INVESTING: Tax hikes are just what the bull market doesn’t need

The seed of the next bear market might have just been planted, and what better place than right here in the Crossroads of America. A seed is a tiny and innocent thing. But one tiny seed from a destructive weed can ruin an entire garden.

A little background for those who don’t live in Indianapolis (or for those who do but don’t follow local politics): For years, there has been a gaping hole in the promised retirement benefits for retired police officers and firemen hired before 1976 (after that, there is a pension that is not underfunded). The $450 million liability has been a political problem for the city that got passed from one mayoral administration to another. Bart Peterson, the current mayor of Indianapolis, recently came up with a plan that will provide $70 million in principal and interest payments on a loan to cover the $450 million.

Under the headline-grabbing guise of improving public safety, the mayor is attempting to pass a tax increase for Marion County residents. A tax hike is good for us, he’s saying. But I didn’t see enough attempts from the mayor to cut city spending to address the problem. As usual, a government official is demonstrating a lack of leadership by thinking that forcing us to throw more money at a problem is going to fix everything.

Oil is above $70 a barrel again. Interest rates are higher than they have been in a while. The housing market is still months, if not years, away from a bottom. Health care costs are still rising by more than double the inflation rate. The American consumer is clearly slowing. The last thing anyone needs right now is a higher tax bill.

Every once in a while, I stop and think about what it might take to kill this bull market. At this point, I don’t believe the faltering housing market is going to drag everything else down with it. Oil above $100 a barrel probably would do the trick (which I think will happen before the end of 2010). Higher interest rates should add to the slowdown, but I don’t see rates backing up that much more from here, at least for the next several months.

Higher taxes, though, are a bona fide economic killer. What’s happening here could play out in counties and states all over America. And let’s not leave the federal government out, either. Our country is littered with unfunded entitlement commitments, and too many politicians are going to offer only one solution-higher taxes. This not only has the potential to spell the end of this current bull market, but also could lead to the end of the American hegemony.

I have no doubt residents of Indianapolis will find a way to survive. But the qualityof-life comparisons to places like Chicago or Las Vegas just got a little more difficult. For the time being, this is an isolated event that will slow one small piece of the largest economy in the world. But the day is coming when elected officials across America will face the same issue. If they choose the same route as Mayor Bart Peterson, grab your stock-trading manual and read the chapter, “How to short stocks to profit from a down market.”