New ways to raise taxes

Politicians aren't ready to admit that taxes are going up on most Americans. Here are some of the areas where governments will try to raise money. If you're hoping that tax hikes on the rich will solve America's debt crisis, you're sorely mistaken the power of the wealthy.

President Barack Obama's budget proposal would raise taxes on upper-income earners by $969 billion over the next 10 years, yet the federal debt would continue to bomb. To boost government revenue further, he'd raise an additional $122 billion from multinational companies, $90 billion from banks, $37 billion from oil companies and $24 billion from hedge funds and private-equity firms. All told, that's about $1.2 trillion. And it would barely make a dent. We'd still have huge deficits, and the national debt just keeps growing.

Taxing the rich will be one of the hot political stories this year. It will also divert attention from a much bigger story: Sooner or later, almost everybody in America is going to pay more in taxes.

One reason is that spending on Social Security, Medicare and Medicaid -- which equals 56% of all federal outflows -- continues to skyrocket, and cutting those programs, just as baby boomers begin to retire, would be political suicide. Few politicians in Washington want to cut defense, which leaves little else on the chopping block.

At least 35 states face their own budget shortfalls this year, with revenue in many states coming in below projections that were weak to start with, according to the National Conference of State Legislatures. When federal stimulus spending winds down in 2011, many states anticipate a "cliff effect," in which their revenues plunge. That means money will have to come from somewhere else, and there aren't enough rich people to provide all the funds.

"It's inevitable that the government will have to find a way to have a truly middle-income tax increase," says Clint Stretch of consulting firm Deloitte Tax. "The trick is, how?"

Politicians, of course, don't want to admit that most of their constituents face stinging tax hikes. And until there's no other choice, they'll try to raise funds without having to mouth the T-word. As federal, state and local governments get desperate, here are four of the mechanisms elected officials will try to use to raise funds without getting run out of office:

Expanding existing taxes

Raising income tax rates is so unpopular that most politicians consider it a last resort. Raising state and local sales taxes is a bit more tolerable, and it's even better if you're simply expanding a tax that already exists.
Some states, for example, could expand sales taxes to things not already covered, such as restaurant meals, salons, business services, Internet connections, and phone or cable TV service. It also makes sense to crack down on people evading existing taxes, by increasing the fines for late payments and underpayments, and conducting more inspections to catch merchants and others who may be skirting their obligations.

Avoidable taxes

A new levy is more palatable when politicians can make the case that you don't have to pay it if you choose not to.
Consumers might be able to offset new gasoline taxes, for instance, by driving less or buying more-fuel-efficient cars. Some states are mulling new energy or carbon taxes, with part of the pitch being that you can make up the difference by using less energy.

Then there are the classic "sin" taxes on cigarettes and booze, which are only for people with unhealthful habits -- and have already gone up in more than a dozen states, according to the National Conference of State Legislatures. One new "sin" that could end up taxed: junk food.

Online taxes

This is controversial, because it could force online merchants to figure out tax rates for thousands of localities. But New York and a few other states are trying to impose regular sales taxes on Internet purchases, to replace revenue lost when those transactions don't take place in a physical store. A legal challenge to the so-called Amazon.com tax is pending in a New York court, and if the government wins, more states are sure to follow up with their own Internet taxes.

Health care taxes

You'd think health care was already expensive enough, but at least nine states have upped taxes on hospitals and other providers over the past year, according to National Conference of State Legislatures. Of course, many of those added costs will be passed on to insurers, businesses and, ultimately, consumers.

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