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Budget stalemate: Why America won't raise taxes

Budget stalemate has many on Capitol Hill crunching numbers. With any new budget, taxes may be the real third rail of politics. Can the U.S. solve its fiscal woes without more revenue?

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Nor is the aversion to taxes just a Washington phenomenon. Many states are facing severe economic crunches that may worsen over the next fiscal year as the flow of federal stimulus dollars comes to an end. In response, most Republican and even many Democratic governors are aggressively slashing spending, while generally holding tax increases at bay.

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According to the Center on Budget and Policy Priorities, all of the 48 states that have released budget proposals for fiscal year 2012 (which begins on July 1) are proposing deep spending cuts in areas like education, Medicaid, and public employee salaries in order to address budget gaps, while just seven of those states are opting to offset some of those cuts with tax increases. In fact, for the first time since the recession hit, governors of at least seven states – from Wisconsin to Florida to New Jersey – are now proposing large tax cuts, mostly for corporations, which they believe will boost economic growth.

"At the state level, they've been really resistant to raising taxes, even though they've got a dramatic need to do it," says Len Berman, a tax policy expert at Syracuse University in upstate New York.

Several Republican governors, including Scott Walker in Wisconsin, John Kasich in Ohio, and Rick Scott in Florida, also turned down billions of dollars in federal stimulus money that would have gone toward building high-speed rail projects (and, critics contend, would have created thousands of jobs), because they believed the projects would create a future tax drain on their states.

"I just spent a day with the governor of Florida – he's not raising taxes, period," says Norquist. The same goes for New Jersey, Ohio, Wisconsin, Indiana – "you're going to get real spending restraint in those states."

Historically, this has not always been the case. True, politicians have never been eager to raise taxes. But in the past, when economic crises hit, law­makers have often turned to taxes as part of the solution.

Many of these crises, not surprisingly, came in the form of wars. The nation's first income taxes were levied to help pay for the Civil War. Repealed shortly thereafter, income taxes came back permanently in 1913 with the ratification of the 16th Amendment, enshrining in the Constitution the federal government's right to collect them directly. They became the biggest source of revenue for Washington during World War I.

Lawmakers lowered rates after the war ended, but then increased them again during the Great Depression and raised them even higher during World War II – when the top marginal tax rate hit a staggering 94 percent.

Interestingly, in the war's aftermath, Republican President Dwight Eisenhower and the GOP-controlled Congress chose to leave rates relatively high. During the 1960s, Congress began lowering taxes again, repeatedly bringing them down over the next two decades – but because tax brackets weren't indexed to inflation, which was rising, the overall tax burden on Americans actually increased.

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