- The Washington Times - Wednesday, December 5, 2012

Maryland taxpayers would be hit with the largest federal income-tax increase in the country if Congress fails to pass legislation to avert the looming “fiscal cliff,” and the average U.S. family of four would pay an extra $3,200, according to a study by the nonpartisan Tax Foundation.

The Washington-based tax research group found that a Maryland family of four making $107,000 a year — the median income for such a family in the state — would pay an extra $7,194 in federal income taxes next year.

Economists say some of the biggest increases in taxes are in the Northeast, in states that voted to re-elect President Obama and where residents earn high incomes and pay comparatively high state and local tax rates.

“The general pattern is basically that high-income states and low-income states are most affected,” said Nick Kasprak, an analyst and programmer at the Tax Foundation who wrote the study. “People would start to see that as soon as January, when their paychecks start getting smaller.”

According to the study, Maryland is joined by New Jersey, Connecticut, Massachusetts and New Hampshire as the five states where a typical family of four would get the biggest federal tax increases, with families paying at least $5,600 more next year. New Jersey families would see a higher percentage increase in income tax than Maryland, but the average dollar increase would be lower because the state’s median income trails that of Maryland.

The next five states are North Dakota, West Virginia, South Dakota, Arkansas and Mississippi, which all favored Republican presidential candidate Mitt Romney this year and have significantly lower incomes than the top five.

The states projected to have the lowest tax increases as a percentage of income were Illinois, Colorado, Kansas, Hawaii and Washington, along with the District of Columbia.

The study used states’ median incomes to consider the effects if lawmakers allow tax cuts enacted under the past two administrations to expire and if they allow changes to the alternative minimum tax that would take away certain deductions and subject many more Americans to higher tax rates.

Mr. Kasprak said the two groups of states at the top — five wealthy blue states followed by five lower-income red states — are vulnerable for different reasons.

The lower-income states would suffer most from the expirations of the Bush-era tax cuts, as federal income-tax rates would increase on all Americans and do so most aggressively on the lowest earners. An end to the cuts also would eliminate the standard deduction for married couples and cut the value of child tax credits.

Federal tax rates also would go up in higher-income states, where a larger portion of their abundant middle classes would become subject to the alternative minimum tax, which was created decades ago to ensure fair payment by high earners but do not adjust for inflation — allowing it to affect more and more taxpayers each year.

For many consecutive years, Congress has “patched” the alternative minimum tax by raising its threshold to protect much of the middle class, but lawmakers have not done so this year.

Jason Fichtner, a senior research fellow for George Mason University’s Mercatus Center, said larger federal tax bills would result all around, and it would be only the beginning for many people.

Elimination of certain deductions would raise the amount of federal taxable income, he said, which in most states serves as the starting point for state and local taxation.

“For the majority of states, they piggyback off the federal income-tax return,” Mr. Fichtner said. “Everybody across the board would see an increase in their taxes.”

While damage from the tax portion of the fiscal cliff could be split relatively evenly across the country, the sequestration will hit hardest in states that rely heavily on government jobs and contracting opportunities — potentially delivering a double whammy to Maryland and hitting neighboring Virginia, which could lose some of its workforce dependent on government contracts, but is expected to have the 28th-worst impact from tax hikes.

Some analysts predict that the cliff could plunge the U.S. into long-term struggles and possibly another recession, but Mr. Fichtner said he would expect only a three- to six-month dip in consumption and saving followed by a gradual adjustment.

“Right now, in the Beltway, we’re paying attention. People on the outside are paying a little attention, but I still don’t think they know what it means,” he said. “But people are going to wake up on Jan. 15 and Jan. 16, and they’ll know when they see their paychecks.”

• David Hill can be reached at dhill@washingtontimes.com.

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