If you're paying attention to the drama over the "fiscal cliff," you know that federal income tax rates will skyrocket at the end of this year, if Congress fails to act. That's sure to be a huge battle. But taxes are already going up in a lot of states and cities, in a preview of what's coming sooner or later at the federal level.
A new analysis by the nonprofit Tax Foundation shows that 13 states and the District of Columbia raised sales tax rates between 2007 and 2011, largely to rake in more revenue as the recession cut into state budgets. In Arizona, California, Indiana, Iowa, Kansas, Maryland, Massachusetts, and Utah, sales taxes rose by a full percentage point or more, though in a few of those states, the increase is supposed to be temporary.
That's on top of a lot of other new revenue that states and cities have been collecting from taxpayers. Between 2008 and 2010, 36 states raised taxes or fees, according to the National Association of State Budget Officers. One of the biggest hikes was an increase in Illinois's income tax rate from 3 percent to 5 percent. In many other cases, there have been hikes in targeted taxes on things like cigarettes, alcohol, hotel rooms, and rental cars, or higher fees for car registrations, hunting licenses, and many other things administered by the government.
At the same time, many municipalities have been raising property taxes to offset the loss of revenue that has come from plunging home values. On top of that, states and cities have been cutting services, including the number of teachers, cops, firefighters, road crews, and DMV staffers.
The irony, of course, is that many Americans are outraged at the federal government, even though a slew of federal tax breaks over the last few years has lowered Washington's bite out of most paychecks. Voters have a better attitude toward the state and local governments that are raising their taxes. A recent Allstate/National Journal poll, for instance, found that just 51 percent of people trust information from the federal government, while 61 percent trust state government and 66 percent trust local government.
That trust gap may come from the fact that Americans see less of the political maneuvering that happens at the state and local levels, while the political machinations of national politicians tend to dominate the news. But whatever the reason for the trust gap, I see two major implications.
First, voters aren't so opposed to new taxes that they'll storm the barricades if they go up by a single penny. Many people recognize the need for additional money to fund public services we all depend on. What they care most about is making sure their tax money is spent on legitimate, useful things, not on boondoggles or bridges to nowhere.
Second, for all the worry about the added burden on consumers if Washington raises taxes, many consumers are already bearing an added burden. So if there are further hikes at the federal level, it will only add to the pain many consumers are feeling. That is likely to make people even more cranky toward the federal government.
Most economists agree that Washington's budget mismatch is so large that there's no way to close the gap with spending cuts alone. Federal taxes will have to go up, even if there are major spending cuts. So the time is coming when Washington will have to copy the states and cities that are already dunning their citizens for more money. When Washington comes knocking, many taxpayers will be able to genuinely answer, "I already gave."
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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