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.

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These Little-Noticed Tax Hikes Are Raiding Your Wallet

Many folks think that Social Security shouldn't be counted in the federal budget at all, because they contribute to the retirement fund with each paycheck.

Actually, though, taxes paid in by today's workers aren't socked away for their future retirement, but are used for benefits for today's retirees -- an estimated $779 billion worth of them in fiscal year 2012.

What's more, the so-called trust fund -- where payroll taxes not needed for current payouts are stashed -- consists of $2.7 trillion in IOUs from the U.S. Treasury. The funds have been borrowed over the past two decades to pay for other federal programs.

Nearly 18% of President Obama's proposed FY 2013 budget is for defense spending. It includes funds for military operations in Afghanistan, Iraq and South Korea as well as for 760 bases scattered across the U.S. and abroad.

The $716-billion tab also pays for research, construction, family housing and myriad defense-related items. About 25% of the total goes to personnel costs, and the figure doesn't include veterans' pensions and health care.

Combined, these two national health care programs rival defense and Social Security as Uncle Sam's biggest expenses. While the White House and Congress talk a lot about cutting these health care costs, lawmakers have avoided taking the tough -- and extremely unpopular -- actions needed.

In addition to Medicaid, about 9% of the total federal budget is dedicated to assistance for the needy. The total -- about $297 billion for FY 2012 -- includes funds for housing subsidies, food stamps, school lunch and other nutrition programs, aid to families with dependent children (welfare) and other aid, plus the earned income tax credit.

In addition, unemployment insurance will account for a bit less than $82 billion -- and about 2.1% of the budget -- in FY 2012. With the economy improving, that's well down from the $160 billion doled out in 2010. A $58-billion tab is expected in FY 2013.

Next fiscal year, Uncle Sam is expected to shell out a whopping $224 billion in interest to the owners of U.S. Treasuries, here and abroad. For the past few years, low interest rates have helped keep a lid on this category. But interest rates won't remain at historical lows forever. Meanwhile, the debt accumulates.

The White House estimates that debt held by the public will approach $12 trillion at the end of FY 2012. If you include intragovernment payments -- by the Treasury to funds such as Social Security, for example -- the nation's total gross debt will approach $16.5 trillion. In coming years, interest payments will gobble up even more.

The biggest five items in the federal budget -- Social Security, defense, Medicare, Medicaid, and net interest on the debt -- account for about two-thirds of the total.

Everything from transportation (3.3%), education (1.9%), federal employees' and military retirement (3.8%) to science and space (0.9%) and homeland security (1.3%) comes out of what's left.

International aid -- frequently mentioned as a potential source of savings -- accounts for just 1.7% of spending, and half of that is for humanitarian assistance. All environmental and natural resource programs -- 0.6%. Help for low-incomers, which we have already discussed, is an amalgam of programs whose total adds up to 9% of federal spending.

Only about a third of the federal budget actually falls under congressional control on an annual basis, and much of that is for defense spending -- mostly off-limits for political reasons.

About three-fifths of the budget is dedicated to programs such as Social Security, Medicare, Medicaid, food stamps, crop subsidies and other programs for which spending is automatic -- controlled by formulas. Add interest payments to the list of uncontrollables and untouchables, and the share of spending Washington can actually manipulate from year to year is about 16%.

If that entire 16% -- encompassing programs as diverse and as popular as medical and scientific research, space exploration, maintenance of national parks, repairing roads and bridges -- were eliminated, it would reduce the federal deficit only by less than half. Individually, these programs amount to crumbs on Washington's dinner table, where $38 billion is just 1% of the main course.

About 58% of all government spending consists of direct payments from Uncle Sam to individuals. Retirees get Social Security payments, veterans' pensions and Medicare benefits. Students get tuition assistance. Payments are made to farmers to idle erosion-prone land. Victims of natural disasters get a helping hand to rebuild their homes, businesses and lives.

Lobbies for many of these programs are immensely powerful and usually able to deflect attempts to trim spending. And while nearly everyone agrees that belt-tightening is needed, few are willing to cinch in their own waistlines.

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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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