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Tax Hikes Boost State Coffers, Thin Your Wallet

State and local tax revenues increased in the third quarter–an about face from a year ago. Most of the increase has come from a bump-up in revenue from income and sales taxes, which fell in the recession, leaving many states facing budget gaps.

Combined state and local tax revenues rose 5.2% to $284.3 billion in the third quarter of 2010 over the same quarter in 2009, when tax revenues fell by 5.4% from the year-earlier period, The Wall Street Journal reported.

The Journal reported that personal income tax receipts were up 4.8% in the third quarter and edged up the amount collected in sales taxes by 4%. Property taxes were also up—a whopping 7.8%, despite the continued uptick in foreclosures and falling home values. Where does all this extra cash come from? Your pocket, of course. To be sure, governments have seen tax revenue growth as more Americans have seen a boost in their salaries and, in turn, increased their spending. But not all of that revenue is driven by happy consumers. Many cities and states have also increased their income and sales tax rates to make up for recession-related shortfalls.

For example, if you live in California you paid 8.25% in sales tax in 2010, compared to 7.25% in 2008. That means that new $30,000 car cost you an extra $300 in sales tax.

Sales tax in Los Angeles County will be bumped up even higher to 9.75% this year after voters approved a county-wide transportation tax and lawmakers agreed to increase the state sales tax by an additional 1%.

But it’s not all take on the part of government. There’s a little give, too. As part of the tax legislation signed in late December, Congress extended the federal itemized deduction for state and local sales taxes through 2011.

That’s a boon for taxpayers in states that don’t have income tax—like  Florida, Washington and Texas—but that might have high sales tax rates. You can check the rates in your state at Bankrate.com.

But, to get that tax break, you’ll need to be patient. Taxpayers who file for the tax deduction are among those who may have to wait until mid- to- late February for the Internal Revenue Service to update its systems to reflect changes made under the new tax law, as we wrote last week.

Readers, has your city or state raised income or sales tax rates? How has it impacted your budget? And will you wait to file for the deduction?

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