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Many states turn to targeted tax increases

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Wonder how other states make ends meet? A new report out by the Washington, D.C.-based Tax Foundation provides a good snapshot. 

So far this year, five states tweaked individual income tax structures, two states raised sales tax rates and five states boosted cigarette excise taxes. 

“Aside from the politically easy options of one-time aid, borrowing and other accounting gimmicks, states have two choices: raise taxes or cut spending,” Joseph Henchman, the foundation’s director of state projects and the report’s co-author, said in a statement. 

In a tough economy, states that chose to raise taxes targeted specific groups, such as high-income earners, smokers and out-of-state business transactions. For instance, among the income tax changes, Oregon voters upheld a so-called “millionaire’s tax” measure.  It creates two new income tax brackets: 10.8 percent on income over $125,000 and 11 percent on income over $250,000. 

Arizona and Kansas both raised sales tax rates by a full percentage point. Arizona’s rate went from 5.6 percent to 6.6 percent, while Kansas boosted its levy from 5.3 percent to 6.3 percent.

People buying food caught a break in Arkansas, which dropped its tax on groceries from 3 percent to 2 percent. Colorado put more of the burden on out-of-state companies, approving a measure designed to require these businesses to collect the state’s use tax from consumers.

And cigarette smokers have been hit big. Taking the lead from 18 other states in 2009, Hawaii, New Mexico, New York, South Carolina and Utah all increased cigarette excise taxes in 2010. 

Henchman turned a critical eye on the tax hikes. “When the recession ends, states need to have the right policies in place that will promote economic growth and maintain revenue stability,” he said. “Relatively high taxes on high-income individuals, smokers and out-of-state business transactions can make a state less attractive and create more volatility in an already uncertain economic climate.”

The Tax Foundation is a nonpartisan, nonprofit organization. The report, “A Review of 2010’s Changes in Sate Tax Policy,” is available online at http://www.faxfoundation.org/research/show/26645.html

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