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These Little-Noticed Tax Hikes Are Raiding Your Wallet

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Hidden city taxesIn a tough economy, the last thing many people can afford is for the government to take more of their money. Yet at least in some places, recent tax increases have already taken a big bite out of taxpayers' wallets, and the worst may be yet to come.

The looming expiration of favorable tax rates has grabbed the lion's share of attention lately: In just over six months, much higher tax rates are scheduled to take effect. If the government does nothing, those increases would boost tax bills for people at just about every income level.

But increasingly, state and local governments have been the culprits in making life more difficult for taxpayers.

As U.S. News recently observed, states and municipalities are pulling out all the stops to try to balance their budgets in the wake of falling revenue and greater demand on services. Here are some of the things they're doing:

  • More than a dozen states have raised their sales tax rates in the past five years, with the majority of those doing so by at least a percentage point. According to IRS estimates, each percentage-point increase in sales taxes could cost the typical family of four with a $50,000 income an extra $100 to $200 per year, depending on where they live.
  • States have also hiked other taxes. Illinois pushed its income tax rate from 3% to 5%, but many states have gotten extremely creative in the places they seek higher revenue from taxes and fees, focusing on little-noticed niche sources like hotel tax or fishing licenses.
  • Cities and towns tend to depend on property taxes, which have gotten hurt badly by drops in home prices. That's required big hikes in property tax rates in many areas.

What's Next?

The trend toward higher state and local taxes isn't likely to change anytime soon. The reason is that unlike the federal government, states and cities don't have unlimited borrowing power. Even as they weigh big spending cuts on everything from essential services to employee pensions, state and local governments are trying to balance lower spending with higher tax revenue to balance budgets.

As federal income tax rates become a big issue in this election year, remember to keep an eye on the other taxes you pay. The rises you've already seen could prove to be just the tip of the iceberg.

Motley Fool contributor Dan Caplinger wasn't thrilled when his sales tax went from 5% to 6.25%. You can follow him on Twitter here.


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