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Wall Street bailout/rescue would have marginal impact on state and local IT market

UPDATE (10/03/08): The House passed the legislation (263-171) today.

UPDATE (10/02/08): The Senate passed a slightly revised version of the legislation (74-25) last night. The House is expected to revisit the legislation as early as Friday. The Senate attached the bailout/rescue legislation to a completely unrelated bill that had previously passed the House.

UPDATE (09/30/08): The bailout/rescue bill failed to pass in the House today, but one political expert expects a re-vote on the bill in coming weeks. It will be interesting to see if market events vindicate one side or another in this debate in coming days.

State and local government-IT vendors should have guarded optimism in regard to potential impact of any Wall Street bailout/rescue plan. Regardless of the specifics, vendors in this space should remember that all impact on this market would be indirect. State and local revenues rest on a three-legged stool of income taxes, sales taxes, and property taxes. So, anything that might increase employment, encourage consumption, and stabilize housing prices would be a good thing for state and local revenues. However, this plan has been offered only as an option to keep the bottom from falling out, not to return the market to its soaring heights. No one is pushing the idea that this will be any sort of "trifecta" for employment, consumption, and housing.

However, any plan that relies on new federal debt is likely to reduce the value of the dollar, which would at least benefit the few states with a significant share of the nation's $1.2 trillion in export income. So, we're mostly talking about California, Texas, New York, and Washington state.

Vendors should not expect the bailout/rescue as it is currently conceived to result in a surge of state and local IT spending even under the rosiest of plausible scenarios (emphasis on "plausible"). The best way to spur state and local government IT spending in the short run is via federal grants (GovWin research) for social services, justice/public safety, transportation, education, university-based R&D, and homeland security. A bailout/rescue that relies on massive amounts of new federal debt is more likely to put severe downward pressure on federal grant funds in the short run.

Also, keep in mind that even if housing prices were to stabilize tomorrow, the long-term trend will be for property taxes to decline or grow slowly as Baby Boomers seek to either stay put, downsize, or cash out of their homes. The property-tax leg of the revenue stool will remain weak for many years to come and only a new economic boom that generates millions of new jobs and/or growing incomes could reinforce the other two legs. (The "housing boom" might have been nothing more than an infusion of easy international money for mortgage holders, but it did boost spending all across all sectors of the economy, which led to more jobs with little wage inflation.)

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