Finance Blog number 1

Want to create jobs? Just create a tax credit for businesses.

For decades, that’s how many governors and state lawmakers have approached economic development. But with budget deficits collectively in the billions of dollars and unemployment rates still uncomfortably high, some state officials have begun to rethink whether the jobs promised from tax credits are worth the drain on state funds that could go to public schools and services.

Perhaps nowhere is the tax credit tension more evident than in Missouri, where lawmakers have convened a special session to consider scaling back several existing tax credits in order to finance new tax incentives targeting a variety of business interests _ from Chinese cargo planes to computer data centers, high-tech companies and even the organizers of major sporting events.

Democratic Gov. Jay Nixon and Republican legislative leaders tout it as one of the most far-reaching job-creation packages being considered among states. But it faces opposition from some lawmakers who see it as the latest give-away of taxpayer dollars to big businesses at the expense of school children, the disabled and elderly.

The battle in Missouri and several other states mirrors that in Washington, where President Barack Obama and Republican congressional leaders are expected to clash in coming weeks over the right mixture of tax breaks and spending to stimulate the economy without plunging the nation deeper into long-term debt. The outcome figures to play prominently in the 2012 elections as incumbents seeks to assuage voter concerns about both the economy and government spending.

“There is a tension between just about everybody,” said Sen. Chuck Purgason, a Republican who has wavered on whether to back the Missouri plan. “You’ve got core Republican principles that government doesn’t create jobs _ the private sector creates meaningful jobs _ and what you need is broad-based tax reform.”

For others, he said, “their idea is for government to take money and incentivize aspects of trying to stimulate the economy.”

Tax credits have been popular among many politicians because they directly reduce the taxes that a business must pay, unlike a tax deduction which only reduces the income that can be taxed. Some states also allow tax credit vouchers to be sold, which allows the recipient to generate upfront cash for a project.

As lawmakers consider an overhaul of Missouri’s tax incentives, a task force in Oklahoma is reviewing whether the state’s estimated $5 billion of annual tax cuts, exemptions, and deductions _ many of them intended to attract jobs _ truly are serving the public good.

“We know that while government cannot create prosperity, it can and should help create conditions that encourage it,” said Rep. David Dank, an Oklahoma Republican who is leading the task force. He said the review is “a sincere effort to determine what works, what doesn’t, and what reforms we should make.”

In New Mexico, Republican Gov. Susana Martinez ordered agencies last month to prepare an annual analysis of whether tax credits are costing the state revenue and creating jobs.

Some states have continued to create business tax credits this year under the belief that the lost revenue will be replaced as companies hire workers, who in turn pay individual income and sales taxes.

In Wisconsin, for example, the Republican governor and Legislature enacted a new income tax credit for manufacturers that eventually could cost the state $128 million a year _ a move that Democratic Rep. Tamara Grigsby decried as “shameful” and “nauseating” after cuts to public education and other areas.

Connecticut’s Democratic governor and Legislature also expanded tax credits, offering incentives to the first five businesses that agree to create 200 jobs and invest $25 million in the state. A new Idaho law will offer businesses tax credits worth between 2 percent and 6 percent of a new employee’s annual wage.

Yet after decades of adding tax incentives, Oregon lawmakers this year abolished about a dozen tax credits and reduced several others to save the state more than $125 million over the next four years. Hawaii lawmakers decided against enacting a new incentive sought for filmmakers. Louisiana Gov. Bobby Jindal signed into law several expanded tax breaks but vetoed several others passed by lawmakers.

In Missouri, the value of annual tax credit redemptions increased more than fivefold from 1998 to the 2010 budget years, prompting increased criticism. Among the tax breaks on the chopping block are ones for developers who build low-income housing or renovate historic buildings _ two of Missouri’s mostly costly tax credits.

Missouri officials say the savings are essential to afford new incentives for businesses, such as the $360 million of proposed tax credits intended to transform the St. Louis airport into a hub for Chinese cargo planes and other international trade. Other new incentives seek to lure large computer data centers used by the likes of Google or Amazon and high-tech companies with a scientific emphasis.

“We’re trying to move the state forward on jobs when a lot of other people around the country are kind of frozen,” said Missouri Gov. Jay Nixon.

But some Missouri lawmakers doubt the proposed business incentives will be any less of a drain on the state budget, which has seen funding slashed for public colleges and universities, student scholarships and busing for elementary and secondary schools. Republican state Sen. Jason Crowell has threatened to filibuster the proposal. He’s particularly peeved that Missouri would subsidize the importation of China-made products, which compete with American-made goods.

Missouri’s proposed business tax breaks also have drawn opposition from some tea party participants and a free-market think tank financed by one of the state’s most active political contributors.

Tax credits are “an attempt to place a bet really _ for whatever reason, we think this industry or this company is going to be more successful,” said Audrey Spalding, a policy analyst at the St. Louis-based Show-Me Institute. “Nothing miraculous happens to a lawmaker when they’re elected to state office that gives them the ability to figure that out.”

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A marked slowdown in European economic growth is overshadowing a meeting Tuesday between the leaders of Germany and France aimed at getting the eurozone’s 17 countries to work closer together to dig Europe out of its debt crisis.

The meeting between Angela Merkel and Nicolas Sarkozy in Paris comes after a week of turmoil in financial markets, largely blamed on Europe’s sprawling government debts and worries that European leaders aren’t doing enough to address them. It also comes a day after the European Central Bank revealed that it splashed out more money than ever trying to appease the markets.

Europe’s sagging growth prospects make it even harder for governments to shrink their debts. Economic growth in the 17 countries that use the euro sagged to a lackluster quarterly rate of 0.2 percent in the second quarter, as a previously robust expansion in Germany almost ground to a halt, according to EU figures Tuesday.

“The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy,” said Lloyd Barton, senior economic advisor to Ernst & Young. “A further deterioration in financial conditions could severely damage the outlook for the whole of the eurozone.”

The downbeat growth news weighed on markets, and provided yet more evidence that the global economy is slowing down sharply, following disappointing second-quarter growth figures from the United States.

Financial markets have been hugely volatile of late, partly over fears that Italy and Spain, the eurozone’s third and fourth largest economies, may find it too expensive to service their debts. Those concerns triggered last week’s intervention in the bond markets from the ECB, which has increasingly stepped in as Europe scrambles.

France and Germany, which together account for almost half of the eurozone’s economic output, are taking the lead in pushing for reforms. But, speculation that the two leaders would consider proposals for the eurozone to issue jointly guaranteed government debt appear to have been dashed, with officials for both sides indicating that would not be on the agenda.

Germany has remained firm in its stance that other EU countries must exert more fiscal discipline.

The discussions will center on “measures for better agreement of financial policies,” Merkel’s spokesman Steffen Seibert said.

Officials for both Merkel and Sarkozy said Monday that jointly guaranteed eurobonds would not be on the agenda.

Analysts forecast that Tuesday’s meeting could set the stage for future political decisions about the euro and European integration, but no immediate breakthroughs.

“Don’t expect any game-changers from today’s meeting,” said Neil MacKinnon, global macro strategist at VTB Capital. “The eurozone debt and banking crisis has yet to be properly resolved, and the future viability of monetary union is a choice between moving towards fully fledged fiscal union or considering the possibility of a break-up in monetary union.”

European growth prospects are a growing concern too. Until now Germany’s economy, Europe’s biggest, had been growing strongly despite Europe’s government debt crisis.

The eurozone’s growth rate was well short of the 0.8 percent recorded in the first quarter, and was largely due to an abrupt slowdown in Germany. Germany’s economy has helped support the eurozone through the government debt crisis. Its world-renowned companies have tapped export markets all around the world, particularly in faster-growing emerging countries.

The chief of the International Monetary Fund urged rich-country governments not to squeeze their budgets so far that they stifle growth.

“For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans,” Lagarde wrote in the Financial Times. “At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects.”

France was caught in the market crossfire last week, with investors worrying about the financial health of the country’s banks in particular and whether it would be the next country after the U.S. to lose its triple-A credit rating.

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Drugmaker Merck says it has received a subpoena from federal prosecutors investigating the company’s marketing of three drugs acquired through its 2009 acquisition of Schering Plough.

Merck & Co. Inc. disclosed the request for information from the Department of Justice in a regulatory filing Monday morning. The government is investigating marketing and selling of the brain cancer drug Temodar and hepatitis C drugs PegIntron and Intron A. The probe involves company activities between 2004 and today. Merck, based in Whitehouse Station, New Jersey, said it is cooperating with the government.

Merck and Schering Plough completed their merger in November 2009.

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A car bomb outside a Christian church wounded 23 people on Tuesday morning, police said, as security forces found and disabled vehicles packed with explosives outside two other parishes in northern Iraq.

The bombing and the two averted attacks in the northern city of Kirkuk signal continued violence against Iraqi Christians, nearly 1 million of whom have fled since the war began in 2003.

“The terrorists want to make us flee Iraq, but they will fail,” said the Rev. Haithem Akram, the priest of one of the churches that was targeted. “We are staying in our country. The Iraqi Christians are easy targets because they do not have militias to protect them. The terrorists want to terrorize us, but they will fail.”

The assault began at 6 a.m., when the car blew up outside the Syrian Catholic church, severely damaging the church and nearby houses, said police Col. Taha Salaheddin.

The parish’s leader, the Rev. Imad Yalda, was the only person inside at the time of the blast and was wounded. The 22 other wounded were people whose nearby homes were hit by the blast, said Kirkuk police chief Maj. Gen. Jamal Tahir cash advance today.

Following the blast at the Syrian Catholic church, police discovered two more car bombs parked outside the Christian Anglican church and the Mar Gourgis church, both in downtown Kirkuk.

The ethnically and religiously mixed city of Kirkuk is located 180 miles (290 kilometers) north of Baghdad. Sunni extremists often target Christians who are seen as unbelievers.

Violence against Christians stepped up late last year, climaxing in the Oct. 31 siege of a Catholic cathedral in downtown Baghdad that left 68 dead and scored wounded when al-Qaida suicide bombers held worshippers hostage for hours before detonating their explosives belts.

Since then, the Vatican and the U.S. Congress have pleaded for Iraq’s government to do more to protect Christians in Iraq.

A State Department report says Christian leaders estimate that 400,000 to 600,000 Christians remain in Iraq, down from a prewar level of as high as 1.4 million by some estimates.

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Drugmaker Bristol-Myers Squibb Co. said Thursday that its second-quarter profit fell nearly 3 percent due to higher taxes and increased costs for production, marketing and administration. Those were partly offset by a 14 percent jump in sales.

The company, which sells blockbuster blood thinner Plavix, still beat Wall Street expectations, and it increased its earnings-per-share forecast for 2011 by 8 to 10 cents.

New York-based Bristol-Myers said net income was $902 million, or 52 cents per share, down from $927 million, or 53 cents a share, a year earlier. Excluding a total of $69 million in one-time restructuring and licensing charges, it would have made 56 cents per share.

Analysts surveyed by FactSet were expecting, on average, 55 cents per share and revenue of $5.05 billion.

Revenue totaled $5.43 billion, up from $4.77 billion in 2010’s second quarter, on strong increases for most drugs and encouraging initial sales for a new cancer medicine.

“This performance demonstrates the success of our biopharma strategy in delivering short-term results and in positioning the company for the future,” Chief Executive Lamberto Andreotti said in a statement.

The company raised its full-year profit forecast to $2.08 to $2.18 per share, or $2.20 to $2.30 per share excluding one-time items. In January, it gave a forecast of $2 to $2.10 per share, or $2.10 to $2.20 excluding one-time items.

Bristol also confirmed its forecast of $1.95 per share, excluding one-time items, for 2013. That’s the first full year after generic competition starts slashing Plavix revenue.

Andreotti noted the company has had three new products approved in three months: just-launched Yervoy for advanced skin cancer, Nulojix for preventing rejection of transplanted kidneys and Eliquis, an anticlotting drug approved in Europe for preventing dangerous blood clots after knee or hip replacement surgery. Bristol and partner Pfizer Inc. plan to apply for U.S. approval of Eliquis later this year.

Top seller Plavix, which faces generic competition next May, had sales jump by 15 percent to $1.87 billion, and bipolar disorder treatment Abilify rose 12 percent to $706 million. Rheumatoid arthritis drug Orencia, Baraclude for hepatitis B and Sprycel for leukemia were all up by more than 25 percent, for a total of $713 million. Yervoy brought in $95 million.

But blood pressure drugs Avapro and Avalide, hurt by supply problems that have been mostly resolved, saw sales drop 18 percent to $251 million.

The company’s tax rate jumped to 27 percent, from 20.4 percent a year ago, boosting income taxes to $483 million.

For the first six months, Bristol-Myers reported net income of $1.89 billion, or $1.10 per share. That was up 13 percent from $1.67 billion, or 96 cents per share, in the first half of 2010. Revenue was up 9 percent, to $10.45 billion from $9.58 billion.

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Eurozone leaders are moving closer to signing off on a second bailout for Greece but markets are fretting that any deal that emerges later Thursday may imply a Greek debt default after a plan to slap a tax on banks appears to have been shelved.

Reaching a deal _ it had looked unlikely earlier this week _ became easier after Germany and France agreed on a common position on how to get banks and other investors to share the burden of a second rescue during last-ditch talks in Berlin Wednesday.

The offices of German Chancellor Angela Merkel and French President Nicolas Sarkozy did not release any details on their common plan, but the prime minister of Luxembourg said it was unlikely to include a tax on banks to help pay for the second rescue package.

“I have the impression that there is no agreement on a banking tax,” Jean-Claude Juncker, who as the chairman of the Eurogroup is one of the key officials of the currency union, said as he arrived in Brussels.

Juncker’s comments sparked a bout of euro selling in the markets, as investors now think that any private sector involvement may well mean that the credit rating agencies will consider that Greece will be in default of its debts. By late morning, the euro was 0.8 percent lower at $1.4150, having earlier traded above $1.42.

Juncker conceded that the final deal could well see the agencies slapping a “selective default” rating on the country.

That could trigger fresh financial turmoil, especially if the European Central Bank insists on cutting Greek banks from emergency support, as it threatened to do if the country is considered to be in default.

Leaders have been struggling to find an agreement that makes sure that banks and other private investors help pay for a bailout, without triggering panic on financial markets that the crisis could spread to larger economies like Spain or Italy.

Juncker also said that any deal should include more “flexibility” for the currency union’s bailout fund. Such flexibility is usually shorthand for lower interest and longer maturity for bailout loans as well as wider powers for the fund, such as the ability to buy up distressed bonds.

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Stock markets are opening sharply lower amid fresh fears about the global economy and ahead of the start of earnings season.

The Dow Jones industrial average is down 119 points, or 0.9 percent, at 12,537, in opening trading. The Standard & Poor’s 500 index is down 14, or 1.0 percent, at 1,330. The Nasdaq composite is down 29, or 1.0 percent, at 2,830.

Worries about possible European debt defaults have spread beyond Greece, Ireland and Portugal to Italy and Spain cash advances pay day loan. New concerns also arose about the U.S. where lawmakers face an Aug. 2 deadline to avoid an unprecedented U.S. debt default.

A report Friday saying far fewer jobs than expected were added in June compounded fears that the U.S. economy was in worse shape than economists thought.

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A strong earthquake with a magnitude of 7.1 has hit off the northeast Japan coast, prompting a tsunami warning.

The quake hit at 9:57 local time (0057 GMT) and a warning of a possible tsunami was issued for most of the northeastern coastline. The epicenter of the quake was in the Pacific Ocean off the coast of Japan’s main island, Honshu.

Japan’s northeast coastline was devastasted by an earthquake and tsunami on March 11 that left nearly 23,000 dead or missing and touched off a nuclear crisis at a badly damaged facility in Fukushima.

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The banks that are most important to global financial stability will be required to hold extra capital on their balance sheets to protect them _ and the global economy _ from financial crises under new rules proposed Saturday.

Global central bank heads have proposed rules that would require the world’s biggest banks to hold an extra 1 percent to 2.5 percent of capital on their balance sheets, depending on their size. The goal of requiring larger cash buffers is to prevent another shock to the global financial system like the one that occurred in 2008 when Lehman Brothers collapsed.

The rules were proposed by the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision. The committee is part of the Bank for International Settlements, an umbrella organization for the world’s central banks.

The cash buffers that giant global banks would have to hold would be in addition to an existing requirement that all banks hold 7 percent of their assets in reserve.

The Group of Governors said in a statement Saturday that the proposed requirements would discourage banks from becoming so big that their failure could destabilize the global financial system.

“This will contribute to enhancing the resiliency of the banking system and help mitigate the wider spill-over risks of global systemically important banks,” Jean-Claude Trichet, President of the European Central Bank and chairman of the Group of Governors, said in a statement.

Banks would have three years, from the beginning of 2016 until the end of 2018, to meet the new requirements.

The Group of Governors also agreed on a method for determining banks’ importance to the banking system, though it did not disclose details. The group said its package of recommendations would be announced near the end of July.

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European stocks were helped Friday by an easing in tensions over Greece’s debt crisis after a big Cabinet reshuffle and suggestions that Germany has softened its stance over the need for private creditors to shoulder a part of a second Greek bailout.

The centerpiece of Prime Minister George Papandreou’s wide-ranging Cabinet reshuffle was the appointment of long-time rival Evangelos Venizelos to finance minister and deputy prime minister.

Papandreou will be hoping that the move brings an end to a damaging 48-hour political crisis that raised fears that Greece could run out of money in less than a month.

The reshuffle came after a seven-hour meeting between Socialist lawmakers and Papandreou on Thursday, at which they demanded that the prime minister remove inexperienced loyalists from the Cabinet and replace them with more experienced party veterans, mostly in their late-50s.

The hope in the markets is that Papandreou has done enough to get austerity measures through Parliament, which are necessary for the country to get more bailout funds.

Further relief came from news that Germany may be backing off from its tough stance to get private creditors to take their share of any future second bailout of Greece.

In a press conference with French President Nicolas Sarkozy, Germany Chancellor Angela Merkel agreed that private investors should be part of the solution but that their participation had to be on a “voluntary” basis.

“Markets are currently taking this as a positive step,” said UBS analyst Chris Walker.

In Europe, the FTSE 100 index of leading British shares was up 0.3 percent at 5,713 while Germany’s DAX rose 0.7 percent to 7,156. The CAC-40 in France was 1.1 percent higher at 3,835.

Greek stocks were doing particularly well, with the main ATHEX index up 3.6 percent.

Wall Street was poised for a solid opening, too _ Dow futures were up 0.7 percent at 11,976 while the broader Standard & Poor’s 500 futures rose 0 personal loans for people with bad credit.8 percent to 1,273.

The euro was also a big gainer, climbing 0.5 percent on the day to $1.4284. On Thursday, it had fallen below $1.41 for the first time in three weeks as investors fretted about a possible Greek debt default.

Greece’s debt crisis has been the main driver in markets this week, but with a seemingly calmer mood Friday, investors may turn to U.S. economic data later for more direction. A run of weak U.S. economic news has weighed on stock markets over the past few years.

The University of Michigan’s monthly consumer confidence survey could well be a catalyst to how markets end the week. The consensus in the markets is that the headline index will rise modestly to 74.5 in June from the previous month’s 74.30.

“Any signs of improving demand from U.S. consumers would have wide reaching implications and the hope is that with oil prices tumbling, lower petrol costs will free up cash for discretionary spending,” said Ben Critchley, senior sales trader at IG Index.

Oil prices continued to push lower Friday, with the benchmark rate on the New York Mercantile Exchange down another $1.22 to $93.76 a barrel.

Earlier in Asia, before the reshuffle and the German comments, stocks pushed lower.

Japan’s Nikkei 225 index closed 0.6 percent lower at 9,351.40 while Hong Kong’s Hang Seng index fell 1.2 percent to 21,695.26.

Mainland Chinese shares fell to their lowest level so far this year as investors reacted to news of a rise in the rate for Chinese central bank’s three-month bills on Thursday, seen as a cue that an interest rate hike may be in the offing.

The Shanghai Composite Index fell 0.8 percent to 2,642.82, while the Shenzhen Composite Index fell 1.1 percent to 1,085.11.

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Pamela Sampson in Bangkok contributed to this report.

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