Will Americans raise taxes to curb deficits? Oregon a test case.

A handful of states, from Oregon to Illinois, confront serious budget gaps. California recently saw its bond rating downgraded on fears that it will run out of money in coming months.

The federal government, while having no mandate to balance its budget, is also running up against political and economic constraints. President Obama has called for a partial spending freeze in Washington – part of a broader recalibration of his economic policies. But many budget experts say that move won't do much to close a yawning federal budget gap.

The president has taken positions similar to those by Democratic legislators in Oregon, whose plans paved the way for the vote-by-mail referendum that concludes Tuesday. Obama has favored a return to higher (Clinton-era) income-tax rates on top earners.

More recently, he's come out with a proposal to tax big banks. In part, it's a populist-tinted response to government bailouts of Wall Street. But fiscal experts say it also hints at growing pressure on Washington to find more ways to raise revenue.

Is taxing the rich enough?

In December, market strategists at Bank of America Merrill Lynch picked "rising taxation" as one of 10 big themes for investors to consider for the year ahead.
Yet tax hikes have a popularity problem with voters. Obama has pledged not to raise taxes on households earning less than 250,000. That's the same threshold as Oregon is using ($125,000 for individuals and double that for joint filers).

Tax experts say that, ultimately, tax hikes centered only on the rich won't be enough to restore fiscal stability.

Some economists worry that bond investors will begin to demand higher interest on US Treasury debt, unless the government shows signs of fiscal discipline.
Robert Shapiro, a former Clinton economic adviser, says the answer is one that has proved effective, for all its political thorniness, in the past: raising taxes and slowing the pace of spending.

He points to a December rise in interest rates on US Treasury debt as a troubling sign.

Foreign investors "are sending the White House and Congress a clear message," he wrote earlier this month for the Washington think tank NDN. "They think that Washington is taking on more debt than the American economy can handle."

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