The state and local tax cap, called SALT, has been the bane of many high-tax states since its passage as part of the 2017 Tax Cuts and Jobs Act. It created an effective tax hike for many high earners in high tax states, as well as many middle-class workers. That may be about to change, at least for some income earners.

 

Last week, the Senate Budget Committee, chaired by Vermont Sen. Bernie Sanders, presented a draft outline of a $6 trillion budget resolution. It included $120 billion for SALT relief over five years. Readers may recall that the controversial tax placed a $10,000 cap on the amount taxpayers could deduct from their federal income tax in state and local taxes. One of many unintended consequences was that it triggered a mass exodus of many wealthy residences from higher to lower tax states.

 

But don't break open the champagne just yet. The Sander's proposal falls far short of the cost of repealing the total tax. The Tax Policy Center estimates that in order to repeal SALT in full, the cost would be more like $460 billion over the same five years. 

 

Even so, the proposal is a victory for the caucus of 30 Republicans and Democrats from high tax states who have been lobbying for the repeal of SALT for years. They have their work cut out for them, however, in order to convince the various opposing factions between and within both parties to rescind the tax.

 

Progressive members of the Democrat Party view any change of SALT as a giveaway to the wealthy. They have a point, given that 57 percent of the benefits if SALT is repealed would fall to the top 1 percent of Americans. But what about the remaining 43 percent? Those are middle-income earners, who had fewer tax deductions as a result of the 2017 Republican tax cuts.

 

SALT also created some real fiscal problems for many states. The on-going migration from states such as New York, New Jersey, and California to places like Texas and Florida has drained the funds necessary to support schools, hospitals, police, fire, transportation and other basic services. To cope, higher tax states are forced to raise taxes even higher, which could cause even more residents to flee. Remember, too, that those large tax payments by the wealthy were largely used to support and expand social programs.

 

At the same time, receiving states, which at first applauded the tax cap that fell disproportionally on blue states, are now increasingly facing their own budget shortfalls. All these new residents expect the same basic services they enjoyed previously. These newcomers also increase the demands on existing infrastructure. Water, roads, bridges, hospitals, even the internet, may have to be upgraded as the population swells. This will cost money.

 

As a result, longtime residents of some states are suddenly seeing property taxes explode higher. Strapped for funds, legislatures, pressured by this influx of voters (many of whom are liberals), are being forced to introduce additional taxes to cope with this new demand for services.

 

A possible compromise solution to reduce the havoc caused by the 2017 tax act would be to repeal the SALT tax for those earning less than $400,000 per year. That could appease the progressive Democrats without alienating most Republicans. The cap would be lifted entirely for those under that threshold, while those over it would still be subject to the $10,000 cap.

 

There is plenty of motivation to compromise, at least among Democrats, since the cap caucus members (20 Democrats and nine Republicans) have pledged not to vote for any legislation that doesn't include a repeal of SALT. The SALT issue has already delayed the president's infrastructure plan and could hamstring his own tax plans as well. Since the Democrats cannot afford to lose even one SALT Democrat, given their slim majority in the Senate, I believe we will see some relief on the SALT taxes for at least some of the taxpaying population.

 

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.

Airplanes are full, parkways are bumper to bumper, and restaurants are packed. The summer is in full swing, and for many, the coronavirus is a thing of the past. Let's hope it stays that way.

 

The last thing I want to do is spoil the re-opening party. Afterall, we deserve to feel good, go out, meet family and friends without a mask, even chance a hug now and then. The one fly in all of our ointments may be the onset of an extremely contagious, and virulent coronavirus mutation dubbed the "delta variant."

 

You have probably read about this super bug and its devastating impact on the population of India. It was first detected in that country in December 2020. To this point, it has spawned at least a dozen mutations. Some strains are vastly more contagious and lethal (as well as vaccine-resistant) than others. The virus effectively doubles the risk of a victim's hospitalization, and most delta-related cases occur in the under-50 age group. That unfortunately accounts for many who have yet to be vaccinated.

 

Since last December, the delta varient has spread throughout Southeast Asia, hopped over to Europe, and now has entered the U.S., where 10 percent of new cases have been identified as such.  In the U.K., the number of cases is doubling every 11 days. In Ireland, the delta variant accounts for 50 percent of new cases.

 

The danger of spreading is so great that the United Kingdom has delayed the re-opening of their economy by at least another month. That delay will hopefully give the British government more time to get as many people vaccinated as possible. And therein lies the good news. The present vaccines appear to be effective (but not entirely) against this variant as well.   

 

Most political leaders, including President Biden, understand that we are now in a numbers game to vaccinate as many people as possible before the spread of this mutation overwhelms hospitals, decimates the labor force, and damages the re-opening of the economy.

 

The good news for the U.S. is that more than half of all Americans are at least partially vaccinated (45 percent are fully vaccinated), and COVID cases are falling. It is the main reason why the country is resuming its pre-pandemic behaviors. In some states like New York and Massachusetts, 70 percent of the populations have been vaccinated.

 

Overall, 319 million doses of vaccine have been administered thus far in the U.S., but the rate of vaccination is dropping. The CDC data indicates from 3.3 million vaccinations a day two months ago to a little more than 1 million/day today. At this rate (assuming the vaccination rate does not decline further), it will take another five months before we reach 75 percent of the total population, which is the minimum number to attain for herd immunity. Folks, with the delta strain nipping at our heels, we are running out of time.

 

It is no surprise that the vaccination holdouts are split roughly along politically partisan lines. In at least 482 U.S. counties, less than 25 percent of the population is fully vaccinated, according to the Center for Disease Control (CDC). Many of these counties are in rural red states, and/or low-income areas.

 

But the holdouts come in all shapes and sizes. My niece and her family refuses to get vaccinated. She "heard" the vaccines may jeopardize her chances of childbearing. A neighbor, as a matter of course, does not believe in any kind of vaccination, while a local dental hygienist refuses because she just doesn't like needles.

 

In the recent past, virus-related surges in Europe and other countries, have acted as an early-warning signal for what could be in store for the U.S. in the next few weeks. I have noticed that in the past week, President Biden, his Chief Medical Advisor Anthony Fauci, the Chairman of the Federal Reserve Bank Jerome Powell, and a slew of medical experts have expressed their concerns over the spread of the delta variant within the U.S

 

Most businesses and consumers seem to be ignoring these foreign red flags. Certainly, the stock market doesn't appear to care, or see the delta variant as a "clear and present danger." I hope I am wrong in sounding the alarm. The last thing the economy needs at this point is to experience a roll-back of our newly won gains. 

 

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.

Supply chain shortages are showing up across the nation. Some items, such as chlorine for America's pools and used cars, just illustrate a lesson we need to learn.

 

 The chlorine shortages illustrate why supply chains are so important and how fragile they can be when faced with something as devastating as the pandemic. Last year, when lockdowns kept most Americans hunkered in their homes, an enormous home improvement wave swept through the country. Demand for home offices on the inside, and new recreational improvements on the outside, skyrocketed.

 

Gazebos, firepits, and swimming pools were just some of the items that consumers decided would make life bearable under a lockdown. New pool construction and upgrades were a savior to the pool industry, which saw their sales jump 20 percent or more. Roughly 66 percent of the 5.2 million in ground, residential pools in the U.S. use traditional chlorine systems. The last thing new and old pool owners were expecting was a chlorine supply shortage.

 

All it took was a fire at one chemical plant in Louisiana to drive prices of chlorine pool tablets into the stratosphere. Unfortunately, this facility accounted for a large share of domestic chlorine pool tab production, and there are few remaining sources of supply within the U.S. And as with so many other products in the global supply chain, China is the only significant foreign supplier.

 

Importing products from China is beset by a variety of problems ranging from bottlenecks in ports, China's own virus outbreaks, and the various economic sanctions and tariffs imposed by the U.S. We are paying a price, and a steep one at that, for our past and present policies of bashing China (and other nations) rather than investing in our own abilities to compete.

 

The scarcity of new and used automobiles in the U.S. is far a far more serious issue than chlorine, but its cause is just another example of how supply chain disruptions can ultimately impact consumers in unexpected ways. Semiconductors, for example, are used in so many products that they are considered indispensable to the world's economic health. As most readers are aware, there is at present a global semiconductor shortage. For today's gadget-filled automobile that has posed a real problem.

 

The pandemic is once-again the culprit behind the shortages. Demand by shut-in consumers seeking electronic equipment for home offices, and for chip-heavy gadgets for home entertainment exploded. The companies that build and sell these devices reacted by sending a wave of semiconductor orders through the supply chain all at once.  At the same time, many of these global chip makers were being forced to shut down due to their own coronavirus threat. As a result, those U.S. orders quickly overwhelmed the few chip foundries that manufacture most of the world's computer chips.

 

Automobile manufacturers were caught flat-footed by the semiconductor shortage. The electronic goods manufacturers had quickly gobbled up most of the relatively lean, worldwide inventory of chips. By the time they got around to realizing there was a shortage, it was too late. The production of many new models had to be halted, since many models just couldn't be completed without vital semiconductor components. New car production became a trade-off and dealerships found that their supply of new cars was being rationed.

 

At the same time, consumer demand began picking up. One reason is that the U.S. passenger auto stock is aging. The average age of America's vehicles is now approaching 13 years old. Consumers shopping for new cars realize there are few to be had and the waiting list is in months, not weeks, long. The result has been a growing shortage of new cars. That has led to a record increase in used car prices. The subsequent rise in used and new auto prices was so strong that it accounted for one-third of April's overall rise in consumer prices.

 

Cars and chlorine are just two examples of the present supply change imbalances.  There are lessons to be learned from this predicament. For one, the world's economies are a lot more vulnerable to catastrophes than anyone imagined. Second, global supply chains are just that — global. Whether we like it or not, we need and depend on the products other nations sell us, and they need ours.

 

The next calamity may be weather-related, or another virus (like the bird flu resurgence in China today); who knows? Whatever it is, we are dependent on each other if we hope to survive it. The sooner we wake up to that fact, the better off we will be.

 

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.

 

The Memorial Day weekend launched the unofficial beginning of the summer season. Movie theater owners are holding their breath in hopes that consumers, once vaccinated, may start to return to the cinema. Is it a false hope?

At the beginning of this year, the global price of carbon was $24.05 per ton of CO2. In order to achieve the emissions reduction goals of members of the Paris Agreement, prices need to reach a range of $50-$100 per ton of CO2. That makes buying carbon an attractive investment.

 

The ongoing concerns about climate change have spawned several emission trading schemes over the last decade. The reasoning is simple: if left unchecked, carbon emissions (among other factors) will have a material impact on our environment and will do severe damage to the global economy.

 

The ratification of the Kyoto Protocol of 2007, by world governments, effectively addressed the challenge, establishing rules of carbon emissions. And in the process created an entirely new asset class.

 

Today, whatever system a government chooses has at its core, a cap-and-trade system. Emitters of carbon must by law either limit carbon emissions to the level allocated by their government, purchase additional carbon emissions permits in the marketplace, or pay a fine for exceeding their emission limits. This has created a new commodity: carbon emission permits.

 

The European Union Emission Trading Scheme (EU ETS) is by far the largest such scheme in the world. It has also become the model for most of the world's governments. Carbon emissions, according to the Financial Times, was the top performing commodity in recent years, growing fivefold in the last four years. By the end of 2020, the three largest global carbon futures exchanges had a market size of $260 billion.

 

In April 2021, on Earth Day, President Joe Biden hosted a "Leaders' Summit on Climate," and promised to reduce emissions by 50-52 percent below 2005 levels by 2030. The U.S. was just one country, among many. The EU, the U.K., and China promised similar, if not larger, reductions. Carbon emission pricing was the central theme of the summit and is the key, fundamental component for achieving the summit's reduction goals.

 

Prices have risen by 70 percent this year in response to the aggressive goals set by the EU, which is targeting a 55 percent reduction in greenhouse gases by 2030 and net-zero by 2050. The hope is that as the price of carbon credits continue to rise, polluting companies will at some point decide to invest in reducing emissions rather than purchasing increasingly expensive credits.

 

The re-opening of the world's economies is also a bullish development for carbon pricing as industrial companies and utilities increase output and carbon emissions, which is sparking even more demand for carbon credits. And adding to that trend, new carbon markets seem to be popping up every month. Cap-and-trade carbon pricing exists in 24 national and sub-national markets currently. Another 19 more markets are in the development or consolidation phase.

 

Some American institutional investors and pension funds are gaining access to this market either directly, or through Exchange Traded Funds (ETFs). The retail crowd is still relatively absent from this asset class.

 

In addition, as far as I can tell, the carbon market is uncorrelated with other risk assets. The underlying asset, the EU ETS, is a liquid instrument with a well-understood prospective risk premium. Its risk-adjusted returns have outperformed traditional asset classes such as equities, bonds, and other commodities. In my opinion, it appears to be a case of making some real money over the long-term, and, at the same time, contributing to the greater good by helping to address climate change and a much-improved global environment.

 

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.