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States Try to Tap High Earners

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The governor and Democratic lawmakers in New York will attempt to patch an $18 billion budget deficit by imposing much higher taxes on the richest residents, joining several states considering such a move this year.

Under a proposal by Gov. David Paterson, New York would follow California and Maryland in pushing its top earners into higher tax brackets that are several percentage points more than what most earners pay. And New Jersey is considering raising its top-tier income taxes even higher, to more than 10% compared with the 5.25% marginal rate paid by most households.

Several states are considering similar solutions as they face diminished revenue, yawning budget gaps and a populist political climate.

“Most people are treading water. Others are drowning. That gave politicians the courage to say the rich have to pay their fair share,” said Dan Cantor, executive director of Working Families Party, a political group that pressed New York Democrats to impose higher taxes.

Such sentiments, coupled with a new Democratic majority in Albany, made it easier to push the proposed tax increase.

Critics say the planned increase wouldn’t hit just those in the financial industry. Small-business owners in New York are especially piqued, business groups say. Many report their business earnings on their personal income-tax returns and fear the additional tax load will constrict their enterprises. “You eliminate their ability to hire new employees, buy equipment, finance an expansion,” said Mike Elmendorf, state director of the National Federation of Independent Businesses.

A 2008 analysis by the libertarian Cato Institute found that higher taxes suppressed economic growth and that locales that imposed an income tax to generate revenue had poorer growth rates than places that chose alternative taxes.

To seal a $132 billion budget, Mr. Paterson has called for raising the marginal tax rate to 7.85% for three years for single filers who earn $200,000 to $500,000 as well as married couples whose combined earnings total $300,000 to $500,000. A new 8.97% tax bracket would be levied on filers with $500,000 of taxable income. The state’s tax rate is 6.85% for everyone who earns more than $40,000. New York City levies a 3.6% marginal rate for earnings over $90,000.

A handful of states already had in place so-called millionaire’s taxes, but New Jersey is considering boosting for one year the tax on top earners to 10.25% from 8.97%. The proposal would provide an estimated $620 million to help close a $7 billion shortfall, said Thomas Vincz, a spokesman for the state treasury.

California already has a 10.3% tax on incomes above $1 million. The governor and Legislature agreed in February to raise the tax on all brackets by 0.25 percentage point in an effort to close a $42 billion deficit.

Last year, Maryland added a new 6.25% tax bracket for those with incomes of over $1 million. Other states are taking note: Wisconsin’s governor has pitched a new tax bracket for individuals making more than $225,000 a year or couples making $300,000. Delaware’s governor has suggested raising taxes on those who make more than $60,000 by one percentage point, to 6.95%.

Connecticut Gov. Jodi Rell, a Republican, has vowed not to raise taxes, but she is facing pressure from unions and advocates for the poor who have been pressing the Democrat-controlled Legislature to squeeze more revenue from residents earning more than $200,000 a year.