Surprise! Some taxes go up.

By , Staff writer of The Christian Science Monitor

This is the era of the tax cut. Federal rates have been reduced. Throw in state and local levies and the combined revenues raised by governments last year shrank to a smaller share of the economy than at any time since 1968.

So this news flash may come as a shock: Millions of American individuals and businesses face tax hikes this year. These extra taxes and fees, some at the state and local levels, will shrink or even possibly wipe out the savings that some taxpayers would otherwise see on their federal 1040.

Here's a rundown of some of the less-noticed tax hikes:

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Social Security taxes: About 9.2 million of the estimated 156 million workers who pay this tax will pay higher taxes in 2004 - the result of an increase in the taxable maximum amount subject to that tax. Reflecting an increase in average wages, the taxable maximum has risen from $87,000 in 2003 to $87,900 this year. Those with earnings of $87,900 or more will pay up to an additional $58.80. So will their employers.

Alternative minimum tax: An additional 800,000 taxpayers, reaching a total of 3.2 million, will be subject this year to the AMT, according to the Tax Policy Center in Washington. As a result, federal AMT revenues will rise to $18 billion from $15.9 billion in 2003.

The AMT operates parallel to the regular income tax, with different rates and definitions of income and deductions. When first devised in 1970, it was intended to ensure that all high-income households paid income taxes, even if they qualified for loopholes. The AMT rate reaches 35 percent of income.

But because the AMT is not indexed to inflation and the 2001 tax cut, more and more middle- income taxpayers are made subject to the AMT.

"It's a time bomb," says David Bradley, an analyst at the Center on Budget and Policy Priorities (CBPP), a Washington think tank.

Unless current law is changed, 33 million taxpayers - most in the upper middle-income level - will face a much bigger tax bill by 2010. Considering the political implications, the White House and Congress are expected to soften that extra tax blow next year, at least temporarily.

Income-tax bracket creep: As some taxpayers enjoy real gains in their income, many will pay not only more taxes, but a higher proportion of their income in taxes. This is because the tax system is nominally progressive - with tax brackets of 10, 15, 25, 28, 33, and 35 percent - so the more you earn, the higher the tax bracket you're in.

This phenomenon isn't new, of course. And compared with the '70s, the system is less progressive, so the jumps to higher brackets aren't as dramatic. Still, with tax brackets indexed to inflation and the inflation rate so low, a significant income boost can more easily push individuals into the next bracket or more of their income into that higher bracket, increasing their tax burden.

State and local taxes: In some cases, the cuts in federal taxes and programs have shoved some of the tax burden down to states and municipalities. True, housing values have risen in most areas, resulting in higher property taxes. But many cities and municipalities have also suffered cuts in state aid. So they have also hiked property taxes, hitting millions of homeowners, to pay for schools and other services.

Robert Zahradnik, a CBPP analyst, says federal tax changes such as cutting estate taxes and other policies will cost states $185 billion between 2002 and 2005. Congress did provide $20 billion in fiscal relief to the states. But many states, also hit by a weak economy, are struggling. Their combined deficits exceeded $100 billion between 2001 and 2003.

Faced with the need to balance budgets, 36 states enacted tax and fee increases for fiscal 2004, which ends next June 30, notes the National Association of State Budget Officers. These are expected to bring in $9.6 billion. Other measures, such as ending tax amnesty programs and accelerating payment of sales taxes, are aimed at raising another $3 billion.

Relatively few states, however, raised sales or income taxes, says Scott Pattison, director of the association. Such action is more troublesome politically than fee hikes. "It's a really difficult situation," he says.

In addition, 11 states have acted to separate their estate-tax system from the federal system, which is being rapidly phased out. That way, the states can be sure of continued revenues from new estates.

Unemployment insurance rates: Because unemployment has risen with the recent recession and unemployment benefits were extended (until this year), the state tax that employers pay to provide for unemployment insurance benefits is rising "significantly," says Eric Oxfeld, president of Strategic Services on Unemployment & Workers Compensation in Washington.

A survey of some 168 firms by this association of employers and trade groups found that 25 percent have budgeted for a 20 percent or higher jump in their unemployment tax burden. The tax varies from state to state, largely depending on unemployment levels. Since the tax averages nearly 2 percent of payroll or taxable wages, such a tax boost to replenish unemployment trust funds can be sizable.

Tax-shelter crackdown: The Internal Revenue Service is taking aim at fancy tax shelters for the wealthy - a move that should both raise taxes for those affected and boost federal revenues. "These are people who are ripping off the system," says Richard Kogan, an economist at CBPP. "I wish they could make them pay back taxes with penalties."

When the tax police audit corporations, they are even looking carefully into lavish executive-pay packages to see if the bosses have underpaid taxes.

The nation's Big Four accounting firms are under intense IRS scrutiny over the sale of tax shelters that might evade the law. Last month, this prompted the departure of the No. 2 executive at KPMG LLP, one of the four firms.

A study by the Multistate Tax Commission in Washington found that corporate tax shelters reduced state corporate income tax revenues by more than a third, or $12.38 billion, in 2001.

The Treasury Department announced Jan. 13 a series of legislative proposals for the fiscal 2005 budget to close loopholes, halt several abusive tax-avoidance transactions, and simplify the tax code. If implemented by Congress, the changes would raise revenues by $47.3 billion over 10 years. Some $33.7 billion of that would arise from blocking corporate leasing deals, done for their tax benefits and often involving public works like subways and sewer systems of cities and towns.

Democratic critics contend the IRS could stop such leasing deals by acting itself, without new legislation.

In the end, the IRS crackdown and these lesser-known tax hikes will not entirely reverse the savings from the Bush tax cuts - certainly not for most of the well-to-do, who received the biggest tax savings. Of course, those savings depend on Congress renewing or extending the tax cuts of the past few years. President Bush asked for renewal in his State of the Union message last month.

But with an election in the fall, experts don't expect Bush to mention the need to fix the AMT in his budget this week. That's because it would add hugely to budget deficit projections. Leonard Burman of the Tax Policy Center calculates that simply fixing the AMT so that it did not sweep in middle-income taxpayers would raise the cumulative deficit by $600 billion for the next 10 years. If all the tax cuts were made permanent, as requested by Bush, the cost would be $900 billion, he adds.

The AMT and other tax factors greatly complicate efforts to cut the budget deficit. CBPP experts regard Bush's promise to cut the deficit in half over the next five years as fiction. The real cumulative deficit through 2013 will total $5 trillion or more, the CBPP and other groups have calculated.

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