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Tax rate hikes would impact few

By Kay Bell · Bankrate.com
Thursday, June 21, 2012
Posted: 3 pm ET

Congress and the president continue to fight over how individual income tax rates should look in 2013.

President Barack Obama wants to increase the top two rates, currently at 33 percent and 35 percent, to 36 percent and 39.5 percent, respectively.

Congress, and by Congress I mean the Republicans who control the House and who have almost half of the seats in the Senate, want to leave the two top rates alone. Actually, they want the rates to be made permanent, but in the short term they'll settle for another continuation like the one they strong-armed into effect in December 2010.

Smart money, if there is such a thing in Washington, D.C., says that even if Obama is re-elected, the current rates will stay in place at least through 2013.

Residents of Connecticut, New Jersey and the nation's capital sure hope that's true. More taxpayers in those locales will pay bigger Internal Revenue Service bills if the rates go up, according to an analysis by the Institute on Taxation and Economic Policy and Citizens for Tax Justice.

More than 3 percent of folks in those two northeastern states and D.C. would lose some portion of the Bush income tax cuts. Overall, the president's proposal would cause about 1.9 percent of Americans to lose some portion of the cuts implemented in 2001 and 2003.

The reason Connecticut, New Jersey and D.C. residents would suffer more if the top tax rates were hiked is simple: There are a lot of rich people living in those locales.

What about New York and California, you ask? Good question.

Yes, there are lots of wealthy folks living in the Golden and Empire States who obviously would see higher federal tax bills, too.

But the populations of those two coastal (and cultural) opposites are so large that there are enough regular taxpayers to bring down each state's percentage of residents who would face higher tax bills under the Obama plan. Only 2.6 percent of New Yorkers and 2.3 percent of Californians would have larger tax bills if the current top two federal tax rates were bumped up.

Interestingly, hiking the two top rates would produce relatively bigger tax bites for more folks living in the two states claimed as home by this year's presidential candidates.

Obama's plan would cause higher taxes for 2.4 percent of his former neighbors in Illinois. In Massachusetts, where Mitt Romney once served as governor, 2.8 percent of those residents would have bigger tax bills.

The key question that this set of numbers raises for me is why is there any fight at all over letting the top two Bush tax cut rates -- OK, the Bush-Obama tax cuts since he agreed to their extension -- expire.

The calculations by the Citizens for Tax Justice and the Institute on Taxation and Economic Policy are just the latest to show that very few of us -- fewer than 2 percent in this instance -- would face higher tax bills. And the money that the expiration of the rates would bring in would sure help to solve that other problem that folks are so worked up about, the federal deficit.

Keep track of the tax-rate debate, as well as get tips on ways to reduce your federal and state tax bills, by subscribing to Bankrate's free Weekly Tax Tip newsletter.

You also can follow me on Twitter @taxtweet.

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