if passed, the billionaire tax would only impact around 700 people. As such, there is not a lot of voter risk involved in this idea. But the upside would be that it would generate several hundred billion dollars in revenues. Capital losses on assets would be allowed, which could also be carried forward (and in some cases backwards).

 

For those who might oppose this plan, the idea of defending a bunch of billionaires is dicey at best. Most voters (and most of the media) believe this wealthy handful of people are not paying their "fair share" of taxes in the first place. And as for the corporate tax rate, most large corporations are not paying the official tax rate any way. After all the credits and other tax loopholes that have been accumulated over the decades, the effective tax rate for most corporations is well below. The tax rate for some companies is zero or below.

 

As with most new or proposed legislation nowadays, even if the tax is passed, it would likely be challenged in court. The American Constitution does not allow so-called direct taxes. The idea is that you can't levy a tax on someone that can't be imposed on others. However, thanks to the 16th Amendment, there is an exception when it comes to income taxes, which allows Congress to tax earnings. A court case would focus on whether a billionaires' tax would count as an income tax.

 

The new plan is a result of the present stumbling block between Democrats of different persuasions. Sen. Joe Manchin III, a Democrat from West Virginia, and Sen. Kyrsten Sinema, a Democrat from Arizona, have stalled any agreements, both from the size of the spending, as well the best way to pay for it. Will this tax, as well as the minimum corporate tax, ever see the light of day?

 

In the case of the corporate minimum tax there may be enough support for it within the Senate. As for a billionaire's tax, probably not.  Aside from the question of constitutionality, the current Supreme Court would also be an obstacle to interpretating the legality of the tax. The billionaire victims of the proposal, while a small group, carry enormous political weight among politicians. They would be sure to express their opposition (privately) to those that matter.

 

And finally, most Americans would probably see this kind of wealth tax as an unmistakable step toward socialism, if not Marxist. I don't think the average voter is ready to take that step quite yet.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Inflation is worrying investors. Every new data point seems to be heightening their anxiety. Oil and other commodities are raging higher. The rate of wage increases is also climbing, but the most important variable the Fed is watching is about to move higher.

 

Housing and/or home ownership is one of the most important components of the U.S. economy. However, housing prices per se are not included in the Consumer Price Index (CPI). Instead, the CPI measures the cost of shelter, which is broken down between actual rents paid and the Owners' Equivalent Rent or OER.

 

OER is the amount of rent that would need to be paid in order to substitute a currently owned house as a rental property. It measures (in an indirect way) the value of the present price increases in the real estate market including your home.

 

One could call it the "shelter" component of the Consumer Price Index, which is published by the Bureau of Labor Statistics. The OER represents about one third of the CPI basket and it is a number the Fed watches carefully.

 

You may wonder why rent is included in the CPI, but not food and energy. The Fed considers price fluctuations in food and energy as transitory. If, for example, OPEC decides to raise oil production next month, the price of oil would probably decline. That, in turn, would likely impact how much consumers will pay at the gas pump. Rents, on the other hand, are stickier and tend to last longer.

 

It is obvious to most readers that housing costs have skyrocketed during the last two years. Since the start of the pandemic, inflation-adjusted home prices have increased 11.8 percent annualized. To put that in perspective, real house prices have been rising 100 times faster than they did from 1955 to 1998.

 

But there has been no commensurate increase in the OER, until recently. That is because there is usually a lag time between increased housing prices and rent increases (by roughly five quarters). That lag time is now up, and right on schedule we are beginning to see OER impact the inflation rate in both the CPI and the PPI (Producer Price Index). In September 2021, the shelter index rose by 0.4 percent, accounting for nearly one third of the increase in prices across all goods and services in the CPI.

 

That is the largest increase in 20 years. OER rose by 0.4 percent, while rents of primary residences rose by 0.5 percent. Those were the biggest one month increases since the early 2000s. Economists blame the results on rapid housing price gains, more aggressive landlord pricing, low inventory and faster wage growth.

 

For the Fed, this is bad news. As the headline number of the Fed's inflation gauges, the CPI and the Producer Price Index (PPI), continue to climb higher, the pressure to raise interest rates sooner rather than later is building. The idea that broad-based inflation pressures will continue to rise thanks to supply chain issues and aided and abetted by wage growth has the financial markets nervous.  They also know that some of the long-lasting economic forces that have kept inflation low for decades have been turned on their heads. China, for example, is exporting inflation right now, after functioning as a massive deflationary force for the last thirty years.

 

Consumer expectations for inflation are continuing to surge, rising to 5.3 percent over the next year, and 4.2 percent over the next three years. Both are the highest in the history of data going back eight years, according to the New York Fed.

 

 As it stands, about half of the Fed's policy makers are expecting to start raising interest rates next year and think borrowing costs should increase to at least 1 percent by the end of 2023. That timetable may have to be pulled forward if the present trends continue. Watching the OER may give us an early warning of what the Fed will do next.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Despite this new age of video games, electronic toys, and diminishing attention spans, children are returning to a toy that is almost as old as me. Mattel's Barbie doll is back and at the top of many holiday shopping lists.

 

Some of the credit for Barbie's new-found popularity can be attributed to the pandemic. The lockdowns and the subsequent search for things to keep children occupied had mothers remembering their own fascination with all-things Barbie. Buying a Barbie, however (at least until recently), had parents wrestling with several negative stereotypes. Leading the list was the doll's image of a whites-only toy that ignored the realities of the melting pot we call America. Then there was the all-too-perfect body, which critics said promoted an unrealistic body image.

 

Consumers took the criticism to heart. In years past, sales declined, competitors gobbled up Barbie's long-reigning market share, and there was even talk of discontinuing the 62-year-old model from the company's lineup.

 

Instead, Mattel's management, after much soul-searching, decided to revamp their products to better reflect the world we live in.  Taking their cues from the success of Disney's Marvel and it's cast of superheroes of every race, age, gender, and walk of life, Barbie entered the 21st century.

 

Mattel revamped their entire product line and produced news dolls with various skin tones as well as body types. The doll now comes in 94 hair colors, 13 eye colors, and five body types. But they haven't stopped there. Some models have prosthetic legs or wheelchairs. Ken dolls have also been updated with their own skin colors, body types, and hairstyles.

 

Mattel has also delved into areas such as wellness and has introduced a line of role-model Barbies. The company, for example, recently announced a series of dolls honoring the heroes of the novel coronavirus pandemic. COVID-19 vaccine developer Sarah Gilbert, a 59-year-old Oxford University professor and co-developer of the Oxford/AstraZeneca vaccine, is one of six women who have new Barbies modeled after them. Others include an emergency room nurse, a frontline doctor in Las Vegas, as well a Brazilian scientist and a Canadian psychiatry resident at the University of Toronto who battled systemic racism in health care.

 

Mattel has also established a film department and enlisted some social media influencers to help propel their toys into the forefront of popular culture. It appears to be exceeding. Last year, Barbie had its best sales growth in 20 years. The company's stock price has risen by almost 50 percent, and analysts are expecting good results for 2021 as well.

 

And given its long history, certain dolls have become collectors' items. Barbie debuted at the American International Toy Fair in New York on March 9, 1959. Over the years, thanks to limited edition models, or exclusive collaborations that resulted in a unique doll design, there are about 60 Barbie dolls worth as much as $667,757.

 

The "I Love Lucy" Barbie fetches as much as $1,050, while other expensive collectables such as the Coach Barbie ($1,500) or the Christmas Show Barbie ($2,000) are in demand. There are also Chicago Cubs versions, as well as a NASCAR Official Barbie. Both models are commanding $2,000 or more. Not bad, for a new doll that usually retails for under $40. It should come as no surprise that the Mattel is now considering turning its collector brands into non-fungible tokens (NFTs) as the next market to explore.

 

In the coming months, a Barbie movie, starring Margot Robbie, should keep the kids and their parents' pocketbooks quite busy into the holiday season. In anticipation of the film's release, management has increased prices for the iconic doll, due to higher commodity prices and transportation costs. The company said it expects full-year net sales to increase by 12 percent to 14 percent driven by Barbie's new-found popularity, as well as demand for toy cars (Hot Wheels) and other action figures.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.